Software distribution payments were not royalty, so no withholding tax, default liability, or disallowance followed.

Payments for distribution of software products under a non-exclusive, non-transferable licence were not royalty because the assessee received only a copyrighted article, not rights in the copyright itself. The supplier had no source code access, no power to modify the products, and no proprietary rights in the underlying intellectual property; the India-UK treaty definition of royalty therefore governed, and the domestic retrospective amendment to section 9(1)(vi) could not enlarge treaty scope. As the UK recipient had no permanent establishment in India, the sums were not taxable as royalty in India, so no tax was deductible at source and the consequential exposure under sections 201, 201(1A) and 40(a)(ia) did not arise.

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Issues: Whether payments made for distribution of software products to a UK resident supplier constituted royalty, thereby attracting deduction of tax at source under section 195 and consequential liability under sections 201 and 201(1A), and whether related disallowance under section 40(a)(ia) could be sustained.

Analysis: The agreement showed that the assessee was only granted a non-exclusive, non-transferable licence to market and distribute software products. It had no right to the source code, no authority to modify the products, and did not acquire any proprietary rights in the copyright, patents, trademarks or other intellectual property. The payments were for distribution of copyrighted software products, not for use of or right to use the copyright itself. A distinction was drawn between a copyrighted article and copyright. The India-UK treaty definition of royalty governed the field, and the retrospective domestic amendment to section 9(1)(vi) inserting Explanation 4 could not by itself expand the treaty scope. As the foreign recipient had no permanent establishment in India, the payments were not taxable as royalty in India.

Conclusion: The payments were not royalty, so the assessee was under no obligation to deduct tax at source; consequently, it could not be treated as an assessee in default, interest under section 201(1A) was not leviable, grossing up did not arise, and disallowance under section 40(a)(ia) could not be sustained.

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