Mere use of software without transfer of copyright is not royalty, so no Indian withholding tax arises.

Access to computer software under a non-exclusive, non-transferable group arrangement was held not to constitute royalty, because the Indian entity received only use of a copyrighted product and no transfer of any copyright right such as the right to exploit, reproduce, or otherwise exercise protected copyright rights. Applying the Supreme Court's ruling in Engineering Analysis and the relevant treaty and domestic royalty definitions, the court found the consideration outside royalty taxation in India. As no royalty character attached to the payment, no withholding tax liability arose under section 195 of the Income-tax Act, 1961.

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Issues: Whether consideration received by the non-resident for access to computer software and related deliverables under the group arrangement constituted royalty taxable in India and attracted withholding tax.

Analysis: The payment was examined in light of the governing treaty provision and the domestic definition of royalty, as interpreted by the Supreme Court in Engineering Analysis. The decisive question was whether the arrangement transferred any copyright interest in the software, or merely permitted use of a copyrighted product through a non-exclusive, non-transferable arrangement. On the facts, the Indian entity received only access to software procured from third-party vendors, and no right to exploit, reproduce, or otherwise exercise any of the copyright rights protected under the Copyright Act was shown. In the absence of transfer of copyright, the consideration could not be characterised as royalty. The earlier advance ruling, which proceeded on a contrary view, was therefore unsustainable.

Conclusion: The payment for providing access to the software did not amount to royalty under the Income-tax Act, 1961 or the India-UK DTAA, and no withholding tax liability arose under section 195 of the Income-tax Act, 1961.

Ratio Decidendi: A payment for mere use of software, without transfer of copyright or any right in the copyright, is not royalty and is not taxable in India as royalty.

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