Software licence, bandwidth charges and unsegregated reimbursements treated as royalty, triggering withholding tax obligations.

Payments for a non-exclusive, non-transferable software licence and maintenance were treated as royalty because the assessee acquired the right to use software rather than a mere copyrighted article, so tax had to be withheld under section 195. Dedicated bandwidth charges were also characterised as royalty, as they were considered consideration for use of a process and a facility under section 9(1)(vi) and the DTAA, again attracting withholding. Amounts routed as reimbursements were not proved to be pure reimbursements with proper segregation and supporting records, so they were taxed according to their underlying character and subjected to deduction at source.

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Issues: (i) Whether payments for software licence and maintenance were royalty within the meaning of section 9(1)(vi) of the Income-tax Act, 1961, attracting deduction of tax at source under section 195; (ii) Whether bandwidth charges were royalty and chargeable to tax in India under the Act and the DTAA; (iii) Whether reimbursement of expenses routed through the parent company was liable for tax deduction at source.

Issue (i): Whether payments for software licence and maintenance were royalty within the meaning of section 9(1)(vi) of the Income-tax Act, 1961, attracting deduction of tax at source under section 195.

Analysis: The payment was for a licence to use software on non-exclusive and non-transferable terms, and not for a mere sale of software as goods. The distinction between purchase of a copyrighted article and acquisition of the right to use copyright was material. Where the assessee obtains the right to use software under a licence, the consideration assumes the character of royalty. The statutory definition, including the relevant explanations to section 9(1)(vi), supported treatment of such consideration as royalty.

Conclusion: The payment for software licence and maintenance was rightly treated as royalty, and the assessee was liable to deduct tax at source; the finding was against the assessee.

Issue (ii): Whether bandwidth charges were royalty and chargeable to tax in India under the Act and the DTAA.

Analysis: The bandwidth facility was a dedicated communication arrangement enabling uninterrupted transmission of voice and data through cable, optic fibre or similar technology. The consideration was for the use of a process and for the right to use the facility made available on a dedicated basis. The reasoning treated the bandwidth service as falling within the extended scope of royalty under section 9(1)(vi), including the explanations dealing with process and the absence of necessity of possession or control. The DTAA definition was also read as pari materia with the domestic provision.

Conclusion: Bandwidth charges were taxable as royalty and subject to withholding under section 195; the finding was against the assessee.

Issue (iii): Whether reimbursement of expenses routed through the parent company was liable for tax deduction at source.

Analysis: The so-called reimbursements were not shown to be pure reimbursements devoid of income character. The records indicated that the amounts included payments relatable to software, bandwidth and commission, and the assessee failed to produce a proper segregated statement with supporting invoices and vouchers. In the absence of reliable segregation, the payments were treated according to their underlying character and not as a neutral reimbursement outside the withholding regime.

Conclusion: The reimbursement payments were held liable for tax deduction at source; the finding was against the assessee.

Final Conclusion: All the grounds raised by the assessee failed, and the common orders confirming the assessee's default under the withholding provisions were sustained.

Ratio Decidendi: Consideration paid for a licence to use software or for dedicated bandwidth facility, where the payer acquires the right to use a copyrighted article or a process, is royalty within section 9(1)(vi) and attracts withholding under section 195; amounts not proved to be pure reimbursements are also subject to withholding according to their true character.

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