Software licensing receipts were not royalty and were not taxable as business profits without a permanent establishment.

Consideration for supply of standard software under a perpetual, non-exclusive and non-transferable licence was treated as payment for a copyrighted article, not as a transfer of copyright or any copyright right, because the customer received only limited use rights and no right to modify, reverse engineer, decompile, disassemble or commercially exploit the software. The treaty definition of royalty under Article 12 was applied as narrower than the domestic definition in Explanation 2 to section 9(1)(vi), and the payment did not fall within royalty. In the absence of a permanent establishment in India, the receipt also could not be taxed as business profits under Article 7.

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Issues: Whether consideration received for supply of standard software under the licensing arrangement was royalty taxable in India under the treaty and the Income-tax Act, or was business profits not taxable in the absence of a permanent establishment.

Analysis: The agreement granted the customer only a perpetual, non-exclusive, non-transferable licence to use the software for internal business purposes and backup or testing purposes, with no right to modify, reverse engineer, decompile, disassemble, or commercially exploit the software. The software was supplied as a standard product and the customer acquired no rights in the copyright itself. On that basis, the payment was held to be for a copyrighted article and not for transfer of any copyright or copyright right. The treaty definition of royalty under Article 12 was regarded as narrower than the domestic definition in Explanation 2 to section 9(1)(vi) of the Income-tax Act, 1961, and the facts did not amount to royalty. Since the assessee had no permanent establishment in India, the receipt could not be taxed as business profits under Article 7.

Conclusion: The payment was not royalty and was not taxable in India as business profits in the absence of a permanent establishment.

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