Software sale receipts are business profits, not royalty, where no copyright rights are transferred and no permanent establishment exists.

Receipts from sale of software products were treated as business profits, not royalty, because the distributor acquired only copyrighted articles for resale and no right to duplicate or exploit the underlying copyright. The Tribunal applied the treaty royalty definition and held that consideration for use of a copyrighted product, without any right to copy the work, does not constitute royalty. It also ruled that invoice descriptions are not conclusive and that the transaction must be characterised by its substance. Following its earlier decision in the assessee's own case, it held that, in the absence of a permanent establishment in India, the receipts were not taxable.

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Issues: Whether receipts from sale of software products were assessable as royalty or as business income not taxable in India in the absence of a permanent establishment.

Analysis: The Tribunal compared the distribution arrangement with the earlier licence arrangement and found that, under the relevant sale arrangement, the distributor acquired only the software products for resale and was not granted any right to duplicate or exploit the copyright in the software. It held that the decisive distinction is between a transfer of copyright and a transfer of a copyrighted article. Applying the treaty definition of royalties, the Tribunal held that consideration paid for the use of a copyrighted product, without any right to copy the work, does not fall within royalty. The Tribunal also held that the description used in the invoices was not conclusive and that the true nature of the transaction had to be determined from its substance. Following the coordinate bench decision in the assessee's own case, it concluded that the receipts were business profits and, in the absence of a permanent establishment in India, were not taxable.

Conclusion: The receipts from sale of software products were not royalty but business income, and the addition treating them as royalty was deleted.

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