TDS on foreign commissions and software licences fails where services are outside India and no copyright rights are transferred.

Commission paid to non-resident agents for procuring export orders outside India was treated as not chargeable to tax in India, so no tax deduction at source arose and disallowance for non-deduction could not be sustained. Payments to foreign licensors for content and software under non-exclusive, non-transferable licences were held not to be royalty because they involved only access to a copyrighted article, not transfer of copyright or other intellectual property rights; tax was therefore not deductible at source on those remittances. On both issues, the additions for non-deduction of tax at source were unsustainable.

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Issues: (i) Whether commission paid to foreign agents for procuring export orders outside India was liable to tax deduction at source and consequent disallowance; (ii) Whether payments made to foreign licensors for content and software under non-exclusive, non-transferable licences constituted royalty so as to attract tax deduction at source and disallowance under the Act.

Issue (i): Whether commission paid to foreign agents for procuring export orders outside India was liable to tax deduction at source and consequent disallowance.

Analysis: The commission was paid to non-resident agents for services rendered outside India in procuring export orders. On those facts, the income was not chargeable in the hands of the non-resident agents in India. The conclusion followed the settled position that where the foreign agent's services are rendered outside India and the payment is not chargeable to tax in India, no obligation to deduct tax at source arises, and disallowance cannot be sustained merely for non-deduction.

Conclusion: The issue was decided in favour of the assessee and against the Revenue.

Issue (ii): Whether payments made to foreign licensors for content and software under non-exclusive, non-transferable licences constituted royalty so as to attract tax deduction at source and disallowance under the Act.

Analysis: The agreements conferred only a limited right to use copyrighted material, without transfer of any copyright rights or other intellectual property rights. The payment was for access to a copyrighted article and not for use or transfer of copyright itself. On that footing, the consideration did not fall within royalty under the Income-tax Act or the relevant treaty provisions, and tax was not deductible at source on such payments.

Conclusion: The issue was decided in favour of the assessee and against the Revenue.

Final Conclusion: The additions made for non-deduction of tax at source on both the export commission and the software or content licence payments were unsustainable, and the Revenue's appeals failed.

Ratio Decidendi: Payments to non-resident agents for services rendered outside India, and payments for use of a copyrighted article under a non-exclusive, non-transferable licence without transfer of copyright rights, do not give rise to deductible tax at source merely because they are remitted abroad.

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