Software sale receipts are not royalty under the India-UK DTAA when no copyright rights are transferred.

Receipts from sale of software were held not to be royalty under the India-UK DTAA because the payment was for purchase of a copyrighted product on a principal-to-principal basis, without transfer of copyright rights; the issue was decided in favour of the assessee. Explanation 4 to section 9(1)(vi) of the Income-tax Act did not alter the treaty position under Article 13, as a domestic amendment cannot enlarge the scope of royalty under an unamended treaty; this issue was also decided in favour of the assessee. The appeals were dismissed, as no substantial question of law arose.

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Issues: (i) Whether receipts from sale of software were taxable as royalty under the India-UK DTAA. (ii) Whether Explanation 4 to section 9(1)(vi) of the Income-tax Act, 1961, altered the treaty position under Article 13 of the India-UK DTAA.

Issue (i): Whether receipts from sale of software were taxable as royalty under the India-UK DTAA.

Analysis: The dispute turned on the distinction between consideration paid for use of copyright and consideration paid for purchase of a copyrighted product. Where software is sold as a product and the purchaser obtains only a limited right to use the copyrighted material, the payment is not for use of copyright. The Court followed its earlier decisions holding that sale of software on a principal-to-principal basis, without transfer of copyright rights, does not amount to royalty under the treaty.

Conclusion: The receipts from sale of software were not taxable as royalty under the India-UK DTAA and the finding was in favour of the assessee.

Issue (ii): Whether Explanation 4 to section 9(1)(vi) of the Income-tax Act, 1961, altered the treaty position under Article 13 of the India-UK DTAA.

Analysis: The domestic amendment could not control the treaty definition of royalty in the absence of a corresponding amendment to the DTAA. The Court applied the settled principle that where a treaty applies, it overrides the Act to the extent of inconsistency, and that a later domestic amendment does not retrospectively enlarge the scope of royalty under an unamended treaty.

Conclusion: Explanation 4 did not apply to expand the meaning of royalty under the India-UK DTAA, and this issue was decided in favour of the assessee.

Final Conclusion: No substantial question of law arose for interference with the Tribunal's order, and the appeals were dismissed.

Ratio Decidendi: Consideration for purchase of software as a copyrighted product, without transfer of copyright rights, is not royalty under the treaty, and a domestic amendment cannot enlarge the treaty definition absent a corresponding treaty amendment.

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