Software licence receipts are business income, not royalty, when no right to copy or exploit copyright is granted.

Consideration for sale of software licences to end users, distributors and resellers is not royalty under Article 12 of the India-USA DTAA where the purchaser receives only the product for onward sale and no right to copy, reproduce, or commercially exploit the copyright. The agreements showed that intellectual property rights remained with the assessee, and the reseller or distributor role was limited to facilitating sales. On that basis, direct sales and routed sales were treated alike and characterised as business income, not royalty. In the absence of a permanent establishment in India, the receipts were not taxable in India and the adjustment was unsustainable.

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Issues: Whether receipts from sale of software licences to end users, distributors and resellers constituted royalty income or business income.

Analysis: The receipts had to be examined under Article 12 of the India-USA Double Taxation Avoidance Agreement, which taxes consideration only for the use of, or the right to use, copyright or other specified intellectual property. A sale of software product or a resale arrangement does not, by itself, confer any right to copy the software or commercially exploit the copyright. The agreements showed that the resellers and distributors purchased the products for onward sale, without acquiring any copyright, title or right to reproduce the software. Their role was limited to facilitating sale of the software products, and the assessee retained all intellectual property rights. The earlier year's decision in the assessee's own case covered direct sales to end users, and the same legal character applied to sales routed through resellers and distributors because the essential element of licensing copyright was still absent.

Conclusion: The receipts from direct sales as well as sales through distributors and resellers were not royalty but business income. Since there was no permanent establishment in India, the income was not taxable in India and the addition was unsustainable.

Ratio Decidendi: Consideration received for transfer of software products, without granting any right to copy or commercially exploit the copyright, is not royalty under the applicable tax treaty and is taxable, if at all, only as business income.

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