Software licence receipts are business profits, not royalty, where only limited use rights are granted without transfer of copyright.

Software licensing receipts under the India-Netherlands treaty were held not to be royalty because the agreements granted only a non-exclusive, non-transferable right to use the software for internal purposes, without transfer of copyright or any exclusive copyright rights. Limited rights to make backup copies or modify source code for compatibility did not amount to copyright transfer. The receipts were therefore treated as business profits, and the more beneficial treaty treatment prevailed over the domestic deeming provision. The reopening challenge was not pressed, and the beneficial-owner grounds became academic and did not survive for substantive adjudication.

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Issues: (i) Whether receipts from licensing of software under the India-Netherlands tax treaty were taxable as royalty or as business profits, and whether the absence of transfer of copyright kept the receipts outside the royalty article; (ii) whether the related reopening challenge and the beneficial-owner grounds survived for adjudication.

Issue (i): Whether receipts from licensing of software under the India-Netherlands tax treaty were taxable as royalty or as business profits, and whether the absence of transfer of copyright kept the receipts outside the royalty article.

Analysis: The software agreements granted only a non-exclusive, non-transferable, perpetual right to use the products, restricted to internal use, without conferring ownership in the products or any of the exclusive rights that form copyright. The limited permissions to make backup copies or modify source code for compatibility did not amount to transfer of copyright because the customer was not authorised to reproduce, commercially exploit, assign, sublicense, or otherwise exercise the rights enumerated in copyright law. The treaty definition of royalty, being confined to consideration for use of or the right to use copyright and not extending to a mere copyrighted product, did not cover the receipts. The receipts therefore retained the character of business income and, in view of the treaty position being more beneficial, could not be taxed as royalty under the domestic deeming provision.

Conclusion: The software receipts were not royalty and were taxable as business profits; this issue was decided in favour of the assessee.

Issue (ii): Whether the related reopening challenge and the beneficial-owner grounds survived for adjudication.

Analysis: The reopening challenge was not pressed. The beneficial-owner grounds were rendered academic once the software-receipt issue was decided in favour of the assessee.

Conclusion: These grounds did not survive for substantive adjudication.

Final Conclusion: The appeals were allowed only to the extent that the software licensing receipts were held taxable as business profits rather than royalty, while the remaining grounds were either not pressed or became infructuous.

Ratio Decidendi: A payment for a software licence is not royalty under the treaty where the payer acquires only a restricted right to use the software and no copyright or exclusive copyright rights are transferred; in such a case, the treaty's business-profits article prevails where it is more beneficial.

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