Software licence receipts are not royalty where no copyright rights pass and no permanent establishment exists in India.

Consideration for shrink-wrap software was treated as business income, not royalty, because the licence transferred no copyright rights and only permitted use of the copyrighted article subject to restrictions. The Tribunal distinguished a transfer of copyright from supply of software media or download, following the line of authority that mere user rights for internal or personal purposes do not trigger royalty characterisation. It also noted that the DTAA definition was narrower than the domestic provision. In the absence of a permanent establishment in India, the receipts were not taxable as business income.

---

---

Issues: Whether receipts from sale of shrink-wrap software were taxable in India as royalty under section 9(1)(vi) of the Income-tax Act, 1961 and article 12(3) of the India-USA DTAA, or were business receipts not chargeable to tax in the absence of a permanent establishment in India.

Analysis: The receipt had to be tested on the nature of rights transferred. The relevant agreements showed that the distributor and end-user were only enabled to market and use the software under licence restrictions, without acquiring any right in the copyright itself. The Tribunal followed the consistent view of coordinate benches and placed reliance on the distinction between a transfer of copyright and the sale of a copyrighted article. It also noted the line of authority that software supplied on media or by download, where the customer only obtains the right to use the product for internal or personal purposes without exploiting copyright rights, does not amount to royalty. The DTAA definition was narrower than the domestic provision, and the absence of a permanent establishment meant business income could not be taxed in India.

Conclusion: The receipts from software sales were not royalty and were not taxable in India as business income in the absence of a permanent establishment, so the assessee succeeded.

Ratio Decidendi: Consideration for supplying software is not royalty where no copyright right is transferred and the customer only acquires a copyrighted article for use subject to licence restrictions; in such a case, the receipts are business income and, without a permanent establishment, are not taxable in India.

---