Software licence payments treated as royalty, triggering tax deduction at source and section 201 liability.

Consideration paid for shrink-wrap software to a non-resident was treated as royalty because the licence conveyed rights in copyrighted software, not a mere purchase of a tangible copy. Applying the Karnataka High Court ruling in Samsung Electronics and the assessee's own prior case, the ITAT held that the payment fell within section 9(1)(vi) of the Income-tax Act and Article 12 of the Indo-Ireland DTAA. As the sum was chargeable to tax in India, the obligation to deduct tax at source under section 195 arose, and failure to do so sustained liability under sections 201(1) and 201(1A).

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Issues: Whether the consideration paid for shrink-wrap software to a non-resident constituted royalty under the Income-tax Act, 1961 and the Indo-Ireland DTAA, so as to attract deduction of tax at source under section 195 and consequential liability under sections 201(1) and 201(1A).

Analysis: The payments were held to be for the right to use copyrighted software and not a mere purchase of a tangible copy. Following the binding Karnataka High Court decision in Samsung Electronics and the coordinate bench decision in the assessee's own case, the Tribunal held that the licence granted in relation to software involved transfer of rights in copyrighted software. On that basis, the sum paid was treated as royalty within section 9(1)(vi) of the Income-tax Act, 1961 and Article 12 of the Indo-Ireland DTAA. Once the payment was held chargeable to tax in India, the obligation to deduct tax at source under section 195 followed, and failure to do so attracted section 201 consequences.

Conclusion: The payments were royalty, the assessee was liable to deduct tax at source, and the additions under sections 201(1) and 201(1A) were upheld, in favour of Revenue.

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