Software licence receipts not royalty where only limited use rights are granted and copyright remains with the licensor.

Receipts from software licences were held not to constitute royalty or fees for technical services where the customer received only a limited right to use a copyrighted product, with copyright remaining with the licensor and no right to exploit the copyright itself. The treaty position was treated as more beneficial, and the receipts were characterised as business income; in the absence of a permanent establishment, they were not taxable in India. The delay in filing the appeals was condoned on a liberal, justice-oriented approach, and the disputed TDS credit issue was remanded for verification and grant of the correct credit.

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Issues: (i) Whether the delay in filing the appeals for two assessment years should be condoned; (ii) Whether receipts from sale of software licences were taxable as royalty and fees for technical services; (iii) Whether the assessee was entitled to the disputed TDS credit.

Issue (i): Whether the delay in filing the appeals for two assessment years should be condoned?

Analysis: The explanation for delay was examined in the light of the principles that courts should adopt a liberal, pragmatic and justice-oriented approach while considering sufficient cause for delay, and that substantial justice should prevail over technical objections where the delay is not shown to be deliberate or mala fide.

Conclusion: The delay was condoned and the appeals for those years were admitted.

Issue (ii): Whether receipts from sale of software licences were taxable as royalty and fees for technical services?

Analysis: The agreements and the nature of the software transactions were considered against the treaty definition of royalty and the statutory provision. The decisive distinction was between transfer of copyright and transfer of a copyrighted article. The licences permitted use of software products, while copyright in the software remained with the assessee. The Court relied on the principle that a limited right to use a copyrighted product for internal business purposes, without transfer of copyright rights or commercial exploitation of the copyright itself, does not amount to royalty. On that basis, the treaty provisions were found more beneficial and the receipts were treated as business income, not royalty or fees for technical services.

Conclusion: The receipts from sale of software products and licences were not royalty or fees for technical services and were not taxable in India in the absence of a permanent establishment.

Issue (iii): Whether the assessee was entitled to the disputed TDS credit?

Analysis: The claim was examined on the footing that tax had been deducted by Indian customers, but the credit granted by the Assessing Officer was short. The matter required verification of the records and determination of the correct amount of credit.

Conclusion: The issue of TDS credit was restored to the Assessing Officer for verification and grant of appropriate credit.

Final Conclusion: The royalty additions were deleted, the delay objections were rejected by condonation, and the TDS credit issue was sent back for verification, leaving the assessee substantially successful on the main dispute.

Ratio Decidendi: A payment for a software licence is not royalty where the customer receives only a limited right to use a copyrighted product and no right in or to exploit the copyright itself.

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