Off-the-shelf software payments treated as sale of copyrighted articles, not royalty, where no copyright transfer or permanent establishment existed.

Consideration for off-the-shelf software sold on a principal-to-principal basis was treated as payment for a copyrighted article, not a transfer of copyright rights. On that reasoning, and because the non-resident assessees had no permanent establishment in India, the receipts did not fall within the definition of royalty under the Income-tax Act or the applicable treaty. The assessment additions were deleted and the receipts were held not taxable as royalty.

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Issues: Whether consideration received on sale of off-the-shelf software amounted to royalty taxable under the Income-tax Act, 1961 and the applicable Double Taxation Avoidance Agreement.

Analysis: The software supplied was treated as a copyrighted article sold on a principal-to-principal basis, not as a transfer of copyright rights. The decision relied on the distinction between payment for a copyright and payment for a copyrighted article, and on the fact that the non-resident assessees had no permanent establishment in India. On that basis, the receipts were held not to fall within the scope of royalty under section 9(1)(vi) of the Income-tax Act, 1961 or under the relevant treaty provisions.

Conclusion: The receipts were not taxable as royalty and the additions made in assessment were deleted, in favour of the assessees.

Ratio Decidendi: Payment for off-the-shelf software sold as a copyrighted article, without transfer of copyright or a permanent establishment in India, does not constitute royalty taxable under the Income-tax Act, 1961 or the applicable treaty.

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