Software licence receipts are not royalty where the licence does not transfer any right to use copyright.

Consideration received for the resale or use of computer software under a licence or distribution arrangement was held not to be royalty, because such payments do not confer any interest in, or right to use, copyright itself. Applying the Supreme Court ruling in Engineering Analysis Centre of Excellence Pvt. Ltd., the receipts were treated as outside the royalty provisions of the Income-tax Act and the applicable treaty. On that basis, the software licence receipts were not taxable as royalty in India, and the addition made by the Revenue was deleted.

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Issues: Whether consideration received from the sale of software licences was taxable as royalty under the Income-tax Act, 1961 and the applicable treaty.

Analysis: The issue was treated as covered by the Supreme Court's ruling in Engineering Analysis Centre of Excellence Pvt. Ltd., which held that amounts paid by end-users or distributors for resale or use of computer software under EULAs or distribution agreements do not amount to payment for the use of copyright. On that basis, such receipts are not royalty and do not give rise to taxable income in India on the footing adopted by the Revenue.

Conclusion: The software licence consideration was not royalty and the addition was unsustainable.

Final Conclusion: The assessee succeeded on the sole substantive issue, and the assessment addition treating the software licence receipts as royalty was deleted.

Ratio Decidendi: Consideration paid for resale or use of computer software under a licence or distribution arrangement is not royalty unless it creates an interest in or right to use copyright itself.

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