Software licence payments treated as royalty, triggering tax deduction at source and default consequences for the payer.

Payments for shrink-wrapped or off-the-shelf software, together with associated support services, were held to constitute royalty because the transaction conferred licence rights to use and copy software, which fell within copyright-related rights under the Copyright Act. The Tribunal followed the jurisdictional High Court in the Samsung Electronics line of cases and an earlier coordinate bench ruling on similar facts, and held that such payments were royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 12 of the applicable DTAA. As the income was taxable in India, the payer was required to deduct tax at source under section 195, and failure to do so justified treatment as an assessee in default under section 201.

---

---

Issues: Whether payments made for purchase of software and support services to a non-resident constituted royalty chargeable to tax in India so as to attract deduction of tax at source under section 195 and consequent treatment of the payer as an assessee in default under section 201.

Analysis: The Tribunal followed the jurisdictional High Court decision in the Samsung Electronics line of cases and the earlier coordinate bench decision on identical facts. It held that the payment for shrink-wrapped or off-the-shelf software was not merely for a physical medium, but involved a licence permitting the use and copying of software. Such licence rights fell within the concept of copyright-related rights under the Copyright Act and therefore amounted to royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 12 of the applicable DTAA. Once the payment was royalty and income taxable in India, the payer had an obligation to deduct tax at source under section 195, and failure to do so attracted section 201 consequences.

Conclusion: The issue was decided against the assessee and in favour of the Revenue; the assessee was liable to deduct tax at source and was rightly treated as an assessee in default.

---