Restricted software licence payments are not royalty when only internal use is permitted and copyright rights remain untouched.

A restricted, non-transferable software licence used only for internal business purposes, with no right to copy, modify, sub-license, distribute or commercially exploit the software, is treated as payment for a copyrighted article rather than for use of the copyright itself. On that basis, the payment is not royalty under the Income-tax Act or the treaty definition considered, and no tax deduction at source arises. The text also reflects the jurisdictional High Court view that such software payments fall outside section 9(1)(vi), so the payer is not to be treated as an assessee in default.

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Issues: Whether consideration paid for a software licence used only for internal business purposes, without any right to copy, modify, sub-license, distribute or commercially exploit the software, constituted royalty liable to tax and consequential deduction at source.

Analysis: The licence terms showed that the payer acquired only a restricted right to use the software for internal purposes and did not acquire ownership or any right in the copyright itself. The arrangement did not permit copying, alteration, sub-licensing, external distribution or commercial exploitation. In that setting, the payment was for a copyrighted article and not for the use of, or right to use, copyright. The Tribunal also noted that the treaty definition of royalty did not bring the payment within its scope and relied on the jurisdictional High Court's view that such software payments are not royalty under section 9(1)(vi) of the Income-tax Act, 1961.

Conclusion: The payment for the software licence was not royalty, no tax was deductible at source, and the assessee was not liable to be treated as an assessee in default.

Ratio Decidendi: A payment for a restricted, non-transferable right to use software for internal purposes, without any right to exploit the copyright, is not royalty.

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