Copyrighted article receipts treated as business income, not royalty, where no copyright rights were transferred.

Consideration for supply of CAS and Middleware products was held to be business income, not royalty, because only a copyrighted article was transferred and no right in the copyright passed; the treaty position, being more beneficial, prevailed over the domestic charging provision, and the receipts were therefore not taxable in India absent a permanent establishment. The TDS credit dispute was remanded for reconciliation of figures and grant of admissible credit after giving the assessee an opportunity to verify the details. The appeal thus succeeded on the core royalty issue, while the credit issue was restored for verification.

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Issues: (i) Whether consideration received from supply of CAS and Middleware products was taxable as royalty or constituted business income not taxable in India in the absence of a permanent establishment; (ii) Whether the restriction of TDS credit required interference.

Issue (i): Whether consideration received from supply of CAS and Middleware products was taxable as royalty or constituted business income not taxable in India in the absence of a permanent establishment.

Analysis: The dispute on royalty and business income was treated as covered by an earlier decision in the assessee's own case and by the Supreme Court's ruling on software receipts. The decisive principle applied was that payments for resale or use of software, where no copyright right is transferred, do not amount to royalty under the treaty, and the treaty position prevails over the domestic charging provision when more beneficial. On that basis, the receipts from supply of CAS and Middleware products were held to be business income and not taxable in India in the absence of a permanent establishment.

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

Issue (ii): Whether the restriction of TDS credit required interference.

Analysis: The credit mismatch was not finally determined on the merits in the assessment order itself. The matter was sent back for reconciliation of TDS details with a direction to grant the credit admissible in accordance with law after giving the assessee an opportunity to reconcile the figures. The issue was therefore allowed only for statistical purposes.

Conclusion: The issue was disposed of in favour of the assessee only to the extent of remand for verification and grant of lawful credit.

Final Conclusion: The appeal succeeded on the core royalty issue, while the TDS credit dispute was restored for verification, leaving no surviving substantive challenge on the penalty ground.

Ratio Decidendi: Where a transaction transfers only a copyrighted article and not any right in the copyright, the consideration is not royalty under the treaty and the domestic definition cannot override a more beneficial treaty provision.

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