Software distribution receipts are not royalty where only a copyrighted article is supplied, not copyright rights.

Receipts from the sale and distribution of software products to Indian distributors were held not to be royalty under the India-Ireland DTAA or the Income-tax Act. The arrangement gave only a non-exclusive, non-transferable right to supply shrink-wrap software, while copyright ownership remained with the assessee and the agreements barred copying, reverse engineering, sublicensing, and other copyright exploitation. Because the payer obtained only a copyrighted article and no right to use or exploit copyright, the treaty definition of royalty was not satisfied. Domestic law amendments could not expand the treaty meaning, so the software distribution receipts were not taxable in India as royalty.

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Issues: (i) Whether consideration received from sale and distribution of software products to Indian distributors constituted royalty under the India-Ireland DTAA and the Income-tax Act, 1961.

Analysis: The distribution arrangements granted only a non-exclusive, non-transferable right to supply software products, while ownership of the copyright remained with the assessee. The agreements prohibited copying, reverse engineering, sublicensing, and other acts indicative of exploitation of copyright, and there was no assignment of copyright under the Copyright Act, 1957. Applying the treaty definition of royalty, the relevant inquiry was whether the payer obtained use of, or the right to use, any copyright, not merely a copyrighted article. The payment was for a copyrighted product supplied as shrink-wrap software and the limited rights necessary to distribute and use it did not amount to a transfer of copyright rights. Domestic law amendments could not enlarge the treaty meaning.

Conclusion: The receipts were not royalty and were not taxable in India under Article 12 of the treaty; the issue was decided in favour of the assessee.

Final Conclusion: The addition treating software distribution receipts as royalty was deleted, and the appeal was allowed.

Ratio Decidendi: A payment for a copyrighted article, where no copyright or right to exploit copyright is transferred and the licence is only non-exclusive and restrictive, is not royalty under the treaty definition.

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