Software distribution payments are not royalty where copyright remains with the foreign vendor and only resale rights are transferred.

Payments for import and distribution of shrink-wrapped software were treated as consideration for a copyrighted article, not for transfer or use of copyright. The Tribunal applied the distinction between ownership of the software medium and ownership of copyright, noting that the foreign vendors retained the copyright and the Indian purchaser only obtained distribution rights in India. On that basis, the payment did not fall within the statutory definition of royalty and was not chargeable as royalty income. As the non-resident vendors had no permanent establishment in India, section 195 withholding was held inapplicable.

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Issues: Whether payments made for import and distribution of shrink-wrapped software to foreign vendors constituted royalty within the meaning of the Income-tax Act so as to attract deduction of tax at source under section 195.

Analysis: The software acquired by the assessee was held to be a copyrighted article and not a transfer of any copyright or of any exclusive right in copyright. The agreements showed that the foreign vendors retained the copyright and that the assessee only obtained the right to distribute the software in India. The Tribunal applied the distinction between ownership of the copyright and ownership of the physical medium embodying the software, and held that the payment was for purchase of goods and not for use of copyright, invention, process, scientific work, or similar property. Since the payment did not answer the statutory definition of royalty, and the non-resident vendors had no permanent establishment in India, the amount was not chargeable as royalty income.

Conclusion: The payment was not royalty and section 195 was not applicable; the assessee succeeded.

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