Software licence receipts are not royalty where no copyright rights are transferred, and treaty relief applies.

Consideration for supply of software under end-user and distribution arrangements was held not to be royalty because the arrangements transferred only a copyrighted article and not any right in the copyright itself. Applying the Supreme Court ruling in Engineering Analysis Centre for Excellence Private Limited, the Tribunal held that payments for resale or use of computer software do not constitute royalty under the Income-tax Act or Article 12 of the India-USA DTAA. The related ancillary software support services were treated as part of the overall software arrangement. The receipts were therefore not taxable as royalty, and no tax deduction at source arose on that basis.

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Issues: Whether consideration received for supply of software and ancillary support services to Indian resellers, distributors and customers constitutes royalty taxable under the Income-tax Act, 1961 and Article 12 of the India-USA Double Taxation Avoidance Agreement.

Analysis: The dispute turned on whether the transaction conferred merely a copyrighted article or a right in the copyright itself. In view of the binding Supreme Court ruling in Engineering Analysis Centre for Excellence Private Limited, payments for resale or use of computer software under end-user and distribution arrangements, where no interest or right in the copyright is transferred, do not amount to royalty. The treaty definition was held to prevail where more beneficial, and the ancillary software support services were treated as part of the software arrangement.

Conclusion: The software and related support-service receipts were not taxable as royalty, and the assessee was not liable to tax deduction at source on that basis.

Final Conclusion: The assessment treating the receipts as royalty could not stand, and the assessee obtained relief on the principal issue.

Ratio Decidendi: Payment for use or resale of computer software is not royalty unless the arrangement transfers a right in the copyright itself; where the treaty is more beneficial, that narrower treaty definition governs.

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