Software licence payments not royalty where no copyright rights are transferred, so no withholding tax under section 195.

Payment for a non-exclusive licence to use standard software for internal business purposes, without any transfer of copyright or any right to reproduce or commercially exploit the software, was not royalty under the India-UK DTAA or section 9(1)(vi) of the Income-tax Act. The treaty definition was held not wide enough to treat consideration for use of a copyrighted product as royalty, and section 90(2) required the more beneficial treaty position to prevail over the domestic provision. As no income was chargeable to tax in India, section 195 did not require tax deduction at source. The related issues of grossing up, interest, and penalty were consequential.

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Issues: Whether payments made for use of standard software under end-user licence agreements constituted royalty under the India-UK tax treaty and section 9(1)(vi) of the Income-tax Act, 1961, so as to attract deduction of tax at source under section 195.

Analysis: The software arrangement granted only a non-exclusive right to use the software for internal business purposes and did not transfer any interest in the copyright or any right to reproduce, commercially exploit, or otherwise exercise the bundle of rights protected under copyright law. The treaty definition of royalty in Article 13 was not wide enough to cover consideration paid merely for use of a copyrighted product. Since the DTAA was more beneficial than the domestic royalty provision, section 9(1)(vi) read with section 90(2) did not apply to enlarge taxability. In the absence of income chargeable to tax in India, section 195 could not be invoked. The later grounds relating to grossing up, interest and penalty were consequential.

Conclusion: The software licence payments were not royalty and no tax was deductible at source under section 195; the revenue's challenge failed.

Ratio Decidendi: A payment for a non-exclusive licence to use standard software, without any transfer of copyright or right to exploit copyright, is not royalty under the applicable DTAA and therefore does not attract withholding under section 195.

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