Software licence receipts as business income: no copyright rights transferred, so the income was not taxable without a permanent establishment.

Software product and software licence receipts were treated as business income rather than royalty because the end-user, distributor and reseller arrangements did not transfer any copyright rights. The Tribunal found that purchasers obtained only the software for use or onward sale, without any right to copy, sub-license, commercially exploit, or otherwise use the underlying copyright. Applying the India-USA tax treaty and its earlier ruling in the assessee's own case, ITAT Pune held that the receipts arose from sale of copyrighted articles, not from use of copyright. In the absence of a permanent establishment in India, the income was not taxable in India.

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Issues: Whether the consideration received from sale of software products and software licences to end users, distributors and resellers in India was taxable as royalty or constituted business income not chargeable to tax in India in the absence of a permanent establishment.

Analysis: The Tribunal followed its earlier decision in the assessee's own case and examined the nature of the software transactions under the India-USA tax treaty. It found that the end-user licence agreement and the distributor arrangements did not transfer any right in the copyright in the software. The customers, distributors and resellers only acquired the software products for use or onward sale, without any right to copy, commercially exploit, sub-license, or otherwise use the copyright. On that basis, the receipts were held to arise from sale of copyrighted articles and not from use of, or right to use, copyright. Since the assessee had no permanent establishment in India, the business income could not be taxed in India.

Conclusion: The receipts from sale of software products and software licences were not royalty but business income, and were not taxable in India.

Ratio Decidendi: Consideration received for transfer of software products that does not confer any right to use or exploit the underlying copyright is not royalty but business income; in the absence of a permanent establishment, such income is not taxable in India.

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