Software licence payments held not to be royalty where only limited use rights were granted, without transfer of copyright.

A non-exclusive, non-transferable licence to use software, with restrictions on copying, modification, reverse engineering and further exploitation, was treated as a transfer of a copyrighted article rather than a transfer of copyright. Applying the Supreme Court distinction between copyright rights and copyrighted articles, the ITAT Delhi held that mere user rights, even with limited sub-licensing for specified use, do not amount to a copyright transfer. It also noted that where the DTAA definition of royalty is narrower than the domestic amendment, the treaty prevails. On that basis, consideration for supply of software was not taxable as royalty and the assessee's appeal succeeded.

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Issues: Whether consideration received for supply of software under the agreements was taxable as royalty.

Analysis: The software arrangements conferred only a non-exclusive, non-transferable right to use the software, with restrictions on copying, modification, reverse engineering, and other exploitation. The Court applied the Supreme Court's distinction between a transfer of a copyright right and the transfer of a copyrighted article, and held that a mere licence to use software, without transfer of any interest in the copyright, does not amount to royalty. It further noted that treaty provisions prevail where the DTAA definition of royalty is narrower than the domestic amendment, and that the buyer's limited user rights, even with permitted sub-licensing for specified use, did not convert the transaction into a copyright transfer.

Conclusion: The consideration for supply of software was not taxable as royalty, and the assessee's appeal succeeded.

Ratio Decidendi: A non-exclusive, non-transferable licence that permits only use of computer software, without transfer of any right to reproduce or otherwise exploit copyright, is a transfer of a copyrighted article and not a transfer of copyright, and therefore does not constitute royalty under the applicable DTAA.

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