Software licence receipts are not royalty where only a copyrighted article is sold and no copyright rights are transferred.

Amounts received from sale of software licences and incidental maintenance and training services were held not to be royalty under section 9(1)(vi) and Article 12 of the India-Australia DTAA. Applying the principle in Engineering Analysis, the receipts were treated as consideration for a copyrighted article and allied services, because the arrangement did not transfer copyright rights to Indian end-users. Limited source code access for bug fixing and customisation did not alter that character, as no copyright licence was granted. The issue was therefore decided in favour of the assessee.

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Issues: Whether amounts received from sale of software licences and incidental receipts for software maintenance and related training services constituted royalty under section 9(1)(vi) of the Income-tax Act and Article 12 of the DTAA between India and Australia.

Analysis: The receipts arose from sale of software licences to Indian end-users on terms materially identical to those considered by the Supreme Court in Engineering Analysis. The arrangement involved use of a copyrighted article and not transfer of copyright. Even where source code access was available for limited purposes such as bug fixing and customisation, no copyright rights were transferred. On that reasoning, the nature of the receipts remained consideration for sale of software and allied services, not royalty.

Conclusion: The receipts from sale of software licences and incidental maintenance and training services did not constitute royalty under section 9(1)(vi) of the Income-tax Act, 1961 or Article 12 of the DTAA between India and Australia, and the issue was decided in favour of the assessee.

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