Software distribution payments were not royalty where no copyright rights passed, so no tax deduction obligation arose.
Payments by a resident distributor to a non-resident software supplier under a distribution agreement were held not to be royalty because the arrangement conferred only a non-exclusive right to market and resell software, without any transfer of copyright or right to reproduce it. The agreement reserved ownership and intellectual property rights with the foreign supplier and restricted alteration or copyright exploitation. Since the sum was not chargeable to tax in India on that basis, no obligation arose under section 195 to deduct tax at source, and the payer could not be treated as an assessee in default under section 201 or section 201(1A).
Issues: (i) Whether payments made by the assessee to the foreign software supplier under the distribution agreement constituted royalty; (ii) Whether the assessee was required to deduct tax at source under section 195 of the Income-tax Act, 1961, and could be treated as an assessee in default under section 201 of the Income-tax Act, 1961.
Issue (i): Whether payments made by the assessee to the foreign software supplier under the distribution agreement constituted royalty.
Analysis: The distribution arrangement gave the assessee a non-exclusive right to market and resell software products in India, but it did not transfer any copyright or any right to reproduce the software. The agreement reserved ownership and intellectual property rights with the foreign supplier, prohibited alteration or exploitation of copyright, and only permitted resale and limited promotional use. Applying the Supreme Court's ruling on software distribution arrangements, the payment was for sale of software products and not for the use or transfer of copyright.
Conclusion: The payments did not constitute royalty and were not taxable in India on that basis.
Issue (ii): Whether the assessee was required to deduct tax at source under section 195 of the Income-tax Act, 1961, and could be treated as an assessee in default under section 201 of the Income-tax Act, 1961.
Analysis: The obligation to deduct tax under section 195 arises only when the sum paid to a -resident is chargeable to tax in India. Since the consideration paid for software resale was not royalty and did not give rise to taxable income in India, no TDS obligation arose. The assessee therefore could not be brought within section 201 or section 201(1A) for failure to deduct tax.
Conclusion: The assessee was not liable to deduct tax at source and was not liable to be treated as an assessee in default.
Final Conclusion: The additions and consequential TDS liability determined by the revenue authorities were deleted, and all connected appeals were allowed.
Ratio Decidendi: Amounts paid by resident Indian distributors to non-resident software suppliers for resale under distribution agreements, where no copyright rights are transferred, are not royalty and do not attract deduction of tax at source under section 195 unless the sum is otherwise chargeable to tax in India.
TaxTMI 
AI Drafter ✕
TaxTMI 
