Software licence payments are not royalty when only a copyrighted article is used, not copyright rights transferred.

Consideration for supply of standard software under an end-user or distribution licence is not royalty where no copyright rights are transferred. The decisive question is whether the arrangement conveys rights in the copyright itself, attracting section 9(1)(vi) of the Income-tax Act and Article 12(3) of the India-Sweden DTAA, or only a licence to use a copyrighted article. Applying the settled Supreme Court position on computer software payments, the receipts were held to fall outside the royalty definition and were not taxable in India as royalty.

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Issues: Whether consideration received for supply of software under a software licence agreement was taxable in India as royalty.

Analysis: The dispute turned on the character of the payment received for supply of standard software. The decisive question was whether the arrangement granted the customer a transfer of copyright rights so as to attract royalty treatment under section 9(1)(vi) of the Income-tax Act, 1961 and Article 12(3) of the India-Sweden DTAA, or whether it was only a licence to use a copyrighted article. Applying the settled position that payments for resale or use of computer software under end-user or distribution arrangements do not amount to royalty where no copyright rights are transferred, the software receipts were held to fall outside the royalty definition. As the issue was covered by the Supreme Court ruling on computer software payments, the receipt was not taxable in India as royalty.

Conclusion: The issue was decided in favour of the assessee and against the Revenue.

Ratio Decidendi: Consideration paid for use of computer software under a licence or distribution arrangement is not royalty unless rights in the copyright itself are transferred.

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