Software licence payments are not royalty when no copyright or reproduction right is transferred.

Consideration for software supplied to Indian customers under restricted end-user or distribution arrangements was not royalty under the Income-tax Act or Article 12 of the India-Israel DTAA, because the transferee received only a limited licence to use the software and no copyright, reproduction right, or other interest in the underlying work. The payment was therefore characterised as consideration for sale of a copyrighted article, not a grant of rights in copyright, so the royalty charging provisions did not apply and no income arose on that basis in India. The issue was answered in favour of the assessee and against the revenue.

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Issues: Whether the consideration received for sale of software to Indian customers constituted royalty under the Income-tax Act, 1961 and Article 12 of the India-Israel Double Taxation Avoidance Agreement.

Analysis: The issue stood covered by the Supreme Court ruling holding that where the distributor or end-user receives only a limited licence to use software, without any transfer of copyright or any right to reproduce the work, the transaction is not a grant of rights in copyright. The amount paid for such software transactions is treated as consideration for sale of a copyrighted article, not as royalty. In such circumstances, the charging provisions dealing with royalty do not apply and no income chargeable to tax in India arises on that footing.

Conclusion: The question was answered in favour of the assessee and against the revenue.

Ratio Decidendi: Payment for software supplied under restricted end-user or distribution arrangements, where no interest in copyright or right to reproduce the software is transferred, is not royalty but consideration for sale of a copyrighted article.

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