In Brief
Software companies and distributors are not required to deduct tax at source when purchasing computer software from non-resident suppliers. The Supreme Court held that payments for software through end-user licence agreements or distribution agreements are not 'royalty' payments under tax law, but rather purchases of goods (the copyrighted article itself). Copyright remains with the original owner; end-users and distributors receive only a limited right to use the software, not any copyright interest. Under India's tax treaties, royalty requires transfer of copyright or the right to use it. Since these transactions involve sale of a physical medium containing software, not transfer of copyright, they are business income—not royalty—and no tax withholding at source is required. The ruling applies to all categories of software distribution chains."
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