Software licence receipts are not royalty where only limited internal-use rights are granted and treaty terms remain controlling.

Receipts from non-exclusive, non-transferable software licences were examined to determine whether they constituted royalty under section 9(1)(vi) of the Income-tax Act and Article 12(3) of the India-USA treaty. The licence granted only a limited internal-use right during the subscription period, with no power to exploit, transfer, sub-license, modify, decompile, reverse engineer, or commercially deal with the software. On that basis, the Tribunal treated the payment as consideration for a copyrighted article rather than use of copyright, and held that domestic-law amendments expanding royalty could not be imported into the treaty. The receipts were therefore not taxable as royalty under the Act or the treaty.

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Issues: Whether receipts from grant of non-exclusive, non-transferable software licences and associated restrictions constituted royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 12(3) of the India-USA Double Taxation Avoidance Agreement, and whether the domestic-law amendments enlarging royalty could be imported into the treaty.

Analysis: The licence terms showed that the customer received only a limited right to use the software for internal business purposes during the subscription period, with no right to exploit, transfer, sub-license, modify, decompile, reverse engineer, or commercially deal with the software. The rights conferred were held to be merely incidental to use of a copyrighted product and not a transfer of any copyright right within the meaning of the Copyright Act, 1957. Following the jurisdictional High Court decisions, the Tribunal held that a payment for a copyrighted article is distinct from payment for use of copyright, and that the retrospective enlargement of royalty in domestic law cannot be read into the treaty.

Conclusion: The receipts were not royalty under Article 12(3) of the treaty and could not be taxed as royalty under section 9(1)(vi) of the Income-tax Act, 1961; the issue was decided in favour of the assessee.

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