Software reseller payments are purchase consideration, not royalty, where only limited use rights are granted and copyright stays with the supplier.

Payments made under a value added reseller arrangement for software were treated as purchase consideration for a copyrighted article, not royalty for use of copyright. The agreement allowed only limited marketing, demonstration and customisation rights, while copyright and intellectual property remained with the foreign supplier. On that basis, the payments did not attract tax withholding as royalty, and the related disallowances under sections 40(a)(i) and 40(a)(ia) were deleted. The analysis followed earlier decisions distinguishing resale of software products from acquisition of copyright rights and rejected the contrary Karnataka view.

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Issues: Whether payments made for acquiring software under a value added reseller arrangement were royalty and, on that basis, disallowable under sections 40(a)(i) and 40(a)(ia) of the Income-tax Act, 1961.

Analysis: The agreement showed that the assessee was appointed to market and resell the software products, with only limited rights to use, demonstrate and customise the software for end users while copyright and intellectual property remained with the foreign supplier. The findings of the appellate authorities were that the assessee was engaged in resale of software as a product, not acquisition of rights in the copyright. Payments for purchase of software as a copyrighted article were treated as purchase consideration and not consideration for use of, or right to use, copyright. On that basis, the court followed the view taken in earlier decisions that such payments do not constitute royalty. The court also rejected reliance on the contrary Karnataka view.

Conclusion: The payments were not royalty and no tax was required to be deducted at source; the disallowances under sections 40(a)(i) and 40(a)(ia) were rightly deleted.

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