Software payment classification as royalty under DTAA requires fresh review after Supreme Court guidance on copyright rights.

Software maintenance charges paid to an overseas group company were examined for possible classification as royalty under the India-USA DTAA and for consequent disallowance for failure to deduct tax at source. The later Supreme Court ruling on software payments was applied as the governing principle: a licence to use copyrighted software, without transfer of copyright rights, is not royalty, because the payer acquires only a right to use the software. As the agreement terms had not been tested against that ruling, the matter was remitted to the Assessing Officer for fresh consideration after hearing the assessee.

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Issues: Whether software maintenance charges paid to an overseas group company were taxable as royalty in India and liable for disallowance for non-deduction of tax at source, and whether the matter required fresh examination in the light of the Supreme Court ruling on software payments.

Analysis: The payment was examined in the context of the India-USA DTAA and the law governing royalty for computer software. The later Supreme Court ruling held that a licence permitting use of copyrighted software, without transfer of any rights in the copyright itself, does not amount to a royalty payment; the payer merely acquires a right to use the software and not the copyright. The Tribunal noted that the lower authorities had not had the benefit of that ruling when deciding the issue and that the agreement terms needed to be examined afresh to determine the true character of the payment.

Conclusion: The disallowance was not finally sustained and the issue was remitted to the Assessing Officer for reconsideration after hearing the assessee.

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