Imported software in telecom equipment was not royalty, so no withholding tax obligation arose on the payment.

Payment for imported software embedded in telecom equipment was not royalty where the software formed part of a single integrated customer-specific system and the payer acquired only a copyrighted article, not any right to exploit, duplicate, or commercially use the underlying copyright. As the amount was not consideration for use of, or right to use, copyright, patent, process, or industrial equipment, it fell outside section 9(1)(vi) and the corresponding treaty concept. Since the sum was not chargeable to tax in India as royalty, no withholding obligation arose under section 195, and the payer could not be treated as an assessee in default or liable to interest under sections 201(1) and 201(1A).

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Issues: Whether the amount paid for imported software embedded in telecom equipment constituted royalty chargeable to tax in India, so as to require deduction of tax at source and justify treatment of the assessee as an assessee in default under sections 201(1) and 201(1A).

Analysis: The software was supplied as part of a single integrated transaction for a customer-specific switching system, and the hardware and software were inextricably linked so that neither could function independently. The assessee did not acquire any right to exploit, duplicate, or commercially use the software copyright; what was acquired was only a copyrighted article to be integrated into the equipment. On that basis, the payment was not consideration for the use of or right to use copyright, patent, process, or industrial equipment, and did not fall within the scope of royalty under section 9(1)(vi) or the corresponding treaty concept. Since the amount was not chargeable to tax as royalty in the hands of the non-resident recipient, the obligation to deduct tax at source under section 195 did not arise.

Conclusion: The payment was not royalty, section 195 was not attracted, and the assessee could not be treated as an assessee in default or saddled with interest under sections 201(1) and 201(1A).

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