Software licence payments without copyright transfer are not royalty and do not trigger tax withholding in India.

Payments for software licences or end-user download arrangements to non-resident vendors were not royalty because they did not involve transfer of any right in copyright under Section 9(1)(vi) or the applicable DTAA. Applying Engineering Analysis, the court held that no income was chargeable to tax in India on that basis, so tax deduction at source under Section 195 was not required. The assessee therefore could not be treated as an assessee in default under Section 201(1).

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Issues: Whether consideration paid for software licences/downloads to non-resident vendors constituted royalty so as to attract tax deduction at source and treatment of the assessee as an assessee in default under the Income-tax Act, 1961.

Analysis: The dispute turned on whether payments for software distribution or end-user licence arrangements amounted to royalty within the meaning of Section 9(1)(vi) of the Income-tax Act, 1961 and the applicable DTAA, thereby creating income chargeable to tax in India and obliging deduction under Section 195. The Supreme Court's ruling in Engineering Analysis was applied, which held that such payments do not create any interest or right in copyright and therefore do not constitute royalty or taxable income in India on the facts of such software licence transactions.

Conclusion: The payments were not royalty, no income was chargeable in India on that basis, and the assessee was not liable to deduct tax at source under Section 195 or be treated as an assessee in default under Section 201(1).

Ratio Decidendi: Payments for resale or use of computer software under standard distribution or end-user licence arrangements, without transfer of any copyright right, are not royalty and do not attract TDS under Section 195 where no income is chargeable to tax in India.

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