Software licence payments not treated as royalty where no copyright rights were transferred, so no withholding tax obligation arose.

Amounts paid for software licences and resale or use of computer software were held not to constitute royalty in India because the underlying agreements did not transfer any interest in copyright or any right to reproduce the software. A mere licence to use software, subject to restrictions on copying, modification, sublicensing and reverse engineering, was treated as consideration for the software as a product rather than payment for use of copyright. As a result, the receipts were not chargeable as royalty and no obligation to deduct tax at source arose under the charging and withholding provisions.

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Issues: Whether amounts paid for software licences and resale/use of computer software constituted royalty taxable in India, thereby attracting an obligation to deduct tax at source.

Analysis: The issue was governed by the Supreme Court's ruling on software transactions, which held that the relevant end-user and distribution agreements did not transfer any interest in copyright or any right to reproduce the software. A mere licence to use software, with restrictions on copying, modification, sublicensing, and reverse engineering, was distinguished from a transfer of copyright. The payment was therefore treated as consideration for the sale/use of software as a product, not as royalty for the use of copyright. In consequence, the amounts were not chargeable as royalty in India and no tax deduction obligation arose under the charging and withholding provisions.

Conclusion: The software receipts were not royalty and the assessee was not liable to deduct tax at source; the issue was decided in favour of the assessee.

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