Software licence payments held taxable as royalty where use rights in copyrighted software and embedded information were transferred.

Consideration paid by Indian customers for a non-exclusive, non-transferable software licence was held to constitute royalty under section 9(1)(vi) because the decisive question was whether any rights in respect of the copyright were transferred for consideration. The Court treated the phrase "in respect of" in Explanation 2(v) as wide enough to cover permission to use the software and the confidential information embedded in it, even though no full assignment of copyright occurred. Restrictions on copying, decompilation, redistribution, modification and sublicensing did not prevent the payment from falling within the statutory definition. The DTAA did not change the result on the facts found.

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Issues: Whether consideration paid by Indian customers for a non-exclusive, non-transferable software licence constituted royalty under section 9(1)(vi) of the Income-tax Act, 1961.

Analysis: The licensing arrangement permitted the end-user to use the software and associated design techniques, with restrictions on copying, decompilation, redistribution, modification, and sublicensing. The Court held that the decisive inquiry was not whether a copyright itself was assigned in full, but whether any rights in respect of the copyright were transferred for consideration. It distinguished a mere copyrighted article from a right connected with the copyright and held that the phrase "in respect of" in Explanation 2(v) was deliberately wide. On that construction, permission to use the software and the confidential information embedded in it fell within the statutory definition of royalty. The DTAA did not alter that result on the facts found.

Conclusion: The receipts were taxable as royalty and the assessee's challenge failed.

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