Software distribution payments treated as copyrighted article receipts, not royalty, so withholding disallowance was deleted.

Payment for distribution of copyrighted software under a non-exclusive, non-transferable licence was treated as payment for a copyrighted article, not a transfer of copyright rights. On that basis, the India-UK tax treaty did not characterise the payment as royalty, no withholding tax was required under section 195, and the related disallowance under section 40(a)(ia) was deleted. Short credit of TDS was remitted for factual verification and due relief, while interest under sections 234B and 234C was directed to be recomputed on the income ultimately determined.

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Issues: (i) Whether the payment made for distribution of copyrighted software under the India-UK tax treaty amounted to royalty and attracted tax deduction at source, leading to disallowance under section 40(a)(ia); (ii) whether short credit of tax deducted at source required verification and consequential relief; (iii) whether interest under sections 234B and 234C required recomputation.

Issue (i): Whether the payment made for distribution of copyrighted software under the India-UK tax treaty amounted to royalty and attracted tax deduction at source, leading to disallowance under section 40(a)(ia).

Analysis: The distribution arrangement showed that the assessee only received a non-exclusive, non-transferable licence to market and distribute software products in India, without any right to source code or proprietary copyright rights. The payment was for a copyrighted article and not for transfer of rights in the copyright itself. The earlier coordinate bench view in the assessee's own case was followed, and it was held that the retrospective domestic-law amendment did not alter the treaty position. Since the foreign supplier had no permanent establishment in India, the payment did not assume the character of royalty under the treaty framework.

Conclusion: The payment was not royalty, no tax was deductible under section 195, and the disallowance under section 40(a)(ia) was deleted in favour of the assessee.

Issue (ii): Whether short credit of tax deducted at source required verification and consequential relief.

Analysis: The claim was treated as a factual verification matter, and the Assessing Officer was directed to examine the TDS evidence and grant proper credit if due.

Conclusion: The issue was restored for verification and relief, in favour of the assessee to that extent.

Issue (iii): Whether interest under sections 234B and 234C required recomputation.

Analysis: The levy of interest was treated as mandatory and consequential, and the computation was directed to be made on the basis of the income ultimately determined and the returned income, as applicable.

Conclusion: The interest components were directed to be recomputed accordingly.

Final Conclusion: The principal addition on account of alleged royalty-based disallowance was removed, while the remaining issues were left for verification or recomputation, resulting in partial relief to the assessee.

Ratio Decidendi: Payment for distribution of copyrighted software on a principal-to-principal basis, without transfer of copyright rights, is not royalty for the purposes of the treaty and corresponding withholding provisions.

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