Software licence payments as royalty trigger tax withholding and consequential liability for non-deduction

Imported shrink-wrapped software licence payments were treated as royalty because the licence conferred a right to use the software and to make installation and backup copies, which was viewed as involving copyright rights. On that basis, the consideration fell within section 9(1)(vi) of the Income-tax Act and the relevant DTAA, so tax was deductible at source under section 195. Failure to deduct justified consequential liability under sections 201(1) and 201(1A), and the additions and interest were upheld by following the jurisdictional High Court ruling in the assessee's own case and an earlier coordinate bench decision on identical facts.

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Issues: Whether payment made for import of shrink-wrapped software amounted to royalty within section 9(1)(vi) of the Income-tax Act, 1961, and consequently attracted obligation to deduct tax at source under section 195, with exposure to liability under sections 201(1) and 201(1A).

Analysis: The appeal was decided by following the jurisdictional High Court decision in the assessee's own case and the earlier coordinate bench order on identical facts. The software licence was treated as conferring only a right to use the software together with the right to make copies for installation and backup, which was held to involve use of copyright rights. On that reasoning, the consideration paid to the foreign supplier was held to be royalty within the meaning of section 9(1)(vi) and also under the relevant DTAA, and therefore tax was deductible at source under section 195. Failure to deduct tax justified the consequential action under sections 201(1) and 201(1A).

Conclusion: The payment for software was held to be royalty and the assessee was held liable to deduct tax at source; the additions and interest under sections 201(1) and 201(1A) were upheld.

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