Software licence fees for use of copyrighted article held not taxable as royalty under the Act or treaty.

License charges for granting user rights in software were held not to constitute royalty because the payment was for use of a copyrighted article, not for transfer or exploitation of any copyright right. The copyright remained with the original owner, and no rights under copyright law were shown to have vested in the Indian users. On that basis, the receipts were not taxable as royalty under the Income-tax Act or Article 12 of the India-Germany DTAA, and the issue was decided in favour of the assessee.

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Issues: Whether license charges received for granting user rights in software were taxable as royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 12 of the India-Germany DTAA.

Analysis: The payment was found to be for use of a copyrighted article and not for transfer or use of any copyright right. The copyright in the software continued to vest with the original owner, and no rights contemplated by the copyright law were shown to have been vested in the Indian users. On that basis, the receipt could not be treated as royalty either under the Act or under the treaty.

Conclusion: The license charges were not taxable as royalty and the issue was decided in favour of the assessee.

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