Software licence payments are not royalty where only use rights are granted, and treaty protection prevails under tax law.

Consideration paid for resale or use of software under end-user licence or distribution arrangements was not royalty where the transaction conveyed only a right to use copyrighted articles and did not transfer any rights in copyright. Applying the Supreme Court's software licence ruling, the Delhi HC held that the treaty definition, being more beneficial under Section 90(2) of the Income-tax Act, prevailed over the wider domestic wording. The payment was therefore not taxable in India as royalty, and no obligation to deduct tax at source arose on that basis.

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Issues: Whether consideration paid for resale or use of computer software under end-user licence or distribution arrangements constituted royalty taxable in India under the Income-tax Act, 1961 and the applicable DTAA, and whether any obligation to deduct tax at source arose.

Analysis: The appeal turned on whether the software transactions involved any transfer of copyright or merely permitted use of copyrighted articles. The Court followed the Supreme Court's ruling that a non-exclusive software licence confers only a right to use the software and does not part with any rights comprised in copyright under the Copyright Act, 1957. It further noted that the broader language in the income-tax provisions could not prevail where the treaty definition was more beneficial to the assessee, by virtue of the treaty override principle under Section 90(2) of the Income-tax Act, 1961. The question raised was therefore covered by binding precedent and no contrary substantial question survived.

Conclusion: The payment for software use did not amount to royalty and was not taxable in India on that basis; the Revenue's appeals could not succeed.

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