Software as copyrighted article is not royalty where no copyright rights are transferred; BREW and Test Tools receipts escaped tax.

Receipts for software supplied as a copyrighted article, without transfer of copyright or any right to exploit it, are not royalty under section 9(1)(vi) and Article 12 of the Indo-US DTAA. Applying its earlier orders and the jurisdictional High Court's view, the ITAT held that the BREW agreement receipts were consideration for use of software products and not for copyright rights, so they were not taxable as royalty. The same reasoning applied to the Test Tools agreements, with no distinguishing feature shown; those receipts were also held not taxable as royalty, and the additions were deleted.

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Issues: (i) Whether receipts under the BREW agreements were taxable as royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 12 of the Indo-US DTAA; (ii) Whether receipts under the Test Tools agreements were taxable on the same footing.

Issue (i): Whether receipts under the BREW agreements were taxable as royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 12 of the Indo-US DTAA.

Analysis: The Tribunal followed its own earlier orders in the assessee's case and the jurisdictional High Court's view that payments for software supplied as a copyrighted article, without transfer of any copyright or any right to exploit the copyright, do not constitute royalty. The receipt was treated as consideration for use of a copyrighted article and not for transfer of copyright rights, and the treaty position was held to be more beneficial to the assessee.

Conclusion: The BREW agreement receipts were not taxable as royalty in the hands of the assessee.

Issue (ii): Whether receipts under the Test Tools agreements were taxable on the same footing.

Analysis: The Tribunal held that the Test Tools receipts stood on the same legal footing as the BREW receipts and that no distinguishing feature was shown to depart from the earlier binding view. The character of the payment remained linked to use of software products without transfer of copyright rights.

Conclusion: The Test Tools agreement receipts were also not taxable as royalty in the hands of the assessee.

Final Conclusion: The additions treating the receipts as royalty were deleted, and the assessee obtained relief on the substantive issues decided.

Ratio Decidendi: Payment for a software product as a copyrighted article, where no copyright or right to exploit copyright is transferred, is not royalty either under section 9(1)(vi) of the Income-tax Act or under the applicable treaty.

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