Software resale payments are not royalty when no right to reproduce or exploit copyright is transferred.

Consideration for sale of software products to a distributor was analysed under section 9(1)(vi) of the Income-tax Act and the copyright definition in section 14(1)(a) of the Copyright Act. A licence allowing duplication or reproduction was treated as a transfer of copyright, whereas supply of software for onward resale without any right to copy was treated as a transfer of a copyrighted article. On the agreement's terms, the distributor received only software products for resale and no right to reproduce or exploit the software. The India-USA DTAA Article 12(3) was read as covering payment for use of, or right to use, copyright, not a copyrighted product. The amount was therefore not royalty and, if taxable at all, only as business profits.

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Issues: Whether the consideration received from sale of software products to the distributor constituted royalty or business profits.

Analysis: The payment was examined in the light of section 9(1)(vi) of the Income-tax Act, 1961 and the meaning of copyright under section 14(1)(a) of the Copyright Act, 1957. A distinction was drawn between a licence conferring the right to duplicate or reproduce software, which involves transfer of copyright, and a mere sale of copyrighted software products for resale without any right to copy, which is a transfer of a copyrighted article. The agreement in question showed that the distributor acquired software products for onward sale and was not permitted to reproduce or exploit the software by copying it. The treaty definition in Article 12(3) of the India-USA DTAA was also read as covering only consideration for the use of, or the right to use, copyright, not the use of a copyrighted product. The substance of the transaction was held to prevail over the invoice description.

Conclusion: The amount received for sale of software products was not royalty and was taxable, if at all, only as business profits. The addition treating it as royalty was set aside and the appeal succeeded.

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