Software licence receipts are not royalty where only a copyrighted article is supplied, not copyright itself.

Receipts for grant of user rights in off-the-shelf software were held not to be royalty because the payer acquired only a copyrighted article, not any copyright, and no right to sub-license or modify the software was transferred. The Tribunal applied the settled distinction between use of a copyrighted article and use of copyright, and treated the narrower DTAA definition as more beneficial than the domestic provision. Related support services were also found, on the facts, not to constitute royalty. Accordingly, the receipts were not taxable as royalty under the Income-tax Act or Article 12 of the India-USA DTAA.

---

---

Issues: Whether receipts for grant of user rights in off-the-shelf software and related support services were taxable as royalty under the Income-tax Act, 1961 and Article 12 of the India-USA DTAA.

Analysis: The software supplied was off-the-shelf software purchased from third-party vendors, with no copyright in the software or right to sub-license or modify it transferred to the recipient. The consideration was for use of a copyrighted article and not for use of copyright. The Tribunal applied the settled distinction between a copyrighted article and copyright, and followed the principle that the definition of royalty under the DTAA, being more beneficial, prevails over the domestic law where the treaty definition is narrower. The related support services, on the facts, did not amount to royalty either.

Conclusion: The receipts were not taxable as royalty under section 9(1)(vi) of the Income-tax Act, 1961 or under Article 12 of the India-USA DTAA, and the issue was decided in favour of the assessee.

---