Software subscription payment was not royalty under the India-Israel treaty, so no tax deduction at source applied.

Software subscription remittance to a foreign supplier was treated as payment for a copyrighted article, not as consideration for transfer or exploitation of copyright. Because the assessee acquired no right to commercially exploit the software copyright, and the supplier retained ownership, the amount did not constitute royalty under Article 12 of the India-Israel DTAA. The domestic law expansion of royalty under section 9(1)(vi) could not be imported to enlarge treaty taxation, and with no permanent establishment in India, the remittance was not taxable and tax was not deductible at source.

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Issues: Whether the payment made for software subscription/remittance to the foreign supplier constituted royalty under Article 12 of the India-Israel DTAA and section 9(1)(vi) of the Income-tax Act, 1961, so as to require deduction of tax at source under section 195(2) of the Income-tax Act, 1961.

Analysis: The payment was held to be for use of a copyrighted article and not for transfer or exploitation of copyright itself. The assessee did not acquire any right to commercially exploit the software copyright, and the foreign supplier retained the copyright. The treaty definition of royalty governed the matter, and the domestic law amendment expanding the scope of royalty could not be imported into the DTAA to enlarge taxability where the treaty language did not so provide. As the foreign entity had no permanent establishment in India and the payment did not fall within royalty under the treaty, the remittance was not liable to tax deduction at source.

Conclusion: The payment was not royalty and tax was not deductible on the remittance; the issue was decided in favour of the assessee.

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