Software licence reimbursements not royalty where no copyright right is transferred, so no withholding tax liability arises.

Software licence reimbursement payments for shrink-wrap software on a non-exclusive, non-transferable basis were not royalty because the parent entity merely facilitated use of licences held in its name and no right in copyright was parted with. Applying Engineering Analysis Centre of Excellence Private Limited, the ITAT held that such payments are not consideration for the use of, or right to use, copyright and therefore do not create a tax deduction obligation under section 195 where no taxable royalty income exists. The consequential demand, addition and interest were deleted in favour of the assessee.

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Issues: Whether the payments made towards software licence reimbursements were in the nature of royalty so as to attract tax deduction at source and consequential demand and interest.

Analysis: The assessment recorded that the parent entity merely held the software licences in its name and facilitated their use by the assessee, without any income component accruing to it on the software payment stream. The licences were for use of shrink-wrap software on a non-exclusive and non-transferable basis, and no right or interest in copyright was shown to have been parted with. On those facts, the payment did not constitute consideration for the use of or right to use copyright. The rule laid down in Engineering Analysis Centre of Excellence Private Limited was applied, under which such payments do not amount to royalty and no tax deduction obligation arises under section 195 where no taxable royalty income exists.

Conclusion: The payments were not royalty and did not attract tax deduction at source. The addition and interest were liable to be deleted, in favour of the assessee.

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