Software licence fee not royalty where only internal use was allowed and no copyright rights were transferred under the treaty.

A non-exclusive, non-transferable licence permitting only internal use of software technology, without conferring any right to exploit copyright, did not constitute royalty under section 9(1)(vi) or Article 12(3) of the India-Canada DTAA. The treaty definition was confined to consideration for use of, or the right to use, copyright, and mere use of a copyrighted article was insufficient. A later domestic-law amendment could not expand the treaty scope. The licence fee addition was deleted and the assessee's appeals were allowed.

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Issues: Whether the annual membership-cum-licence fee received for permitting use of software technology under a non-exclusive, non-transferable arrangement constituted royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 12(3) of the India-Canada DTAA.

Analysis: The payment arose under an agreement under which the user received only a limited right to use the technology for internal purposes. Title and ownership remained with the licensor, and the user could not sell, sub-license, or transfer the technology. The arrangement did not confer any right to exploit copyright in the software within the meaning of section 14 of the Copyright Act, 1957. On the treaty definition, royalty covered consideration for use of, or the right to use, copyright, and not mere use of a copyrighted article. The later domestic-law amendment to section 9(1)(vi) could not enlarge the scope of the treaty definition.

Conclusion: The receipt was not royalty and was outside the charge of tax under Article 12(3) of the India-Canada DTAA. The issue was decided in favour of the assessee.

Final Conclusion: The addition treating the licence fee as royalty was deleted, and the assessee's appeals were allowed while the Revenue's appeal failed.

Ratio Decidendi: A non-exclusive, non-transferable licence permitting only internal use of software or technology, without conferring any copyright rights, does not amount to royalty under the treaty definition, even if domestic law is broader.

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