Software supply under distribution arrangements is not royalty where no copyright rights are transferred, and India tax does not apply.

Supply of software under distribution or embedded-hardware arrangements does not, by itself, confer any right in copyright and therefore is not royalty under section 9(1)(vi) of the Income-tax Act or Article 13(3) of the India-France DTAA. The commentary applies the principle affirmed in Ericsson and Engineering Analysis, and notes that retrospective Explanations to section 9(1)(vi) do not alter that result. On that basis, receipts from software supply were treated as outside the royalty charge in India.

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Issues: Whether consideration received for supply of software was taxable in India as royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 13(3) of the India-France DTAA, including in view of the retrospective Explanations to section 9(1)(vi).

Analysis: The identical question had already been decided in favour of the assessee in earlier Tribunal proceedings, following the Delhi High Court decision in Ericsson and the Supreme Court ruling in Engineering Analysis. The governing principle applied was that supply of software embedded in hardware, or resale/use of computer software under distribution arrangements, does not by itself create any right in copyright and therefore does not amount to royalty. On that basis, the statutory provision dealing with royalty and the corresponding treaty article were held inapplicable to the receipts in question.

Conclusion: The receipts from supply of software were not taxable in India as royalty and the Revenue's challenge failed.

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