Software sale receipts held outside royalty tax treatment under the treaty, and the income addition was deleted.

Receipts from sale of software products to an Indian distributor were held not to be royalty taxable in India under section 9(1)(vi) or the India-USA DTAA. The analysis followed earlier coordinate bench rulings in the assessee's own case that treated the payments as consideration for sale of copyrighted software, not for transfer of copyright rights. It was also noted that the later domestic law expansion of the royalty definition did not override the more beneficial treaty definition under Article 12(3). The challenge based on absence of a draft assessment order was left undecided because it became academic after the merits were resolved, and the addition was deleted.

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Issues: Whether receipts from sale of software products to the Indian distributor constituted royalty taxable in India under section 9(1)(vi) of the Income-tax Act, 1961, or under the India-USA Double Taxation Avoidance Agreement.

Analysis: The receipts arose from the same regional support agreements that had earlier been examined in the assessee's own case. The earlier coordinate bench decisions had held that the payments were for sale of copyrighted software and not for transfer of copyright rights, and that the DTAA definition of royalty controlled where it was more beneficial to the assessee. The subsequent domestic law amendment enlarging the definition of royalty under section 9(1)(vi) did not alter the treaty definition under Article 12(3), and the treaty position remained more favourable. On that basis, the receipts could not be treated as royalty income chargeable to tax in India. The challenge to the assessment for want of a draft assessment order was not adjudicated because it became academic after the merits were decided.

Conclusion: The receipts were not taxable as royalty in India and the addition was deleted.

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