Software acquisition payments treated as purchase consideration, not royalty, and maintenance disallowance sent back for factual verification.

Payments for acquisition of software for onward supply and installation, where no source code or right to exploit the copyright was transferred, were treated as purchase consideration and not royalty; section 195 withholding was therefore not attracted. Annual maintenance service payments were not finally disallowed under section 40(a)(ia) because the Tribunal required verification of whether the remittance and tax deduction had occurred in the following year, and relief would follow if that factual position was confirmed. The assessee obtained relief on the software-payment issue, with only limited remand on the maintenance-payment issue.

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Issues: (i) Whether payments made for purchase of software from the overseas associate enterprise were royalty chargeable to tax in India, so as to attract deduction of tax at source under section 195 of the Income-tax Act, 1961; (ii) Whether annual maintenance service payments were liable to disallowance under section 40(a)(ia) of the Income-tax Act, 1961 for non-deduction of tax at source.

Issue (i): Whether payments made for purchase of software from the overseas associate enterprise were royalty chargeable to tax in India, so as to attract deduction of tax at source under section 195 of the Income-tax Act, 1961.

Analysis: The payments were examined in the light of the business model, the nature of the software transactions, and the earlier view taken in connected matters on the same line of software sales. The software was found to be purchased for onward supply and installation, without transfer of source code or any right to exploit the software as copyright, and the same transaction had been treated consistently as purchase rather than royalty in the related matter of the associate enterprise. On that basis, the payment did not fall within the royalty provisions of the Act or the treaty framework relied on below.

Conclusion: The payments were not royalty and section 195 was not attracted; the assessee succeeded on this issue.

Issue (ii): Whether annual maintenance service payments were liable to disallowance under section 40(a)(ia) of the Income-tax Act, 1961 for non-deduction of tax at source.

Analysis: The maintenance payment was examined on the footing that the actual remittance was made in the following year and tax was deducted at that stage. The Tribunal directed verification of this factual position and indicated that, if the payment and deduction were found to be in order, the disallowance would not survive. The issue was therefore restored only for limited verification of the payment and deduction position.

Conclusion: The disallowance was not finally sustained and the assessee obtained relief subject to verification.

Final Conclusion: The software purchase payments were held not to be royalty, while the maintenance-fee disallowance was sent back for factual verification, resulting in overall relief to the assessee with limited remand on one issue.

Ratio Decidendi: A payment for acquisition and resale of software, without transfer of copyright or right to exploit the underlying program, is to be treated as purchase consideration and not royalty; disallowance for non-deduction of tax cannot be sustained on that basis.

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