Software licence payments are not royalty where no copyright rights pass, so withholding tax and disallowance do not apply.

Payments made for resale or use of computer software under distribution agreements or end-user licence agreements were treated as not constituting royalty where no right in the underlying copyright was transferred. Applying the Supreme Court's ruling in Engineering Analysis Centre of Excellence Private Limited, the Madras HC held that such consideration was not taxable as royalty under section 9(1)(vi) of the Income-tax Act, 1961. As the payments were not royalty, no tax deduction at source obligation arose, and the related disallowance under section 40(a)(ia) could not be sustained. The appeals were dismissed and the issue was decided in favour of the assessee.

---

---

Issues: Whether consideration paid for purchase or resale/use of computer software under distribution agreements or end-user licence agreements constitutes royalty taxable under section 9(1)(vi) of the Income-tax Act, 1961, and whether tax was deductible at source so as to attract disallowance under section 40(a)(ia) of the Income-tax Act, 1961.

Analysis: The appeals were governed by the principle laid down by the Supreme Court in Engineering Analysis Centre of Excellence Private Limited, which held that payments made to non-resident software suppliers for resale or use of computer software under such agreements do not amount to payment of royalty for the use of copyright. In that view, the amounts were not taxable as royalty in India and the provisions dealing with royalty under section 9(1)(vi) of the Income-tax Act, 1961 did not apply on the facts. As the payment was not royalty, the obligation to deduct tax at source did not arise, and the consequential disallowance under section 40(a)(ia) could not be sustained.

Conclusion: The issue was decided against the Revenue and in favour of the assessee.

Final Conclusion: The tax case appeals failed and were dismissed by applying the binding Supreme Court ruling that software licence or resale payments of this kind are not royalty and do not attract withholding tax liability.

Ratio Decidendi: Consideration for the resale or use of computer software under distribution or licence agreements, where no right in the copyright is transferred, is not royalty and therefore does not give rise to taxable income in India or a corresponding obligation to deduct tax at source.

---