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Issues: Whether consideration received for granting a non-exclusive, non-transferable right to use software for internal business purposes was taxable as royalty under section 9(1)(vi) of the Income-tax Act, 1961 and the India-Germany DTAA, or was business income not taxable in India absent a permanent establishment.
Analysis: The software licence arrangement granted only a user right in the software and did not transfer any copyright rights. The copyright in the software remained with the original owner, and the assessee merely permitted the Indian affiliates to use the copyrighted software as a product. The distinction between a transfer of copyright and a transfer of a copyrighted article was treated as . Applying the reasoning approved in the Delhi High Court decision relied upon, payments for use of a copyrighted article cannot be treated as royalty when no right comprised in the copyright is transferred. On that basis, the receipts were held to fall within business profits rather than royalty, and in the absence of a permanent establishment in India they were not taxable in India.
Conclusion: The licence charges were not royalty and were not taxable in India as business profits.
Ratio Decidendi: Payment for a mere right to use a copyrighted software product, without transfer of any copyright right, is not royalty under section 9(1)(vi) of the Income-tax Act, 1961 or the narrower royalty article of the DTAA.
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