Software licence receipts were held to be business income, not royalty, where only a copyrighted article was transferred.

A non-exclusive, non-transferable software licence that leaves ownership and copyright with the supplier transfers only a copyrighted article, not copyright rights; the consideration is therefore not royalty under the treaty and is taxable as business income under Article 7. The retrospective domestic amendment to section 9(1)(vi) does not change the treaty position absent a corresponding treaty amendment. Credit for tax deducted at source was directed to be verified by the Assessing Officer and granted in accordance with law on remand.

---

---

Issues: (i) Whether receipts from sale of standard software were taxable as royalty under section 9(1)(vi) of the Income-tax Act, 1961 and the India-Finland DTAA, or as business income under Article 7; (ii) whether credit for tax deducted at source was to be allowed.

Issue (i): Whether receipts from sale of standard software were taxable as royalty under section 9(1)(vi) of the Income-tax Act, 1961 and the India-Finland DTAA, or as business income under Article 7.

Analysis: The software licences were non-exclusive and non-transferable, ownership and intellectual property rights remained with the supplier, and the customer received only a limited right to use the software in its own business. The arrangement did not transfer copyright rights; it transferred only a copyrighted article. The Court followed the binding Delhi High Court rulings holding that such consideration is not royalty. The retrospective domestic amendment to section 9(1)(vi) was held not to alter the treaty position.

Conclusion: The receipts were not royalty and were taxable as business income under Article 7 of the DTAA, in favour of the assessee.

Issue (ii): Whether credit for tax deducted at source was to be allowed.

Analysis: The matter was restored to the Assessing Officer for verification of the claim and grant of credit in accordance with law.

Conclusion: The issue was allowed by way of remand for verification, in favour of the assessee.

Final Conclusion: The appeals were allowed on the core software-taxability question and the TDS-credit issue was sent back for verification, with the remaining grounds failing as consequential.

Ratio Decidendi: A non-exclusive, non-transferable software licence that leaves ownership and copyright with the licensor transfers only a copyrighted article, not copyright rights, and the consideration is not royalty under the treaty; a subsequent domestic-law amendment does not enlarge the treaty definition absent corresponding treaty amendment.

---