Software licence payments to non-residents are not royalty, so no Indian tax withholding arose on the receipts.

Consideration paid to non-resident suppliers for software under end-user licence or distribution agreements was treated as payment for a copyrighted article, not for any right in copyright. Applying Engineering Analysis, such non-exclusive licences do not create royalty income, the treaty position prevails where more beneficial, and no income chargeable to tax arose in India from these receipts. As a result, the payer had no obligation to deduct tax at source under section 195, and the appeals were dismissed.

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Issues: Whether consideration paid to non-resident suppliers for computer software under end user licence or distribution agreements constitutes royalty for use of copyright, and whether such receipts are taxable in India so as to attract deduction of tax at source under section 195.

Analysis: The governing principle applied was that a non-exclusive software licence transfers only the right to use the copyrighted article and does not part with any right in the copyright itself. The Supreme Court ruling in Engineering Analysis was treated as settling that such payments do not amount to royalty, that the broader domestic definition cannot prevail where the applicable treaty is more beneficial, and that no income chargeable to tax arose from such software receipts.

Conclusion: The software payments were not royalty, no taxable income arose in India on that basis, and the obligation to deduct tax at source under section 195 did not arise. The appeals were therefore dismissed.

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