Software licence payments as royalty where copyright rights are transferred, triggering tax deduction at source and section 201 liability.

A payment for licensed software from non-resident suppliers was treated as royalty where the licence allowed copying, downloading and storing the software for internal business use, because the arrangement was viewed as a transfer of rights in copyright rather than a mere sale of a copyrighted article. On that basis, the payment fell within the expanded meaning of royalty under section 9(1)(vi) of the Income-tax Act and attracted tax deduction at source under section 195. Failure to deduct tax exposed the payer to liability under sections 201(1) and 201(1A), and the demand was sustained.

---

---

Issues: Whether payments made for purchase of licensed software from non-resident suppliers constituted royalty under section 9(1)(vi) of the Income-tax Act, 1961 so as to attract deduction of tax at source under section 195 and consequential liability under section 201(1) and section 201(1A).

Analysis: The Tribunal followed the jurisdictional High Court decision holding that, on the terms of the software licence arrangement, what was transferred was not a mere sale of a copyrighted article but a licence to use the software coupled with the right to copy, download and store it for internal business use. The Tribunal treated this as a transfer of part of the copyright and held that the payment fell within the expanded meaning of royalty under section 9(1)(vi). Once the payment was treated as royalty, the payer was obliged to deduct tax at source under section 195, and failure to do so attracted the consequences of section 201(1) and section 201(1A).

Conclusion: The payment for licensed software was held to be royalty and the assessee was liable to deduct tax at source; the additions and demand under section 201 were sustained.

Ratio Decidendi: A payment for a software licence that permits use of the software by copying, downloading or storing it for business purposes constitutes royalty where the transaction involves transfer of rights in copyright and not merely sale of a copyrighted article.

---