Copyrighted article supplies are not royalty where the licence is limited and the treaty definition is narrower.

A non-exclusive, non-transferable licence that passes only a copyrighted article, and not rights in the underlying copyright, does not generate royalty income. The article states that consideration for software products, hardware equipment, and related licences was treated as business income rather than royalty because the receipts arose from supply of copyrighted articles, not transfer of copyright rights. It further notes that a narrower treaty definition prevails over an expanded domestic definition of royalty, so the receipts were not taxable in India on that basis. Consequential issues on alternate additions, interest, and penalty initiation were not examined once the core taxability point was resolved.

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Issues: Whether consideration received for supply of software products, hardware equipment, and related licences constituted royalty under the Income-tax Act, 1961 and the applicable tax treaty, or business income not taxable in India in the absence of a permanent establishment.

Analysis: The license granted was limited, non-exclusive, non-transferable, and did not confer any right in the underlying copyright. The receipts arose from supply of copyrighted articles and not from transfer of copyright rights. The domestic law amendments expanding the concept of royalty could not override the narrower treaty definition, and the treaty being beneficial to the assessee prevailed. On that footing, the software and hardware receipts were not taxable as royalty. The consequential grounds regarding alternate additions, interest, and penalty initiation did not require adjudication once the core taxability issue was decided.

Conclusion: The receipts from software and hardware supplies were not royalty and were not taxable in India as such; the issue was decided in favour of the assessee.

Final Conclusion: The assessment additions based on royalty characterisation failed, and the appeal succeeded on the principal ground.

Ratio Decidendi: A non-exclusive and non-transferable licence that conveys only a copyrighted article, without transfer of rights in the underlying copyright, does not give rise to royalty; where the treaty definition is narrower, it prevails over an expanded domestic definition.

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