Software distribution licence as royalty, TDS applies; penalty initiation challenge fails, and section 234B interest is not leviable.

A restricted licence to distribute shrink-wrapped software, where copying for installation and backup was permitted but copyright remained with the supplier, was treated as royalty and attracted tax deduction at source under section 195. The challenge to initiation of penalty proceedings was held not maintainable because mere initiation caused no final prejudice and no appeal lay against it. Interest under section 234A was held leviable as mandatory on the facts, with no computation error shown. Interest under section 234B was not leviable because, where tax was deductible at source from the relevant income, the non-resident payee could not be charged with advance-tax shortfall interest.

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Issues: (i) Whether payments made for distribution of shrink-wrapped software constituted royalty, requiring deduction of tax at source under section 195 of the Income-tax Act, 1961; (ii) whether the ground challenging initiation of penalty proceedings under section 271(1)(c) of the Income-tax Act, 1961 was maintainable; (iii) whether interest under section 234A of the Income-tax Act, 1961 was leviable; (iv) whether interest under section 234B of the Income-tax Act, 1961 was leviable on the assessee.

Issue (i): Whether payments made for distribution of shrink-wrapped software constituted royalty, requiring deduction of tax at source under section 195 of the Income-tax Act, 1961.

Analysis: The payment was examined in the light of the earlier binding decision on identical facts in the assessee's own case and the jurisdictional High Court's ruling on software distribution arrangements. The software agreement showed that what was granted was only a limited right to use and distribute the software, while ownership in the copyright remained with the non-resident supplier. The reasoning proceeded on the basis that the right to make copies for installation and backup, and the restricted licence to exploit the software, amounted to use of copyright and not a mere sale of goods.

Conclusion: The payment constituted royalty and tax was deductible at source under section 195. The issue was decided against the assessee.

Issue (ii): Whether the ground challenging initiation of penalty proceedings under section 271(1)(c) of the Income-tax Act, 1961 was maintainable.

Analysis: The ground was treated as premature, because no final prejudice arose merely from initiation of penalty proceedings. It was also noted that an appeal does not lie against mere initiation of penalty proceedings under the appellate provision invoked.

Conclusion: The challenge to initiation of penalty proceedings was not maintainable. The issue was decided against the assessee.

Issue (iii): Whether interest under section 234A of the Income-tax Act, 1961 was leviable.

Analysis: The levy of interest was treated as mandatory, and no error in the computation was shown. On that basis, the appellate finding against the assessee was affirmed.

Conclusion: Interest under section 234A was leviable. The issue was decided against the assessee.

Issue (iv): Whether interest under section 234B of the Income-tax Act, 1961 was leviable on the assessee.

Analysis: The levy was examined with reference to the principle that where tax was deductible at source from the relevant income, the non-resident payee could not be fastened with interest for shortfall in advance tax. Following the cited judicial authorities, the direction to delete interest was upheld.

Conclusion: Interest under section 234B was not leviable on the assessee in the facts of the case. The issue was decided against the Revenue.

Final Conclusion: The assessee's appeal failed on royalty, penalty initiation, and section 234A interest, while the Revenue's challenge to deletion of section 234B interest also failed, leaving the Revenue successful only on the royalty-withholding issue.

Ratio Decidendi: A restricted software distribution licence that permits copying, installation, and backup use while copyright remains with the supplier amounts to royalty, and tax must be deducted at source; conversely, where tax is deductible at source, section 234B interest cannot be levied on the payee for the corresponding advance-tax shortfall.

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