Software licence receipts not treated as royalty where no copyright rights are transferred under distributor or end-user arrangements.

Consideration received under software distribution and end-user licence arrangements does not amount to royalty where no copyright right or interest is transferred, following the Supreme Court ruling in Engineering Analysis Centre of Excellence Pvt. Ltd. Applying that binding principle, the ITAT held that receipts from software licence sales under the India-Australia treaty framework were not taxable as royalty under section 9(1)(vi) of the Income-tax Act. The royalty additions were therefore deleted, and the assessee's receipts were treated as outside the royalty charge.

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Issues: Whether consideration received from Indian distributors/end-users for software licences amounted to royalty taxable in India under section 9(1)(vi) of the Income-tax Act, 1961 and the applicable DTAA.

Analysis: The issue was governed by the Supreme Court's ruling in Engineering Analysis Centre of Excellence Pvt. Ltd., which held that amounts paid under distributor agreements/EULAs for resale or use of computer software do not create any interest or right in the distributor or end-user amounting to the use of, or right to use, copyright. On that basis, such payments were held not to be royalty, and the deeming provisions dealing with royalty under section 9(1)(vi) were held inapplicable on the facts. The Tribunal applied that binding principle to the assessee's software licence receipts under the India-Australia treaty framework.

Conclusion: The receipts from sale of software licences were not royalty and were not taxable in India on that basis; the additions treating them as royalty were deleted.

Final Conclusion: The assessee succeeded and the royalty additions for both assessment years were set aside.

Ratio Decidendi: Consideration paid for software distribution or end-user licence arrangements that do not transfer any copyright right or interest is not royalty and is not taxable as such under the royalty provisions of the Income-tax Act and the relevant DTAA.

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