Software licence payments and royalty tax treatment under the India-Ireland treaty where no copyright rights are transferred.

Consideration for supply of standard off-the-shelf software was treated as payment for a copyrighted article, not for the use of, or right to use, copyright, because the licence was limited to internal use and no copyright rights were transferred. On that basis, the treaty definition of royalty under the India-Ireland DTAA, being narrower than the domestic provision, prevailed, and the retrospective domestic amendment did not expand the treaty scope; the receipt was therefore not taxable in India in the absence of a permanent establishment. Credit for tax deducted at source was to be allowed subject to verification by the Assessing Officer.

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Issues: (i) Whether consideration received for supply of off-the-shelf software was taxable as royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 12 of the India-Ireland Double Taxation Avoidance Agreement; and (ii) whether credit for tax deducted at source was to be granted as claimed.

Issue (i): Whether consideration received for supply of off-the-shelf software was taxable as royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 12 of the India-Ireland Double Taxation Avoidance Agreement.

Analysis: The software supplied was found to be a standard shrink-wrapped/off-the-shelf product. The agreement granted only a limited licence for internal use and did not transfer any rights in the underlying copyright. The payment was therefore for a copyrighted article and not for the use of, or right to use, copyright. The treaty definition of royalty was narrower than the domestic provision, and the assessee, being a resident of Ireland, was entitled to the more beneficial treaty position. The retrospective domestic amendment was held not to alter the treaty position.

Conclusion: The receipt was not taxable as royalty and was not chargeable to tax in India in the absence of a permanent establishment.

Issue (ii): Whether credit for tax deducted at source was to be granted as claimed.

Analysis: The claim was directed to be examined by the Assessing Officer and allowed if found to be in order.

Conclusion: Credit for tax deducted at source was to be granted subject to verification.

Final Conclusion: The appeal succeeded on the principal royalty issue and the TDS credit issue, while the remaining grounds concerning interest and penalty did not alter the partial relief granted.

Ratio Decidendi: Consideration for a copyrighted article, where no rights in the copyright are transferred, is not royalty under a narrower tax treaty definition, and a unilateral domestic amendment does not automatically expand the treaty meaning.

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