Software distribution receipts are not royalty where there is no transfer of copyright or right to exploit the underlying IP.

Receipts from sale of off-the-shelf software and related maintenance, support and upgrade services were held not to be royalty under section 9(1)(vi) or Article 12 of the India-Finland Tax Treaty. The Tribunal found that distributors had only a non-exclusive right to market and distribute the software, with no source code access, no right to modify or reproduce the software, and no right to exploit the underlying copyright; the payments were therefore for sale of copyrighted articles, not for transfer of copyright or a right to use it. It further held that the treaty's royalty definition was exhaustive and could not be expanded by retrospective domestic amendments absent a corresponding treaty change, so the receipts were taxed as business income.

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Issues: Whether receipts from sale of off-the-shelf software and from maintenance and support services including upgrades constituted royalty under section 9(1)(vi) of the Income-tax Act, 1961 and under Article 12 of the India-Finland Tax Treaty.

Analysis: The software distributors were granted only a non-exclusive right to market and distribute the software products. They had no right to the source code, no authority to modify or reproduce the software, and no right in the underlying intellectual property. The payments were thus for the sale of copyrighted articles and not for transfer of copyright or a right to use copyright. The same principle applied to maintenance, support, and upgrade payments, which were connected with supply and distribution of software updates rather than any independent right to exploit copyright. The Tribunal also held that the definition of royalty in the treaty was exhaustive and that the retrospective amendments to section 9(1)(vi) could not be read into the treaty in the absence of a corresponding treaty amendment.

Conclusion: The receipts were not royalty but business income, and the addition made by treating them as royalty was deleted.

Final Conclusion: The assessee succeeded on the substantive royalty issue concerning software distribution and related support receipts, while the remaining grounds were not pressed, consequential, or premature.

Ratio Decidendi: A payment for distribution of a copyrighted article, without any transfer of copyright or right to exploit the underlying intellectual property, is not royalty under the Act or the treaty, and a retrospective domestic amendment cannot expand the terms of an unamended tax treaty.

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