Non-exclusive software licences are not royalty, and treaty protection can prevent Indian withholding tax on such payments.

Consideration paid by resident Indian end-users or distributors to non-resident software suppliers under end-user licence or distribution agreements is not royalty where the arrangement grants only a non-exclusive right to use the software without transfer of copyright rights. Where a DTAA applies, the treaty definition prevails over the wider domestic definition of royalty under section 90(2), so the payments are not treated as taxable income in India on that basis and no withholding obligation arises under section 195.

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Issues: Whether consideration paid by resident Indian end-users or distributors to non-resident computer software suppliers under end-user licence agreements or distribution agreements is royalty for the use of copyright in computer software and whether such payment gives rise to income taxable in India so as to attract deduction of tax at source under section 195.

Analysis: The binding Supreme Court decision held that a non-exclusive software licence does not transfer any copyright rights under the Copyright Act; the licence only permits use of the copyrighted product subject to restrictive conditions. It further held that the broader domestic definition of royalty cannot override the more beneficial treaty definition where the DTAA applies, by virtue of section 90(2) of the Income-tax Act. Applying that ruling, payments for resale or use of software under EULAs or distribution arrangements were not treated as royalty for use of copyright and were not regarded as taxable income in India.

Conclusion: The issue was decided in favour of the assessee. The software payments were not royalty, were not taxable in India on that basis, and no withholding obligation arose under section 195.

Ratio Decidendi: Consideration for the mere use or resale of computer software under a non-exclusive licence does not amount to royalty for the use of copyright, and where the DTAA is more beneficial, its definition prevails over the wider domestic definition.

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