Software licence receipts are not royalty where no copyright rights are transferred and no permanent establishment exists in India.

Receipts from sale of software licence were treated as business receipts, not royalty, because royalty under Article 12 of the India-USA DTAA and section 9(1)(vi) arises only where rights in copyright are transferred; the Tribunal found no such transfer and treated the payments as sale of software/licence. It also held that Article 7 business profits could not be taxed in India because the foreign enterprise had no permanent establishment in India under Article 5. For the later year, although Explanation 4 to section 9(1)(vi) applied, Article 90(2) required the more beneficial treaty position to prevail, so the receipts remained non-taxable in India.

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Issues: Whether receipts from sale of software licence were chargeable to tax in India as royalty under Article 12 of the India-USA DTAA and section 9(1)(vi) of the Income-tax Act, 1961, and if not, whether they could be taxed as business profits under Article 7 in the absence of a permanent establishment in India.

Analysis: The dispute turned on whether the payments were consideration for use of, or right to use, copyright in software, or merely receipts for sale of software/licence. Applying the Supreme Court ruling on software payments, the Tribunal noted that copyright is distinct from the physical/software medium and that royalty arises only where rights in copyright are parted with. The receipts in question were found to be for sale of software/licence and not for transfer of copyright. The Tribunal further noted that business profits of a foreign enterprise become taxable in India under Article 7 only if the enterprise has a permanent establishment in India under Article 5. The record showed that the assessee had no permanent establishment in India. For the later year, although Explanation 4 to section 9(1)(vi) was applicable, Article 90(2) required the more beneficial treaty provisions to prevail, and the treaty exemption continued to govern the taxability issue.

Conclusion: The receipts were not taxable as royalty and also could not be taxed as business profits in the absence of a permanent establishment in India; the issue was decided in favour of the assessee.

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