Software licence payments are not royalty, so no Indian tax withholding arises on such cross-border distribution arrangements.

Payments made for computer software under distribution or end-user licence arrangements were treated as outside the scope of royalty because the Supreme Court in Engineering Analysis held that such consideration for resale or use of software does not amount to payment for use of copyright. Applying that ruling, the Madras HC held that section 9(1)(vi) did not apply on the facts, so no income was chargeable in India from the software payments and no obligation to deduct tax at source arose under section 195. The issue was therefore decided in favour of the assessee and against the Revenue.

---

---

Issues: Whether payments made for computer software under distribution or end-user licence arrangements constitute royalty so as to give rise to income taxable in India and to an obligation to deduct tax at source under section 195.

Analysis: The issue stood covered by the Supreme Court decision in Engineering Analysis Centre of Excellence Private Limited, which held that consideration paid by resident Indian end-users or distributors to non-resident suppliers for resale or use of computer software under such agreements does not amount to royalty for the use of copyright. The Court applied that ruling and held that the relevant provisions of section 9(1)(vi) dealing with royalty had no application on the facts. On that basis, no income was chargeable in India from such payments and the obligation to deduct tax at source under section 195 did not arise.

Conclusion: The issue was decided against the Revenue and in favour of the assessee.

---