Software licence with trademark rights treated as royalty, triggering withholding tax and interest liability for non-deduction.

A licence fee for software, coupled with rights to copy, develop, reproduce and market the product using the foreign licensor's trademarks and logos, was treated as royalty under Article 12(3) of the treaty and Section 9(1)(vi) of the Income-tax Act. Because the payment was royalty chargeable to tax in India, the payer was required to deduct tax at source under Section 195. Failure to deduct or remit tax attracted interest liability under Section 201(1A), and the interest objection was rejected.

---

---

Issues: (i) Whether the annual fee paid for the right to use software, together with the right to copy, develop, reproduce, market and use the foreign company's trademarks and logos, constituted royalty under the applicable tax treaty and the Income-tax Act. (ii) Whether the assessee was liable to deduct tax at source and, on failure to do so, liable to pay interest for non-deduction and non-payment.

Issue (i): Whether the annual fee paid for the right to use software, together with the right to copy, develop, reproduce, market and use the foreign company's trademarks and logos, constituted royalty under the applicable tax treaty and the Income-tax Act.

Analysis: The payment was linked not to a mere purchase of software, but to a licence conferring rights to copy, develop and reproduce the software and to market the product using the foreign company's trademark and logo. On those terms, the consideration fell within the treaty definition of royalty under Article 12(3) and also within the domestic law definition in Section 9(1)(vi) of the Income-tax Act, 1961.

Conclusion: The payment was royalty and was taxable in India.

Issue (ii): Whether the assessee was liable to deduct tax at source and, on failure to do so, liable to pay interest for non-deduction and non-payment.

Analysis: Once the payment was held to be royalty chargeable to tax in India, the payer was obliged to deduct tax under Section 195. Since tax was not deducted or remitted, liability to interest under Section 201(1A) followed. The interest contention was rejected.

Conclusion: The assessee was liable to deduct tax at source and was also liable to pay interest under Section 201(1A).

Final Conclusion: The appeals failed because the licence fee was treated as royalty and the associated withholding-tax and interest liabilities were upheld.

Ratio Decidendi: Where a licence grants not only use of software but also the rights to copy, develop, reproduce and market it using the licensor's trademarks or logos, the consideration is royalty chargeable to tax, attracting withholding under Section 195 and interest consequences for default.

---