Software purchase from a non-resident was not royalty, so no tax withholding obligation arose on the payment.

Payment for software purchased from a non-resident was treated as consideration for a sale of goods containing embedded computer code, not as royalty, because no right in or transfer of copyright was shown. Applying the Supreme Court principle on software distribution and end-user licence arrangements, the payment was held not chargeable as royalty under the treaty or the domestic royalty provision. As no income chargeable to tax in India arose on the transaction, the obligation to deduct tax at source under section 195 did not arise, and no TDS liability attached.

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Issues: Whether consideration paid for purchase of software from a non-resident supplier constituted royalty so as to attract deduction of tax at source under section 195.

Analysis: The issue was governed by the Supreme Court ruling that payments for resale or use of computer software under distribution arrangements do not amount to royalty where no interest in, or right to use, copyright is transferred. On the facts, the software transaction was treated as a sale of goods containing embedded computer programme, and therefore the payment was not chargeable as royalty under the treaty or the domestic royalty provision. In the absence of income chargeable to tax in India, the obligation to deduct tax at source did not arise.

Conclusion: The issue was decided in favour of the assessee and against the Revenue; the software payment was not royalty and no TDS liability arose under section 195.

Ratio Decidendi: Payment for software under a distribution or end-user licence arrangement is not royalty unless it transfers a right in copyright, and without income chargeable to tax in India there is no obligation to deduct tax at source under section 195.

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