Section 195, DTAAs and Software Licences: A Practical Framework for Withholding Tax

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....d on physical media or by licence. The second, a 2025 order, applies and follows that precedent in disposing of related appeals. Together these rulings clarify the interface between domestic income-tax provisions (notably sections 9, 90 and 195 of the Income-tax Act) the Copyright Act and India's network of Double Taxation Avoidance Agreements (DTAAs), and set important boundaries for withholding obligations of Indian payors to non-residents. Key Legal Issues * Whether payments by Indian residents for computer software supplied by non-residents constitute "royalty" within the meaning of section 9(1)(vi) of the Income-tax Act and corresponding DTAA provisions, thereby attracting TDS liability u/s 195. * Interpretive question whether....

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....ght (e.g., rights to reproduce, distribute, adapt, publicly perform) or merely acquires a copy (a "copyrighted article") or a restricted licence to use an embodied copy for internal purposes. The Court relied heavily on the Copyright Act, the OECD Commentary and international practice to emphasise the distinction between a negative, exclusive copyright right and the ownership/possession of a physical copy in which the work is embodied. The licences commonly encountered in EULAs and distribution agreements were characterised as non-exclusive, restricted permissions that do not vest proprietary copyright interests as envisaged by section 14 of the Copyright Act. Precedents and Doctrinal Tools The Court surveyed domestic precedents, AAR ruli....

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.... internal use or constitutes a resale of a copyrighted article, do not ordinarily constitute "royalty" under DTAAs or section 9(1)(vi). Consequently, payors are not obligated u/s 195 to withhold tax on such payments unless the non-resident's income is otherwise chargeable to tax in India (e.g., by virtue of a PE or a licence transferring copyright rights in the statutory sense). * Section 195 is tied to chargeability: obligation to deduct arises only if the sum is chargeable under the Act; for composite payments, withholding is limited to the proportion that represents income chargeable in India (principle of proportionality, reliance on prior Supreme Court authority). * DTAA supremacy: where a treaty definition is more beneficial t....