Software licence receipts are not royalty where no copyright rights pass and support services are merely ancillary.

Receipts from software licence sales and ancillary support services were held not to be royalty or fee for technical services because the arrangements did not transfer any interest in copyright or confer a right to reproduce the software. The real nature of the transaction was distribution of software products and related support, not a grant of copyright rights. On that basis, the royalty provisions were inapplicable and the receipts were not taxable as royalty or fee for technical services.

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Issues: Whether receipts from sale of software licences and provision of ancillary support services could be assessed as royalty or fee for technical services in the hands of the assessee.

Analysis: The receipts arose from distribution and support arrangements for software products supplied from outside India. The controlling legal position is that where the arrangement does not transfer any interest in copyright or confer a right to reproduce the software, the payment is not for use of copyright and cannot be treated as royalty. The Court applied the principle that the real nature of the transaction is the sale of software products and connected support, not a grant of copyright rights. In that situation, the royalty provisions do not apply and the receipts cannot be brought to tax as royalty or fee for technical services on that basis.

Conclusion: The issue was decided in favour of the assessee and against the Revenue; the software sale and ancillary support receipts were held not taxable as royalty or fee for technical services.

Ratio Decidendi: Consideration paid for resale or use of computer software under distribution or licence arrangements is not royalty unless the payer acquires a right or interest in copyright itself; where no such right is transferred, the receipt is not taxable as royalty.

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