Software licence receipts and royalty tax treatment under treaty law require distinction between copyright rights and copyrighted articles.

Receipts from sale or licensing of off-the-shelf software were examined for royalty treatment under domestic law and the India-US treaty. The Tribunal noted the distinction between transfer of copyright rights and transfer of a copyrighted article, and that a non-exclusive, non-transferable licence for internal business use is not royalty under the Delhi High Court approach in Infrasoft. It also recorded that a unilateral retrospective amendment to the Income-tax Act does not by itself expand the treaty definition of royalty unless the treaty is correspondingly amended by both contracting states. The matter was therefore remitted for fresh examination in light of the governing law.

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Issues: Whether the receipts from sale or licensing of software products were taxable in India as royalty under section 9(1)(vi) of the Income-tax Act and Article 12 of the India-US tax treaty, and whether the retrospective amendments to the Income-tax Act altered the treaty position.

Analysis: The dispute turned on whether the amounts received for distribution of off-the-shelf software represented consideration for the use of copyright, or only for a copyrighted article. The Tribunal noted that the Delhi High Court in Infrasoft had drawn a distinction between transfer of copyright rights and transfer of a copyrighted product, and had held that a non-exclusive, non-transferable licence for internal business use does not amount to royalty. It further noted that a unilateral retrospective amendment to the domestic statute does not, by itself, enlarge the treaty definition of royalty unless the treaty is correspondingly amended by both contracting states. Applying that later High Court approach, the Tribunal held that the issue required fresh examination by the Assessing Officer in the light of the governing law.

Conclusion: The royalty additions were not finally sustained and the matter was sent back for fresh adjudication in accordance with the Delhi High Court decision.

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