Software supply receipts as royalty rejected where only use of a copyrighted article was licensed, with no permanent establishment in India.

Receipts from supply of shrink-wrap software to Indian resellers and end users were treated as business receipts, not royalty, because the distribution and end-user licences allowed only use of a copyrighted article and did not transfer any copyright rights such as reproduction, modification, decompilation, or other exploitation of the copyright. On that basis, the consideration did not fall within royalty under the treaty framework. As the supplier had no permanent establishment in India, the receipts were not taxable in India as business income.

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Issues: Whether receipts from supply of shrink-wrap software to Indian resellers and end users were taxable in India as royalty, and whether such receipts were instead business income not taxable in the absence of a permanent establishment.

Analysis: The software was supplied under distribution arrangements and end-user licences that did not transfer any copyright rights in the software. The rights retained by the supplier showed that the distributor and end user were only permitted to use the copyrighted product, with no right to reproduce, exploit, modify, decompile, or otherwise deal with the copyright itself. In the absence of transfer of copyright rights, the consideration could not be characterised as royalty under the treaty framework. The reasoning adopted also treated shrink-wrap software supplied on media as a copyrighted article, and not as a transfer of copyright. Since the receipts were business receipts and the assessee had no permanent establishment in India, the income was not taxable in India.

Conclusion: The receipts from software supply were not royalty and were not chargeable to tax in India as business income in the absence of a permanent establishment.

Ratio Decidendi: Consideration for supply of software is not royalty where the transaction only permits use of a copyrighted article without transfer of copyright rights; such receipts are business income unless attributable to a permanent establishment.

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