Software royalty character depends on copyright rights transfer; restricted licence receipts remained business income without a permanent establishment.

Software supplied on distributor and end-user terms on a principal-to-principal basis was treated as sale of copyrighted articles, not a transfer of copyright rights. Because the contracts only permitted use of the software and did not grant rights in the copyright itself, the receipts were not royalty under the India-UK DTAA; the treaty definition controlled, and domestic-law amendments to section 9(1)(vi) did not expand the treaty meaning for the relevant years. In the absence of a permanent establishment in India, the receipts were treated as business income not chargeable to tax in India.

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Issues: Whether the consideration received from sale of software products to Indian customers was taxable as royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 13 of the India-UK DTAA, or constituted business income not chargeable to tax in India in the absence of a permanent establishment.

Analysis: The software was supplied under distributor and end-user arrangements on a principal-to-principal basis. The contracts did not transfer copyright rights to the customers; they only permitted use of copyrighted software products. The treaty definition of royalty was held to control the tax treatment, and the domestic-law amendments to section 9(1)(vi) were held not to alter the DTAA position for the years in question. The receipts were therefore treated as consideration for sale of copyrighted articles and, in the absence of a permanent establishment in India, as business income not taxable in India.

Conclusion: The software receipts were not taxable as royalty and were not chargeable to tax in India as business income; the issue was decided in favour of the assessee.

Ratio Decidendi: For a software payment to be taxable as royalty under the DTAA, there must be transfer of copyright rights or a right to use copyright, and mere supply of copyrighted software on restricted licence terms does not amount to royalty; domestic-law amendments cannot enlarge the treaty meaning absent corresponding treaty amendment.

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