Software supply receipts are not royalty where only a copyrighted article is transferred, and no Indian PE exists.

Consideration for supply of software was treated as payment for a copyrighted article, not as a transfer of copyright or right to use copyright, so it was not taxable as royalty under the Act or the India-USA DTAA. On the PE question, the Indian affiliate operated on a principal-to-principal basis, and there was no material showing deputation of personnel or authority to conclude contracts for the non-resident supplier; accordingly, no agency PE or service PE existed in India and no business profits could be attributed. The royalty and PE-based assessments therefore could not stand, and the ancillary interest grounds were consequential.

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Issues: (i) Whether the amounts received by the assessee for supply of software were chargeable to tax in India as royalty under the Act and the India-USA DTAA; (ii) Whether the assessee had a permanent establishment in India and, if so, whether any income was attributable to such PE.

Issue (i): Whether the amounts received by the assessee for supply of software were chargeable to tax in India as royalty under the Act and the India-USA DTAA.

Analysis: The issue was treated as covered by earlier orders in the assessee's own case. The software supply consideration was held to be for a copyrighted article and not for transfer of copyright or right to use copyright. On the same reasoning, the receipts could not be characterised as royalty under the Act or under the DTAA.

Conclusion: The issue was decided in favour of the assessee and the receipts were held not taxable as royalty.

Issue (ii): Whether the assessee had a permanent establishment in India and, if so, whether any income was attributable to such PE.

Analysis: The earlier consolidated order in the assessee's own case had already held that no agency PE or service PE existed on the facts. The Indian affiliate acted on a principal-to-principal basis, and there was no material to show deputation of personnel or authority to conclude contracts on behalf of the assessee. In the absence of a PE, no attribution of business profits could arise.

Conclusion: The issue was decided in favour of the assessee and it was held that no PE existed in India and no profits were attributable.

Final Conclusion: The assessments based on royalty characterisation and PE attribution could not stand, and the appeals were allowed; the ancillary interest grounds were consequential.

Ratio Decidendi: Consideration for supply of software is not royalty where only a copyrighted article is transferred and no copyright rights are conveyed, and in the absence of a permanent establishment in India, no business profits can be attributed to the non-resident supplier.

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