Software licence receipts are not royalty where no copyright or reproduction right is transferred, so withholding tax does not apply.

Payments for resale or use of computer software under end-user licence or distribution arrangements were treated as non-royalty where no copyright was transferred and no right to reproduce the software was granted. Applying the Supreme Court principle in Engineering Analysis Centre for Excellence Pvt. Ltd., the software receipts, including related support services, retained their character as sale proceeds and did not become royalty merely because support was provided. As a result, the royalty charging provision under section 9(1)(vi) and the withholding requirement under section 195 did not apply, and the addition characterising the receipts as royalty was deleted.

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Issues: Whether the receipts from sale of software and related support services were taxable as royalty, and whether tax was deductible at source on such payments.

Analysis: The dispute was governed by the principle laid down by the Supreme Court in Engineering Analysis Centre for Excellence Pvt. Ltd. that payments for resale or use of computer software under end-user licence or distribution arrangements do not amount to royalty where no copyright is transferred and no right to reproduce the software is conferred. On the facts, the agreements showed only a user licence, while the transaction remained a sale of software embedded in goods, with support services not altering the character of the receipt into royalty. In consequence, the charging provision for royalty under section 9(1)(vi) and the withholding mechanism under section 195 did not apply.

Conclusion: The receipts were not royalty and the assessee succeeded on the substantive issue. The addition treating the software receipts as royalty was deleted, while the additional grounds were not pressed.

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