Software licence for internal use is not royalty where no copyright rights are transferred, ruling out withholding tax.

A limited licence to use software for internal business purposes, coupled with express restrictions on copying, decompiling, reverse engineering, sublicensing and modification, was treated as payment for a copyrighted article rather than a transfer of any right in copyright. The consideration therefore did not fall within royalty under Article 12 of the India-USA DTAA, and the domestic retrospective expansion of royalty could not enlarge the treaty meaning without a corresponding amendment to the treaty. The payment was not royalty under the Act or the DTAA, so no tax withholding obligation arose on that basis.

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Issues: Whether payment made for use of software owned by a foreign company constituted royalty liable to tax deduction at source.

Analysis: The software agreement conferred only a limited licence to use the software for internal business purposes and specifically barred copying, decompiling, reverse engineering, sublicensing, modification, or any exploitation of copyright. On those terms, the payment was for a copyrighted article and not for transfer of any right in the copyright. The treaty definition of royalty under Article 12 covered consideration for use of, or right to use, copyright, and the domestic-law retrospective expansion of royalty could not enlarge the treaty meaning in the absence of a corresponding treaty amendment.

Conclusion: The payment was not royalty under the Act or the India-USA DTAA, and no obligation to withhold tax at source arose on that basis.

Final Conclusion: The Revenue's appeals failed and the orders of the first appellate authority were sustained.

Ratio Decidendi: Consideration for a limited licence to use software as a copyrighted article, without any right to exploit the copyright, is not royalty; a unilateral retrospective amendment to domestic tax law does not override the treaty definition of royalty.

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