Software purchase for internal use is a copyrighted article, not royalty, under a narrower treaty definition.

Consideration for standardised software purchased for internal use was treated as payment for a copyrighted article, not royalty, because the buyer acquired only a non-exclusive right to use the product and no copyright rights. The analysis distinguished use of software from use of copyright in software, relying on the Copyright Act framework on exclusive rights and limited exceptions for operational copying or backup use. It also stated that the India-USA DTAA definition of royalty is narrower and more beneficial than the domestic definition, so retrospective amendments to section 9(1)(vi) cannot expand the treaty meaning. On that basis, the amount was not royalty and, if taxable at all, would be business income in the recipient's hands.

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Issues: Whether consideration paid for purchase of standardised software for internal use constituted royalty under section 9(1)(vi) of the Income-tax Act and the India-USA DTAA, or was payment for a copyrighted article taxable as business income of the non-resident recipient.

Analysis: The Tribunal followed its earlier decision in the assessee's own case and held that the treaty definition of royalty was narrower and more beneficial than the domestic definition. It found that the software supplied on non-exclusive terms was a copyrighted product, not a transfer of any copyright or right to exploit copyright. The Tribunal relied on the distinction between use of software and use of copyright in software, and on the statutory framework of the Copyright Act, 1957, particularly the rights conferred by section 14 and the exceptions in section 52. It held that the assessee only acquired the right to use the product internally, and such use, including necessary copying for operation or backup, did not amount to acquisition of copyright rights. It further held that retrospective amendments to section 9(1)(vi) could not enlarge the treaty meaning of royalty.

Conclusion: The payment for purchase of standardised software was not royalty under section 9(1)(vi) or the India-USA DTAA and was taxable, if at all, as business income in the hands of the recipient. The assessee succeeded and the Revenue failed.

Final Conclusion: The common issue was decided in favour of the assessee by applying the DTAA definition of royalty and treating the software transaction as purchase of a copyrighted article rather than transfer of copyright rights.

Ratio Decidendi: Where software is purchased for internal use without transfer of copyright rights, the consideration is for a copyrighted article and not royalty, and a narrower, more beneficial treaty definition prevails over a wider domestic definition.

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