Software licence payments treated as royalty where copyright-type use rights were transferred, requiring tax deduction at source.

Payments for shrink-wrap and download software were treated as royalty because the licence transferred more than a physical copy: it permitted use of software and copying or storing it for internal business purposes, which the Tribunal viewed as rights forming part of copyright under the Income-tax Act and the treaty. The earlier order relied on by the assessee was found inapplicable on the facts because the present matter had already been examined under both the treaty and the Act. The payments were therefore royalty, tax was required to be deducted at source, and the disallowance was upheld.

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Issues: Whether payments made for procurement of shrink-wrap or download software constituted royalty, attracting deduction of tax at source and consequent disallowance.

Analysis: The payment for software was examined in the light of the licence terms and the nature of rights transferred. The Tribunal followed the jurisdictional High Court decision holding that what is transferred in such transactions is not merely a sale of a physical medium, but a licence to use the software, including the right to copy and store it for internal business use. Such rights form part of copyright, and the consideration paid is therefore royalty within the meaning of the Income-tax Act and the relevant treaty provisions. The Tribunal also held that the earlier order relied on by the assessee did not apply on the facts, since the present case had already been examined under the treaty and the Act.

Conclusion: The payments were royalty, the assessee was liable to deduct tax at source, and the disallowance was upheld.

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