Shrink-wrap software payments are not royalty when only user rights are transferred and no copyright rights pass.
Consideration for supply of shrink-wrap software is treated as payment for a copyrighted article, not as royalty, where the distributor or end user acquires only a right to use the software and no copyright rights or commercial exploitation rights are transferred. On that basis, the receipt is not taxable in India as royalty under the Indo-US DTAA or the Income-tax Act. Once characterised as business income, it is taxable in India only if attributable to a permanent establishment; in the absence of a permanent establishment, no Indian tax arises. Interest under section 234B also does not survive where the income itself is not taxable in India.
Issues: (i) Whether consideration received from supply of shrink-wrap software was taxable in India as royalty under the Indo-US DTAA and the Income-tax Act. (ii) Whether, in the absence of a permanent establishment in India, the receipts could be taxed as business income. (iii) Whether interest under section 234B was leviable.
Issue (i): Whether consideration received from supply of shrink-wrap software was taxable in India as royalty under the Indo-US DTAA and the Income-tax Act.
Analysis: The software was supplied as a copyrighted article and neither the distributor nor the end user acquired any right in the copyright. The arrangement permitted only use of the software, without transfer of any copyright rights or right of commercial exploitation. On the reasoning adopted from the earlier view accepted in the case law relied upon, a payment for such supply does not amount to royalty within Article 12(3) of the Indo-US DTAA or section 9(1)(vi) of the Income-tax Act, 1961.
Conclusion: The receipt was not royalty and was not taxable in India on that basis.
Issue (ii): Whether, in the absence of a permanent establishment in India, the receipts could be taxed as business income.
Analysis: Once the payment was held not to be royalty, it constituted business receipts. Business income of a non-resident is taxable in India only if it is attributable to a permanent establishment. The assessee had no permanent establishment in India, and the benefit of the more favourable treaty view was held applicable.
Conclusion: The receipts were business income not chargeable to tax in India in the absence of a permanent establishment.
Issue (iii): Whether interest under section 234B was leviable.
Analysis: The demand for interest was consequential to the taxability issue. Since the income itself was held not taxable in India, the foundation for charging advance tax interest did not survive.
Conclusion: Interest under section 234B was not leviable.
Final Conclusion: The Revenue's challenge failed, and the order granting relief to the assessee was sustained.
Ratio Decidendi: Consideration paid for supply of shrink-wrap software is not royalty where no copyright rights are transferred and the transaction is merely for use of a copyrighted article; in the absence of a permanent establishment, the resulting business income is not taxable in India.