Software licence payment is not royalty where only a copyrighted article is supplied and no copyright rights are transferred.

Consideration for supply of software under a restricted licence was treated as payment for a copyrighted article, not for transfer of any part of the underlying copyright. The licence permitted use of the software in the purchaser's network but prohibited duplication, modification, reverse engineering, sublicensing, assignment, or other exploitation of copyright rights. Applying the distinction between copyright and copyrighted article under the Copyright Act, 1957, and the more beneficial DTAA treatment, the payment was held not to be royalty under Article 12(3) of the DTAA or section 9(1)(vi). The related addition was deleted.

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Issues: Whether consideration received for supply of software under a restricted licence, without transfer of copyright, constituted royalty under Article 12(3) of the DTAA and section 9(1)(vi) of the Income-tax Act, 1961.

Analysis: The licence terms showed that the purchaser received only a copy of the software for use in its network and no right to duplicate, modify, reverse engineer, sublicence, assign, or otherwise exploit any copyright in the software. On the facts, only a copyrighted article was supplied, not any part of the copyright itself. The distinction between copyright and copyrighted article was applied with reference to the Copyright Act, 1957, and the payment was examined in the light of the DTAA, which was more beneficial to the assessee.

Conclusion: The payment did not constitute royalty, and the addition made on that basis was rightly deleted. The issue was decided in favour of the assessee.

Ratio Decidendi: Consideration for supply of software is not royalty where the recipient acquires only a copyrighted article for use and no part of the underlying copyright is transferred.

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