Software licence payments are not royalty when no copyright rights are transferred under the India-USA treaty.

Consideration for sale of pre-packaged software was treated as payment for a copyrighted article, not as royalty or fee for technical services, because the transaction did not involve transfer of copyright rights. A non-exclusive, non-transferable licence for internal use, together with incidental loading or use of the software, was insufficient to constitute transfer of copyright under the India-USA DTAA. The treaty position prevailed over the domestic charging provision under Section 90(3) of the Income-tax Act, 1961, so the later amendment to Section 9(1)(vi) did not alter the result for an assessee covered by the DTAA. The amount was therefore not taxable as royalty or technical fees.

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Issues: Whether consideration received on sale of pre-packaged software was taxable as royalty or fee for technical services under the India-USA DTAA and the Income-tax Act, 1961, or was taxable as business income.

Analysis: The decisive question was whether the transaction involved transfer of rights in copyright or merely sale of a copyrighted article. The applicable treaty provision required transfer of copyright rights before the payment could be characterised as royalty. The Court relied on the earlier holding that a non-exclusive and non-transferable licence enabling use of software for internal business purposes does not amount to transfer of copyright rights. The incidental acts necessary to load or use the software did not alter the character of the transaction. The Court also reiterated that, under Section 90(3) of the Income-tax Act, 1961, the treaty prevails where it is more beneficial to the assessee, and therefore the subsequent domestic amendment to Section 9(1)(vi) did not displace the treaty position for the assessee covered by the DTAA.

Conclusion: The consideration received on sale of pre-packaged software was not royalty or fee for technical services and could not be taxed as such; the issue was decided against the Revenue and in favour of the assessee.

Ratio Decidendi: Payment for a copyrighted article, without transfer of copyright rights, is not royalty under the applicable DTAA, and where the treaty is more beneficial it prevails over the domestic charging provision.

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