Software supply for internal use is not royalty where only a copyrighted article is licensed, not copyright itself.

Payments to non-resident vendors for software supplied for use in a wireless network were treated as consideration for a copyrighted article, not for transfer of copyright or a right to use copyright. The vendors retained ownership of the software and source code, and the purchaser's rights were confined to internal use, with restrictions on copying, sublicensing, modification, reverse engineering, decoding, and commercial exploitation. Although the domestic royalty definition was broader, the applicable DTAA controlled and did not treat such software payments as royalty. The result was that no tax was required to be withheld at source on these payments, and disallowance under section 40(a)(i) was not attracted.

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Issues: Whether payments made to non-resident vendors for supply of software for use in a wireless network constituted royalty under the Act and the applicable DTAAs so as to attract deduction of tax at source and disallowance under section 40(a)(i).

Analysis: The agreements showed that the assessee received only a limited licence to use the software for operating its network. The vendors retained ownership of the software and source code, while the assessee was restrained from copying, sublicensing, modifying, reverse engineering, decoding, or commercially exploiting the software. The software was supplied as a copyrighted article and not as a transfer of any part of the copyright itself. On that footing, the consideration was for acquisition of the software product for internal use and not for the use of, or right to use, copyright. The domestic law definition in section 9(1)(vi) was broader, but the relevant treaty provisions governed the transaction where applicable, and the treaty meaning of royalty did not cover such outright purchase of copyrighted software products. The Court also preferred the view favourable to the taxpayer where conflicting views existed.

Conclusion: The payments did not constitute royalty, and the assessees were not obliged to deduct tax at source on those payments.

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