Software licence payments are not royalty when they cover copyrighted articles, and treaty protection can prevail over domestic law.

Consideration paid by Indian end-users or distributors to non-resident software suppliers under end-user licence and distribution arrangements is treated as payment for copyrighted articles, not as consideration for the use of copyright, and therefore does not constitute royalty under section 9(1)(vi) or Article 12 of the India-USA DTAA. The commentary also states that the treaty definition prevails where it is more beneficial to the assessee, and domestic law cannot be used to broaden the treaty meaning of royalty. On that basis, interest under section 234B is not chargeable where the receipts are not taxable in India on the alleged royalty basis.

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Issues: (i) Whether consideration received for resale/use of computer software under end-user licence and distribution agreements constituted royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 12 of the India-USA Double Taxation Avoidance Agreement; (ii) Whether interest under section 234B of the Income-tax Act, 1961 was chargeable.

Issue (i): Whether consideration received for resale/use of computer software under end-user licence and distribution agreements constituted royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 12 of the India-USA Double Taxation Avoidance Agreement.

Analysis: The governing principle was that payments made by resident Indian end-users or distributors to non-resident software suppliers for resale or use of software under licence/distribution arrangements do not amount to consideration for the use of copyright. Such payments are for copyrighted articles and not for transfer of any copyright rights. The treaty definition also prevails where it is more beneficial to the assessee, and the domestic provision cannot be applied to expand the treaty meaning of royalty.

Conclusion: The issue was answered in favour of the assessee. The receipts were not royalty and were not taxable in India on that basis.

Issue (ii): Whether interest under section 234B of the Income-tax Act, 1961 was chargeable.

Analysis: Once the receipts were held not taxable in India in the manner alleged, the basis for charging interest under section 234B did not survive in the present appeals, following the controlling Supreme Court decision referred to in the order.

Conclusion: The issue was answered in favour of the assessee. Interest under section 234B was not chargeable on the facts of the case.

Final Conclusion: The appeals were partly allowed on the substantive questions of royalty and interest, while the remaining questions were treated as academic, and the batch was disposed of accordingly.

Ratio Decidendi: Consideration paid for the resale or use of computer software under end-user licence or distribution arrangements is not royalty for the use of copyright, and treaty provisions prevail where more beneficial to the assessee.

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