Software supply payments as copyrighted article receipts, not royalty, where no copyright or source code rights are transferred.

Software receipts were examined to determine whether payment for supply of software constituted royalty under the Act and Article 12 of the India-USA DTAA. The agreement terms showed that the purchaser received only a right to use the software, with no rights to exploit copyright, source code, or underlying intellectual property. On that basis, the payment was for a copyrighted article, not for use of copyright. The receipts were therefore not royalty and were not taxable in India on that footing.

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Issues: Whether the amounts received from supply of software were chargeable to tax as royalty under the Act and Article 12 of the India-USA DTAA.

Analysis: The software receipts were examined in the light of the terms of the supply agreements and the earlier decision in the connected matter. The decisive consideration was whether the transaction involved transfer of copyright or only supply of a copyrighted article. On the agreement terms, the purchaser was permitted only to use the software and had no rights to exploit copyright, source code, or underlying intellectual property. The payment was therefore for a copyrighted article and not for use of copyright. On that basis, the receipts could not be characterised as royalty under the Act or under Article 12 of the DTAA.

Conclusion: The receipts from supply of software were not royalty and were not taxable in India on that footing, so the issue was decided in favour of the assessee.

Ratio Decidendi: Consideration paid for a copy of software, where copyright remains with the supplier and no right to exploit the copyright or source code is transferred, is payment for a copyrighted article and not royalty.

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