Software licence payments as royalty under the India-Italy treaty trigger withholding and support disallowance.

Non-exclusive, non-transferable software licence payments to a foreign group company were treated as royalty under the India-Italy DTAA and section 9(1)(vi), because the licence was regarded as involving copyright-related rights within the treaty's wide royalty definition. On that basis, the consideration was held subject to tax withholding under section 195, and failure to deduct tax justified disallowance under section 40(a)(i). The Tribunal relied on the jurisdictional High Court's later view approving the revenue-favouring interpretation of software payments as royalty, which bound its approach to the treaty issue.

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Issues: Whether the payments made for software licences to the foreign group company constituted royalty under the India-Italy DTAA and section 9(1)(vi) of the Income-tax Act, 1961, so as to attract deduction of tax at source under section 195 and consequent disallowance under section 40(a)(i).

Analysis: The payment related to non-exclusive, non-transferable software licences usable only for internal business purposes, with no right of sublicence or transfer. The Tribunal noted that the relevant treaty definition of royalty had already been interpreted in the assessee's own case and contrasted the competing judicial views on software payments, including the later jurisdictional High Court ruling which approved the view that such payments can fall within royalty where the licence conveys rights in respect of copyright. Since the jurisdictional High Court had affirmed the revenue-favouring view, the treaty and the Act were held to cover the consideration as royalty liable for withholding.

Conclusion: The software licence payments were held to be royalty, tax was deductible at source under section 195, and the disallowance under section 40(a)(i) was sustainable; the issue was decided against the assessee and in favour of the Revenue.

Final Conclusion: The revenue's appeal succeeded and the relief granted by the first appellate authority was reversed.

Ratio Decidendi: A non-exclusive, non-transferable software licence can constitute royalty where the treaty definition is wide enough to cover consideration for the use of, or the right to use, copyright-related rights, and the later jurisdictional High Court view on the same treaty definition binds the Tribunal.

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