Software licence receipts not royalty in India; no withholding tax obligation arises on payments to non-resident suppliers.

Receipts from the sale or resale of computer software licences to Indian customers or distributors were held not to constitute royalty for use of copyright in software, following Engineering Analysis Centre of Excellence Pvt. Ltd. The Court applied the treaty position and section 90(2) of the Income-tax Act, 1961, holding that a broader domestic definition could not prevail where the treaty was more beneficial to the assessee. As the receipts were not taxable in India as royalty, no obligation to deduct tax at source under section 195 arose. The appeals were dismissed in favour of the assessee.

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Issues: Whether receipts from sale or resale of computer software licences to Indian customers or distributors were royalty taxable in India, and whether the payer was liable to deduct tax at source under section 195 of the Income-tax Act, 1961.

Analysis: The issue was held to be covered by the Supreme Court decision in Engineering Analysis Centre of Excellence Private Limited, which concluded that amounts paid by resident Indian end-users or distributors to non-resident software suppliers for resale or use of software through EULAs or distribution agreements do not amount to royalty for the use of copyright in computer software. It was further held that such amounts do not give rise to income taxable in India. The governing treaty position and section 90(2) of the Income-tax Act, 1961 were applied so that a broader domestic definition could not prevail where it was less beneficial to the assessee. On that basis, the reasoning that software receipts were taxable as royalty was not accepted.

Conclusion: The receipts were not taxable as royalty and no obligation to deduct tax at source under section 195 of the Income-tax Act, 1961 arose; the appeals were dismissed in favour of the assessee.

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