Software licence receipts treated as copyrighted article use, not royalty, where no copyright rights were transferred

Receipts from a non-exclusive, non-transferable software licence were analysed by distinguishing transfer of copyright rights from mere use of a copyrighted article. Applying the jurisdictional High Court's approach, the transaction was treated as use of a copyrighted article rather than a transfer of copyright, so the software payments did not constitute royalty under section 9(1)(vi) or Article 12 of the India-US DTAA. On that basis, the related maintenance and support receipts also were not taxable in the manner adopted by the Assessing Officer, and the addition was deleted.

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Issues: Whether receipts from sale of software and related maintenance and support services were taxable as royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 12 of the India-US Double Taxation Avoidance Agreement.

Analysis: The receipts were examined in the light of the nature of the software licence and the accompanying support services. The determining question was whether there was transfer of rights in a copyright, or merely use of a copyrighted article. Following the jurisdictional High Court's ruling, the nature of the transaction was held to fall on the side of a copyrighted article, not a transfer of copyright. On that basis, the payments could not be characterised as royalty. Once the receipts were held not taxable as royalty, the ancillary maintenance and support receipts also did not survive as taxable income in the manner adopted by the Assessing Officer.

Conclusion: The receipts from software supply and related support services were not taxable as royalty, and the addition was deleted.

Final Conclusion: The assessee succeeded in the appeal and the impugned tax addition was set aside.

Ratio Decidendi: A non-exclusive, non-transferable software licence that permits use of a copyrighted product without transfer of copyright rights does not give rise to royalty.

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