Software licence payments treated as royalty, triggering tax deduction at source for non-resident suppliers.

Consideration paid for a licence to use shrink-wrapped or off-the-shelf software, including the right to copy it onto a hard disk and make backup copies for internal business use, was treated as royalty because those rights formed part of copyright under the Copyright Act, 1957. Applying the binding jurisdictional High Court ruling, the payment fell within section 9(1)(vi) of the Income-tax Act, 1961, so the payer was required to deduct tax at source under section 195. Failure to deduct attracted liability under sections 201(1) and 201(1A), and the issue was decided in favour of the Revenue.

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Issues: Whether payments made for purchase and use of licensed software from non-resident suppliers constituted royalty so as to attract deduction of tax at source under section 195 and consequent liability under sections 201(1) and 201(1A).

Analysis: The payment was for a licence to use the software, including the right to copy it onto the hard disk and make backup copies for internal business use. Such rights formed part of the copyright under the Copyright Act, 1957. Following the binding jurisdictional High Court ruling, the amount paid to the non-resident supplier for shrink-wrapped or off-the-shelf software was treated as consideration for the right to use copyright and therefore fell within the definition of royalty under section 9(1)(vi) of the Income-tax Act, 1961. Once the payment was royalty, the payer was required to deduct tax at source under section 195, and failure to do so attracted liability under sections 201(1) and 201(1A).

Conclusion: The issue was decided against the assessee and in favour of the Revenue.

Ratio Decidendi: Consideration paid for a licence enabling use and copying of software for internal business use is royalty, not merely payment for a copyrighted article, and it attracts tax deduction at source under section 195 of the Income-tax Act, 1961.

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