Software licence payments as business income, not royalty, where only a copyrighted article is sold and no permanent establishment exists.

Consideration paid for shrink-wrapped software was analysed as payment for a copyrighted article, not a transfer of copyright. The distinction between a right to use copyright and mere acquisition of software supplied off the shelf was central, and the user's fair use of the software for the intended purpose was treated as outside copyright infringement. On that basis, the payment was not royalty under the treaty but business income of the non-resident recipient. As the recipient had no permanent establishment in India, the income was not taxable in India and no tax was deductible at source.

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Issues: Whether consideration paid for off-the-shelf shrink-wrapped software amounted to royalty or only payment for a copyrighted article, and whether the non-resident recipient had taxable income in India in the absence of a permanent establishment.

Analysis: The payment was examined in the context of the licence terms, the nature of the software supplied, and the meaning of royalty under the treaty. The software was treated as a copyrighted product sold off the shelf, with no transfer of copyright in the work itself. The Court relied on the distinction between a right to use copyright and mere acquisition of a copyrighted article, and held that the user's fair use of the software for the purpose supplied did not amount to copyright infringement. On that basis, the consideration could not be characterised as royalty under the applicable treaty and was instead the non-resident's business income. Since the recipient had no permanent establishment in India, the amount was not taxable in India.

Conclusion: The payment was not royalty, the recipient's income was business income, and no tax was deductible at source on that basis; the Revenue's appeal failed.

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