Software licence payments are not royalty where only a copyrighted article is supplied and no copyright rights are transferred.

Payment for a restricted software licence for internal use, without transfer of source code or any right to commercially exploit the software, is treated as consideration for a copyrighted article rather than a transfer of copyright rights. Where the applicable treaty definition of royalty is narrower than the domestic definition, the treaty meaning prevails and a retrospective domestic does not enlarge treaty scope unless the treaty is correspondingly amended. On that approach, software remittances are outside royalty under the treaty and no tax withholding obligation arises under section 195; consequently, there is no default liability under sections 201(1) and 201(1A).

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Issues: Whether consideration paid for licensed software constituted royalty so as to attract tax deduction at source under section 195, and whether the assessee could be treated as an assessee in default under sections 201(1) and 201(1A).

Analysis: The payments were for supply of software for internal use under restricted licence terms, without transfer of source code or any right to commercially exploit the software. The distinction between transfer of a copyrighted article and transfer of copyright rights was applied. The definition of royalty in the treaty was treated as narrower than the domestic definition, and the retrospective expansion in the Income-tax Act was held not to enlarge the treaty meaning in the absence of corresponding amendment. Where two possible views existed, the view favourable to the assessee was adopted. The software payments were therefore not treated as royalty under the treaty.

Conclusion: The assessee was not liable to deduct tax at source on the software payments, and the demand raised under sections 201(1) and 201(1A) could not survive.

Final Conclusion: The software remittances were held to be outside the charge of royalty for treaty purposes, with the result that the assessee was not in default for failure to withhold tax.

Ratio Decidendi: Payment for a restricted licence to use software, without transfer of copyright rights or power to commercially exploit the software, is consideration for a copyrighted article and not royalty where the applicable treaty definition is narrower than the domestic law.

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