Software distribution receipts are not royalty where only copyrighted articles are supplied and no copyright rights are transferred.

Consideration for distribution of off-the-shelf software to Indian distributors was treated as payment for a copyrighted article, not for use of copyright, because the distributors received only a non-exclusive right to market and distribute the software and had no rights over source code, modification, reproduction beyond limited backup use, or other exploitation of copyright. On that basis, the receipt was held not to be royalty under the India-Finland treaty, and domestic retrospective amendments to section 9(1)(vi) could not enlarge the treaty definition. The same reasoning applied to maintenance, support services and upgrades, which were incidental to software supply and functionality support rather than any transfer of copyright rights. Both receipts were therefore taxable as business income, and the royalty additions were deleted.

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Issues: (i) Whether consideration received for sale of off-the-shelf software to Indian distributors was taxable as royalty under Section 9(1)(vi) of the Income-tax Act, 1961 and Article 12 of the India-Finland Tax Treaty. (ii) Whether consideration received for maintenance, support services and upgrades was taxable as royalty under Section 9(1)(vi) of the Income-tax Act, 1961 and Article 12 of the India-Finland Tax Treaty.

Issue (i): Whether consideration received for sale of off-the-shelf software to Indian distributors was taxable as royalty under Section 9(1)(vi) of the Income-tax Act, 1961 and Article 12 of the India-Finland Tax Treaty.

Analysis: The distribution arrangements granted only a non-exclusive right to market and distribute the software products. The distributors had no right to the source code, no right to modify, translate, recompile or create source code, and no right to reproduce the software except for limited backup purposes. The intellectual property in the software remained with the assessee. On these features, the receipt was for sale of a copyrighted article and not for use of copyright. The definition of royalty in the treaty was exhaustive, and the retrospective domestic amendments to Section 9(1)(vi) could not be read into the treaty in the absence of a corresponding treaty amendment.

Conclusion: The receipt from sale of off-the-shelf software was not royalty and was taxable as business income; the issue was decided in favour of the assessee.

Issue (ii): Whether consideration received for maintenance, support services and upgrades was taxable as royalty under Section 9(1)(vi) of the Income-tax Act, 1961 and Article 12 of the India-Finland Tax Treaty.

Analysis: The upgrades, sub-releases and main releases were treated as software updates supplied through the distributors for onward use by customers, and the related support services were rendered only to assist functionality, troubleshooting and error verification. The payment was therefore connected with the supply of copyrighted software articles and incidental support, not with any transfer of a right to use copyright. For the same treaty-based reasons, the domestic expansion of royalty could not enlarge the treaty definition.

Conclusion: The receipt for maintenance, support services and upgrades was not royalty and was taxable as business income; the issue was decided in favour of the assessee.

Final Conclusion: The additions treating the software distribution and associated maintenance receipts as royalty were deleted, while the remaining grounds were either not pressed, consequential, or premature, leaving the appeal only partly allowed.

Ratio Decidendi: Consideration for distribution of a copyrighted software article, without transfer of copyright or any right to exploit the copyright, is not royalty; a later domestic amendment cannot expand an already defined treaty term in the absence of a corresponding treaty amendment.

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