Software licence and support payments are not royalty where no copyrighted rights are transferred, defeating TDS disallowance.

Payments for computer maintenance, software licences and related support services to a Singapore entity were held not to constitute royalty because the arrangement was for services and licensed use of software, not a purchase of copyrighted material. The foreign entity was not the copyright owner, and the consideration was treated as supply of licences and support rather than payment for use of copyright. As the amount was not royalty, disallowance under section 40(a)(i) for alleged failure to deduct tax at source could not be sustained.

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Issues: Whether the payment for computer maintenance, software licences and related support services to the Singapore entity was royalty or fee for technical services chargeable to tax in India, so as to attract disallowance under section 40(a)(i) of the Income-tax Act, 1961 for non-deduction of tax at source.

Analysis: The payment comprised both support services and entitlement to use licensed software and latest versions supplied through the foreign entity. The transaction was found not to be a purchase of any copyrighted article, and the foreign entity was not the owner of the copyright. On the facts, the amount represented services and supply of licences rather than consideration for use of copyright. The reasoning adopted for royalty by the lower authority was not accepted, and the alternative characterisation of the payment as fee for technical services was not examined further because the decisive question before the Tribunal was the nature of the expenditure as royalty.

Conclusion: The expenditure was not royalty and the disallowance under section 40(a)(i) could not be sustained; the issue was decided in favour of the assessee.

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