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Issues: Whether payments made by the assessee to non-resident software suppliers for use or resale of computer software constituted royalty chargeable to tax in India, with the consequence that tax was deductible at source under section 195 of the Income-tax Act, 1961 and the assessee could be treated as in default under sections 201(1) and 201(1A), and whether the allied disallowance under section 40(a)(ia) could survive.
Analysis: The payments were for copyrighted software articles and not for transfer of copyright. The governing principle applied was that a non-exclusive end-user or distribution licence allowing installation and internal use of software, without conferring any right to reproduce, exploit, or otherwise use the copyright itself, does not amount to royalty. On that basis, the amounts paid to non-resident software manufacturers or suppliers did not constitute income taxable in India under the relevant treaty framework, and the statutory royalty provision under section 9(1)(vi), read with its Explanations, did not alter that result for the assessees. Once the payment was not taxable as royalty, no obligation to deduct tax at source under section 195 arose.
Conclusion: The issue is decided in favour of the assessee. The software payments were not royalty, no TDS liability arose under section 195, and the default-based consequences under sections 201(1), 201(1A) and the related disallowance under section 40(a)(ia) could not be sustained.
Ratio Decidendi: Consideration paid for a software end-user or distribution licence, where no right in the copyright is transferred and only the copyrighted article is used, is not royalty and therefore does not give rise to a TDS obligation under section 195.
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