Software licence payments to a non-resident are not royalty where no copyright rights are transferred, so withholding tax does not arise.

Payment for acquisition of a computer software licence from a non-resident was treated as consideration for a copyrighted article, not royalty for use of copyright, following Engineering Analysis. As the non-resident had no taxable income in India on this receipt, no withholding tax obligation arose and disallowance under section 40(a)(i) was not sustainable. The software licence expenditure was therefore allowed.

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Issues: Whether the payment made for purchase of software licence from a non-resident supplier was royalty chargeable to tax in India, so as to attract deduction of tax at source and consequent disallowance under section 40(a)(i).

Analysis: The payment was for acquisition of software licence / copyrighted article from the foreign supplier. Following the decision of the Supreme Court in Engineering Analysis and the co-ordinate bench decision in the assessee's own case for the earlier year, such consideration was not treated as royalty for use of copyright in computer software. In the absence of taxable income arising in India in the hands of the non-resident, no obligation to deduct tax at source arose, and section 40(a)(i) could not be invoked to disallow the expenditure.

Conclusion: The disallowance of the software licence payment was deleted and the issue was decided in favour of the assessee.

Ratio Decidendi: Payment for purchase or resale use of computer software under a licence arrangement, without transfer of copyright rights, does not constitute royalty and therefore does not trigger withholding tax or disallowance under section 40(a)(i).

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