Software distribution payments as sale of copyrighted article, not royalty, where no copyright rights were transferred under the treaty.

Consideration for software supplied through a distributor and sold as off-the-shelf software was treated as payment for a copyrighted article, not royalty, because no copyright, source code, or right to exploit the copyright was transferred. The limited licence allowed only internal business use and did not convey any rights comprising copyright under the Copyright Act, 1957. Article 12(4) of the India-Netherlands DTAA was applied as narrower than the domestic royalty definition, and the retrospective expansion of section 9(1)(vi) was held not to change the treaty position without a corresponding amendment to the DTAA. The amount was therefore business income, not taxable in India in the absence of a permanent establishment.

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Issues: Whether consideration received on sale of computer software supplied through a distributor and sold as off-the-shelf software constituted royalty under Article 12(4) of the India-Netherlands DTAA and section 9(1)(vi) of the Income-tax Act, or business income not taxable in India in the absence of a permanent establishment.

Analysis: The software was supplied as a copyrighted article under a distribution arrangement, and the factual finding was that no copyright, source code, or right to exploit the copyright was transferred to the distributor or end user. The transaction permitted only limited use of the software for internal business operations and did not confer any of the rights comprising copyright under section 14 of the Copyright Act, 1957. The definition of royalty in Article 12(4) was treated as narrower than the domestic law definition, and the retrospective enlargement of section 9(1)(vi) was held not to alter the treaty meaning in the absence of a corresponding amendment to the DTAA.

Conclusion: The consideration was held not to be royalty but consideration for sale of a copyrighted article, and therefore it was business income not taxable in India because the non-resident had no permanent establishment.

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