Restricted software licence receipts are not royalty where no copyright interest is transferred under the tax treaty and domestic law.

Receipts from sale of software licences to Indian customers were analysed under section 9(1)(vi) of the Income-tax Act and the India-Netherlands DTAA. The agreements granted only a non-exclusive, non-transferable right to use and resell software, with express limits on copying, modification, reverse engineering, sublicensing, and any transfer of copyright. Because no interest in, or right to use, copyright was transferred, the receipts were not characterised as royalty under either the treaty definition or the domestic royalty provision. The addition treating the software receipts as royalty was deleted.

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Issues: Whether the receipts from sale of software licences to Indian customers were taxable as royalty under section 9(1)(vi) of the Income-tax Act, 1961 and the India-Netherlands DTAA.

Analysis: The agreements showed that the assessee granted only a non-exclusive, non-transferable licence for use and resale of software, with restrictions on copying, modification, reverse engineering, sublicensing, and transfer of copyright. The arrangement did not confer any interest in or right to use copyright, and the Supreme Court's ruling on software distribution agreements applied to such transactions. On that basis, the receipts could not be characterised as royalty either under the treaty definition or under the domestic provision dealing with royalty.

Conclusion: The software sale/licence receipts were not royalty and were not taxable as such in India.

Final Conclusion: The addition treating the software receipts as royalty was deleted and the assessee succeeded in the appeal.

Ratio Decidendi: A payment for a restricted licence to use or resell software, where no copyright interest is transferred, is not royalty for tax purposes.

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