Software licence resale and royalty treatment restored for fresh factual examination on tax deduction and disallowance.

Payment for procurement and resale of software licences was examined on the question whether it constituted royalty, attracting tax deduction at source and disallowance under section 40(a)(i). The assessee contended that it acted only as a distributor, with no access to source code or rights to modify, reproduce or commercially exploit the software, and relied on the principle that a mere dealer's purchase and resale does not automatically amount to royalty. However, the factual basis for that claim required supporting material, and the matter had been decided below largely by reference to earlier orders that were themselves remitted. The issue was therefore restored to the Assessing Officer for fresh adjudication after hearing the assessee.

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Issues: Whether the payment made for procurement and resale of software licences to overseas associated enterprises constituted royalty so as to attract deduction of tax at source and disallowance under section 40(a)(i).

Analysis: The assessee's case was that it acted only as a distributor, purchasing software from its foreign associated enterprise and reselling it to end customers on a back-to-back basis, without access to source code or any right to modify, reproduce, or commercially exploit the software. The decision in Dynamic Vertical Software India (P.) Ltd. was noted for the principle that a mere dealer's purchase and sale of software does not automatically amount to royalty, but the assessee was still required to establish the factual basis for that claim with supporting material. As the lower authorities had proceeded mainly on earlier orders that had themselves been remitted for fresh consideration, and in view of the need to examine the facts and materials afresh, the matter was sent back to the Assessing Officer.

Conclusion: The issue was restored to the Assessing Officer for fresh adjudication in accordance with law after giving the assessee an opportunity of hearing.

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