Software licence receipts as royalty under tax treaty and domestic law, with double taxation in the chain disallowed.

Consideration for granting a licence to reproduce, install or use computer software is treated as royalty under section 9(1)(vi) and Article 12 of the India-US DTAA, because software is protected copyright and the end-user transaction goes beyond a mere sale of a copyrighted article. The article also notes that the same receipts cannot be taxed again in the hands of a different entity in the same distribution chain where they have already been brought to tax once, so the duplicate addition in MRSC's hands was deleted. Interest under sections 234A, 234B and 234C was treated as consequential and mandatory once tax liability was determined.

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Issues: (i) whether consideration received for supply of Microsoft software products through the distribution chain constituted royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 12 of the India-US DTAA; (ii) whether the amount assessed again in the hands of MRSC could be sustained when the same revenue had already been brought to tax in the hands of Gracemac; (iii) whether interest under sections 234A, 234B and 234C was chargeable.

Issue (i): whether consideration received for supply of Microsoft software products through the distribution chain constituted royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 12 of the India-US DTAA.

Analysis: The definition of royalty in Explanation 2 to section 9(1)(vi) was held wide enough to cover transfer or use of rights in respect of copyright, patent, invention and process. The Court held that a computer programme is protected as a literary work under the Copyright Act, 1957, and that the end-user transactions were not mere sales of a copyrighted article but involved grant of licence to reproduce, install and use the software under the end-user licence terms. It further held that the distinction drawn from OECD commentary between a copyright and a copyrighted article could not control the domestic charging provision or the treaty language. The Court also relied on section 115A(1A) as reinforcing the legislative treatment of computer software royalty.

Conclusion: The software receipts were taxable as royalty and this issue was decided against the assessee.

Issue (ii): whether the amount assessed again in the hands of MRSC could be sustained when the same revenue had already been brought to tax in the hands of Gracemac.

Analysis: The Court accepted that MRSC was only a distribution link in the chain and that taxing the same receipts again in its hands, after the same income had been brought to tax in the hands of Gracemac as royalty, would result in double taxation. The Court therefore declined to sustain the parallel addition in MRSC's hands.

Conclusion: The addition in the hands of MRSC was deleted and this issue was decided in favour of the assessee.

Issue (iii): whether interest under sections 234A, 234B and 234C was chargeable.

Analysis: Interest under these provisions was treated as mandatory once the substantive tax liability was determined.

Conclusion: The levy of interest was upheld against the assessee.

Final Conclusion: The Tribunal held that the software receipts of Microsoft Corporation and Gracemac were taxable as royalty, but it removed the duplicate taxation in MRSC's hands and upheld the consequential interest levy.

Ratio Decidendi: Consideration for granting a licence to reproduce, install or use computer software falls within royalty under section 9(1)(vi) and Article 12 of the India-US DTAA, but the same income cannot be taxed twice in the hands of different entities in the same chain.

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