Software licence payments were held outside royalty treatment under the treaty where no copyright rights were transferred and no permanent establishment existed.

Consideration for supply and licence of software was held not to fall within royalty under Article 12(3) of the India-Israel DTAA because the payment was for a copyrighted article, not for transfer of copyright rights. The treaty phrase referring to the use of, or right to use, copyright could not be expanded to cover mere use of software as a product, and the alternative argument that the payment was for use of a process was also rejected. As the assessee was resident in Israel and had no permanent establishment in India, the receipts were not taxable in India as business profits under Article 7, and the addition was deleted.

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Issues: Whether the consideration received for supply and licence of software was taxable in India as royalty under Article 12(3) of the India-Israel Double Taxation Avoidance Agreement, or as business profits in the absence of a permanent establishment.

Analysis: The assessee was a tax resident of Israel and, by virtue of section 90(2) of the Income-tax Act, 1961, the treaty provisions applied to the extent they were more beneficial. The assessee had no permanent establishment in India, so the receipts could not be taxed as business profits under Article 7. On the royalty question, the payment was found to be for a copyrighted article and not for any transfer of copyright rights. The decision relied on the distinction between copyright and a copyrighted article, and held that the treaty expression "use of, or the right to use, any copyright" could not be expanded to cover mere use of software as a product. The alternative contention that the payment was for use of a "process" was also rejected.

Conclusion: The software payment did not constitute royalty under Article 12(3) and was not taxable in India in the absence of a permanent establishment. The addition was rightly deleted.

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