On appeals the Court observed that  four categories of cases : (a) cases in which computer software was purchased directly by an end-user, resident in India, from a foreign, non-resident supplier or manufacturer ; (b) cases where resident Indian companies were distributors or resellers, purchasing computer software from foreign, non-resident suppliers or manufacturers and then reselling it to resident Indian end-users ; (c) cases where the distributor was a foreign, non-resident vendor, who, after purchasing software from a foreign, non-resident seller, resold it to resident Indian distributors or end-users ; and (d) cases where the computer software was affixed onto hardware and sold as an integrated unit or equipment by foreign, non-resident suppliers to resident Indian distributors or end-users, on the question whether amounts paid by the persons resident in India to non-resident, foreign software suppliers, amounted to royalty, and whether it constituted taxable income deemed to accrue in India under section 9(1)(vi) of the Income-tax Act, 1961 thereby making it incumbent upon all such persons to deduct tax at source and pay such tax deductible at source under section 195 of the Act , Court held that  in all these cases, the “licence” that was granted under the end-user licence agreement, was not a licence in terms of section 30 of the 1957 Act, which transferred an interest in all or any of the rights contained in sections 14(a) and 14(b) of the 1957 Act, but a “licence” which imposed restrictions or conditions for the use of computer software. Thus, none of the end-user licence agreements was referable to section 30 of the 1957 Act, inasmuch as section 30 of that Act spoke of granting an interest in any of the rights mentioned in sections 14(a) and 14(b) of that Act. The end-user licence agreements did not grant any such right or interest, least of all, a right or interest to reproduce the computer software. In fact, such reproduction was expressly interdicted, and it was also expressly stated that no vestige of copyright was at all transferred, either to the distributor or to the end-user. What was “licensed” by the foreign, non-resident supplier to the distributor and resold to the resident end-user, or directly supplied to the resident end-user, was in fact the sale of a physical object which contained an embedded computer programme, and was therefore, a sale of goods. The distributors resold shrink-wrapped copies of the computer programmes already put in circulation by foreign, non-resident suppliers and manufacturers, since they had been sold and imported into India via distribution agreements, and they were thus not hit by section 14(a)(ii) of the 1957 Act. The end-user licence agreements conveyed title to the material object embedded with a copy of the computer software to the distributors or end-users. The distribution of copyrighted computer software, on the facts, would not constitute the grant of an interest in copyright under section 14(b)(ii) of the 1957 Act, thus necessitating the deduction of tax at source under section 195 of the Income-tax Act, 1961. Court also observed that  given the definition of “royalties” contained in article 12 of the DTAAs there was no obligation on the persons mentioned in section 195 of the Act to deduct tax at source, as the distribution agreements and end-user licence agreements did not create any interest or right in such distributors or end-users, which would amount to the use of or right to use any copyright. The provisions contained in the Act which deal with royalty, not being more beneficial to the assessees, had no application in the facts of these cases. The amounts paid by resident Indian end-users or distributors to non-resident computer software manufacturers or suppliers, as consideration for the resale or use of the computer software through end-user licence agreements or distribution agreements, was not royalty for the use of copyright in the computer software, and did not give rise to any income taxable in India, as a result of which the persons referred to in section 195 of the Act were not liable to deduct any tax at source under section 195 of the Act. Court also observed that the real nature of the transaction must be looked at upon reading the agreement as a whole. By virtue of section 90 of the Income-tax Act, 1961 , once a Double Taxation Avoidance Agreement applies, the provisions of the Act can only apply to the extent that they are more beneficial to the assessee and not otherwise. Further, by Explanation 4 to section 90 , Parliament has clarified that where any term is defined in a DTAA, the definition contained in the DTAA is to be looked at. It is only where there is no such definition that the definition in the Act can then be applied.

Indian tax laws use the expression “in respect of” as synonymous with the expression “on” : the expression “in respect of”, when used in a taxation statute, is only synonymous with the words “on” or “attributable to”. This accords with the meaning to be given to the expression “in respect of” contained in Explanation 2(v) to section 9(1)(vi) of the Income-tax Act, 1961 and would not in any manner make the expression otiose. ( AY.1999-2000 to 2002-03)