Software licence receipts treated as payment for a copyrighted article, not royalty, under the tax treaty and domestic law.

Consideration received for sale of standard software licences was not royalty where the transaction involved only supply of a copyrighted article under restrictive end-user terms, with no transfer of copyright rights such as copying, sublicensing, modification, transfer or reverse engineering. The distinction between a copyright and a copyrighted article was decisive, and mere acquisition of a software copy did not amount to use of copyright. The DTAA definition, being more beneficial, prevailed over any wider domestic amendment. The receipt was therefore not taxable as royalty under the Income-tax Act or the India-USA DTAA.

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Issues: Whether consideration received on sale of software licences by a non-resident for standard software amounted to royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 12 of the DTAA between India and USA.

Analysis: The software was sold as a standard product under restrictive end-user licence terms that prohibited copying, sublicensing, transfer, modification, reverse engineering and commercial exploitation. The distinction between transfer of a copyright and transfer of a copyrighted article was treated as decisive. Relying on the principle that mere acquisition of a copy of software, without transfer of any copyright rights, does not amount to use of copyright, the consideration was held to be for a copyrighted article and not for royalty. The treaty definition, being more beneficial and not expanded by the domestic amendment, governed the characterization of the receipt.

Conclusion: The receipt from sale of software licences was not royalty under the Income-tax Act, 1961 or under the DTAA, and was therefore not taxable in the assessee's hands as royalty.

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