Software sale receipts are not royalty; absent a permanent establishment, they are not taxable as business profits in India.

Receipts from sale of Microsoft retail software to Indian distributors were treated as consideration for a copyrighted article, not as transfer of copyright, so they did not constitute royalty. The article notes that this view was supported by the Supreme Court's position on software distribution arrangements. In the absence of a permanent establishment in India, the receipts could not be taxed as business profits under Article 7 of the India-USA DTAA and were therefore not chargeable to tax in India as royalty or business income.

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Issues: Whether the receipts from sale of Microsoft retail software products to Indian distributors were taxable as royalty or constituted business income not chargeable to tax in the absence of a permanent establishment in India.

Analysis: The assessment authorities had continued to treat the software-sale receipts as royalty, both on substantive and protective bases, despite earlier Tribunal directions and the subsequent legal position. The governing principle applied was that sale of software amounts to transfer of a copyrighted article and not transfer of copyright. The conclusion was reinforced by the Supreme Court's affirmation of the view that such receipts do not constitute royalty merely because the software is distributed under commercial arrangements. In the absence of a permanent establishment, the receipts could not be brought to tax as business profits under Article 7 of the India-USA DTAA.

Conclusion: The receipts from sale of software were not taxable as royalty and were to be treated as business income not chargeable to tax in India in the absence of a permanent establishment; the assessee succeeded.

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