Software licence payments are not royalty when only limited use rights are granted, not copyright rights under treaty law.

A software licence fee is not treated as royalty under the India-Singapore DTAA where the payer receives only a limited right to use the programme for internal business purposes and no rights in the underlying copyright. The treaty meaning of royalty applies only to consideration for use of, or the right to use, copyright itself, not merely copyrighted software as an article. A domestic amendment to section 9(1)(vi) cannot widen the treaty meaning where the treaty is more beneficial. In the absence of a permanent establishment of the non-resident recipient in India, the payment is not taxable as business income under the treaty, and no tax deduction obligation arises under section 195.

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Issues: Whether consideration paid for software licence amounted to royalty chargeable to tax in India and whether the payer was liable to deduct tax at source and be treated as an assessee in default.

Analysis: The software agreement granted only a limited right to use the computer programme for internal business purposes. The recipient retained all ownership and intellectual property rights, and the payer did not obtain any of the exclusive rights comprised in copyright under the Copyright Act, 1957. Computer software may fall within literary work, but the treaty definition of royalty requires consideration for the use of, or right to use, copyright itself and not merely the use of copyrighted material. The broader domestic-law amendment inserting Explanation 4 to section 9(1)(vi) of the Income-tax Act, 1961 could not enlarge the treaty meaning, since the assessee was entitled to rely on the more beneficial treaty provisions. In the absence of a permanent establishment of the non-resident recipient in India, the payment was not taxable as business income under the treaty.

Conclusion: The payment was not royalty under the India-Singapore DTAA, no tax was deductible at source under section 195, and the assessee could not be treated as an assessee in default under sections 201(1) and 201(1A) of the Income-tax Act, 1961.

Ratio Decidendi: For treaty purposes, consideration for a software licence is not royalty unless it is paid for the use of, or right to use, copyright in the software; a mere right to use the software as a copyrighted article is not sufficient, and a later domestic amendment cannot expand the unamended treaty meaning.

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