Software licence payments for a copyrighted article are not royalty absent copyright transfer or exploitation rights under the India-USA DTAA.

Consideration paid for shrink-wrapped software acquired for internal use under a non-exclusive, non-transferable licence, without transfer of copyright or any right to exploit it, is treated as payment for a copyrighted article and not royalty. The analysis follows the view that the treaty definition of royalty under the India-USA DTAA prevails over the expanded domestic definition in section 9(1)(vi), and that retrospective domestic amendments cannot enlarge the treaty meaning. On that basis, the payment is not chargeable to tax in India and no tax withholding obligation arises under section 195.

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Issues: Whether consideration paid for acquisition of shrink-wrapped software from a US supplier constituted royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 12(3) of the India-USA DTAA, so as to require deduction of tax at source under section 195 of the Income-tax Act, 1961.

Analysis: The software was acquired for internal use under a non-exclusive and non-transferable licence, with no transfer of copyright or right to exploit the copyright. The Court followed the line of authority holding that a payment for a copyrighted article is distinct from payment for copyright itself. It preferred the Delhi High Court view over the contrary Karnataka High Court view, noting that where two constructions are possible the one favourable to the assessee should be adopted. It also held that the treaty definition of royalty prevailed over the enlarged domestic definition, and that the retrospective amendment to section 9(1)(vi) could not be read into the DTAA to expand the treaty meaning of royalty.

Conclusion: The payment was not royalty and was not chargeable to tax in India as such. The assessee was not liable to deduct tax at source under section 195, and the demand under sections 201(1) and 201(1A) could not be sustained.

Ratio Decidendi: Consideration for a copyrighted article, without transfer of any copyright or right to exploit the copyright, is not royalty under the India-USA DTAA or section 9(1)(vi) of the Income-tax Act, 1961, and domestic amendments cannot unilaterally enlarge the treaty definition.

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