Software licence receipts are not royalty where no copyright is transferred, and reopening based on the outdated view fails.

Receipts from sale of software licences, together with support, maintenance and training services, were treated as consideration for use of licensed software rather than for transfer of copyright, so they were not taxable as royalty. The distinction between a copyrighted article and copyright itself was applied, and the later expansion in Explanation 4 to section 9(1)(vi) of the Income-tax Act was regarded as prospective only. In the absence of a permanent establishment in India, the receipts were not taxable as business profits either. Reassessment based solely on the earlier royalty view was unsustainable because its recorded reason no longer had legal force, so the reopening was invalid and the assessment was annulled.

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Issues: (i) Whether receipts from sale of software licences and related support, maintenance and training services were taxable as royalty; (ii) Whether reassessment initiated on the basis of the earlier view that such receipts were royalty was valid.

Issue (i): Whether receipts from sale of software licences and related support, maintenance and training services were taxable as royalty.

Analysis: The receipts were found to arise from sale of software licences and connected services, not from transfer of copyright. Applying the principle that ownership of a copyrighted article is distinct from ownership of copyright, the payment for use of licensed software did not amount to consideration for the use of, or right to use, copyright. The later statutory expansion in Explanation 4 to section 9(1)(vi) of the Income-tax Act, 1961 was held to be prospective and therefore not applicable to the relevant assessment year. In the absence of a permanent establishment in India, the receipts could not be taxed as business profits either.

Conclusion: The receipts were not taxable as royalty and were not chargeable to tax in India.

Issue (ii): Whether reassessment initiated on the basis of the earlier view that such receipts were royalty was valid.

Analysis: The reassessment was founded solely on the proposition that consideration for software licences was royalty, based on an earlier High Court view. That basis ceased to survive after the Supreme Court clarified the legal position on software licence receipts. Since the sole reason recorded for reopening was invalid in law, the reassessment could not be sustained.

Conclusion: The reassessment was invalid and was set aside.

Final Conclusion: The assessee succeeded on both the merits of taxation and the challenge to reopening, and the assessment action was annulled in full.

Ratio Decidendi: Payment for the use of standard software without transfer of copyright is not royalty, and a reopening founded solely on a subsequently overruled legal premise cannot stand.

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