Software payment not royalty where end-user licence applies; no TDS arises and section 40(a)(i) disallowance fails.

Payment by a resident Indian end-user or distributor for computer software under a distribution agreement or end-user licence agreement was treated as consideration for use of software, not royalty for use of copyright. Applying the Supreme Court's software royalty ruling, the amount was not chargeable to tax in India on that basis, so no obligation to deduct tax at source arose under section 195. Because the treaty definition of royalties governed and was not more adverse than the Act, the payment could not be characterised as royalty under section 9(1)(vi), and the corresponding disallowance under section 40(a)(i) was unsustainable.

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Issues: Whether the payment made for purchase of computer software was taxable as royalty so as to require deduction of tax at source and attract disallowance under section 40(a)(i).

Analysis: The dispute was covered by the Supreme Court's ruling that consideration paid by resident Indian end-users or distributors to non-resident software suppliers for resale or use of software under distribution agreements or end-user licence agreements does not amount to royalty for the use of copyright in the software. In such cases, no income is chargeable in India on that footing, and there is no obligation to deduct tax at source under section 195. Since the treaty definition of royalties governed the field and was not more adverse to the assessee, the amount paid for the software could not be treated as royalty under section 9(1)(vi) of the Act.

Conclusion: The payment was not royalty, no TDS liability arose, and the disallowance under section 40(a)(i) was unsustainable.

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