Shrink-wrapped software licence payments treated as royalty; interest for non-resident advance-tax default was not leviable where tax was deductible at source.

Consideration for shrink-wrapped software licences paid by Indian customers was treated as royalty because the transaction was viewed as use of copyrighted software rights, not a mere sale of goods; the receipt was therefore taxable in India under the Act and the applicable treaty. On interest under section 234B, the Tribunal followed its earlier view that a non-resident payee is not liable for advance-tax default where the payer was required to deduct tax at source, so interest was not leviable. The dispute thus turned on the royalty character of software licence payments and the inapplicability of section 234B to income subject to withholding tax.

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Issues: (i) Whether consideration received for sale of shrink-wrapped software licences from Indian customers constituted royalty taxable under section 9(1)(vi) of the Income-tax Act, 1961 and the applicable treaty. (ii) Whether interest under section 234B of the Income-tax Act, 1961 was leviable on the non-resident assessee.

Issue (i): Whether consideration received for sale of shrink-wrapped software licences from Indian customers constituted royalty taxable under section 9(1)(vi) of the Income-tax Act, 1961 and the applicable treaty.

Analysis: The assessee was a non-resident engaged in sale and marketing of software licences in India. The dispute turned on whether the transaction was a sale of goods or a grant of right to use software. The Tribunal followed the binding decision of the Karnataka High Court in the Samsung Electronics line of cases and its own earlier orders in the assessee's case. On that reasoning, the payment for shrink-wrapped software was treated as consideration for use of copyright rights embedded in the software, and not merely as sale of a CD or goods. The definition of royalty under the Act and the treaty was held to cover such receipts.

Conclusion: The receipts from Indian customers were held to be royalty and taxable in India; this issue was decided against the assessee.

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

Analysis: The Tribunal followed its earlier decisions in the assessee's own case and the principle that where the payer was obliged to deduct tax at source from payments to a non-resident, the non-resident payee could not be treated as being in default for advance tax purposes in respect of such income. Since tax was deductible at source, the assessee's liability to advance tax did not arise in the manner required to attract section 234B.

Conclusion: Levy of interest under section 234B was not sustainable; this issue was decided in favour of the assessee.

Final Conclusion: The appeal succeeded in part because the royalty addition was sustained, but the interest charge under section 234B was deleted.

Ratio Decidendi: Consideration for shrink-wrapped software licences to non-residents is royalty where the transaction entails use of copyrighted software rights, and interest under section 234B cannot be levied on a non-resident where the tax was deductible at source by the payer.

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