Software payment as copyrighted article, not royalty, and later domestic amendment cannot fasten withholding on earlier remittances.

Software acquired off the shelf for internal business use, without transfer of copyright or commercial exploitation rights, is treated as payment for a copyrighted article rather than royalty under a restrictive DTAA definition. Where the treaty is more beneficial than domestic law, the treaty prevails, and the non-resident receipt is not taxed as royalty or business profits in India absent a permanent establishment. The text also explains that retrospective Explanation 4 to section 9(1)(vi) broadened domestic law, but it could not be used to create withholding liability for remittances made before the amendment, including transactions involving Hong Kong payments.

---

---

Issues: (i) Whether consideration paid for purchase of off-the-shelf software from non-resident suppliers constituted royalty under section 9(1)(vi) of the Income-tax Act, 1961 and the relevant DTAA, or only payment for a copyrighted article taxable as business income of the non-resident; (ii) Whether the retrospective insertion of Explanation 4 to section 9(1)(vi) altered the position for remittances made prior to that amendment, including cases where no DTAA existed.

Issue (i): Whether consideration paid for purchase of off-the-shelf software from non-resident suppliers constituted royalty under section 9(1)(vi) of the Income-tax Act, 1961 and the relevant DTAA, or only payment for a copyrighted article taxable as business income of the non-resident.

Analysis: The software was purchased as a standardised product for internal business use, embedded in media, with no transfer of copyright or commercial exploitation rights. The DTAA definitions of royalty were restrictive and did not specifically include computer software, while the domestic law was wider. Where the treaty was more beneficial, section 90(2) required it to prevail. Use of the software for the assessee's own business amounted to use of a copyrighted article and not use of copyright. The non-resident had no permanent establishment in India, so the receipts could not be taxed as royalty under the DTAA and were not chargeable in India as business profits.

Conclusion: The payment was not royalty under the applicable DTAA and the assessee was not liable to deduct tax at source on that basis; the issue was decided in favour of the assessee.

Issue (ii): Whether the retrospective insertion of Explanation 4 to section 9(1)(vi) altered the position for remittances made prior to that amendment, including cases where no DTAA existed.

Analysis: Explanation 4 broadened the domestic law and changed the pre-existing position rather than merely clarifying it. The assessee's remittances had been made before that amendment, when the prevailing legal position and prior decisions supported non-deduction of tax. A subsequent amendment changing the law could not be applied to fasten withholding liability on earlier transactions. For the Hong Kong payments, the same reasoning applied and the receipts remained outside tax deduction liability on the facts found.

Conclusion: Explanation 4 did not operate to create withholding liability for the earlier remittances, including the Hong Kong transactions; the issue was decided in favour of the assessee.

Final Conclusion: The software payments were treated as payments for copyrighted articles and not royalty, and the retrospective domestic amendment did not alter the result for the transactions in question. The Revenue's appeals failed and the assessee's appeals succeeded.

Ratio Decidendi: Where software is acquired for internal use without transfer of copyright rights, the payment is for a copyrighted article and not royalty under a restrictive DTAA definition, and a later domestic-law expansion of royalty cannot be read into the treaty or retrospectively fasten withholding liability on earlier transactions.

---