Software sale receipts are not royalty absent copyright transfer; favourable interpretation of taxing provisions applies.

Consideration from sale of shrink-wrap software to Indian customers through distributors or resellers was analysed on the basis of whether it involved transfer of copyright rights or only sale of a copyrighted article. The ITAT Mumbai followed its own earlier coordinate-bench decisions and held that, absent transfer of copyright, the payment could not be treated as royalty under section 9(1)(vi) of the Income-tax Act or Article 12(3) of the India-USA DTAA. It also applied the settled principle that where two reasonable constructions of a taxing provision are possible, the interpretation favourable to the assessee should prevail, and the software-sale receipts were therefore not taxable as royalty in India.

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Issues: Whether consideration received from sale of shrink-wrap software to Indian customers through distributors/resellers was taxable in India as royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 12(3) of the DTAA between India and USA.

Analysis: The receipt arose from sale of software products and the question was whether such supply amounted to transfer of copyright or merely sale of a copyrighted article. The Tribunal followed its earlier coordinate-bench decisions in the assessee's own case and relied on the view that, in the absence of transfer of copyright rights, the payment could not be treated as royalty. It also noted the settled principle that where two reasonable constructions of a taxing provision are possible, the construction favourable to the assessee is to be adopted. On that basis, the contrary view taken in some non-jurisdictional decisions did not persuade a different result.

Conclusion: The receipts from sale of shrink-wrap software were not royalty and were not exigible to tax in India under section 9(1)(vi) of the Income-tax Act, 1961 or Article 12(3) of the DTAA.

Final Conclusion: The addition made by treating the software sale receipts as royalty was deleted and the assessee's appeal succeeded.

Ratio Decidendi: Payment for sale of software is not royalty unless there is a transfer of copyright rights; sale of a copyrighted article, without transfer of copyright, is not taxable as royalty on that basis.

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