Software resale rights without copyright transfer are not royalty and not taxable as royalty under the India-USA treaty.

Receipts from software resale and distribution arrangements were not royalty where the distributors received only a non-exclusive, non-transferable right to market and resell the products, and no right to copy, modify, reproduce, create derivative works, or exploit copyright was granted. The consideration was therefore for sale of software products, not for use of, or right to use, any copyright or other intellectual property. Applying Engineering Analysis Center of Excellence Pvt. Ltd., the receipts were held not taxable as royalty under section 9(1)(vi) or Article 12 of the India-USA DTAA, and the addition was deleted.

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Issues: Whether receipts from sale of software products to Indian resellers/distributors were taxable as royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 12 of the India-USA Double Taxation Avoidance Agreement.

Analysis: The distribution arrangements granted only a non-exclusive, non-transferable right to market and resell the software products. The agreements prohibited copying, modification, reproduction, creation of derivative works, and transfer of any intellectual property rights, while ownership of the software and associated rights remained with the assessee. On these terms, the consideration was for sale of software products and not for the use of, or right to use, any copyright or other intellectual property. The ruling of the Supreme Court in Engineering Analysis Center of Excellence Pvt. Ltd. was applied to hold that such receipts do not constitute royalty and are not taxable on that basis under the treaty.

Conclusion: The receipts were not royalty and were not taxable in India as royalty under Article 12 of the India-USA DTAA or section 9(1)(vi) of the Income-tax Act, 1961; the addition was to be deleted in favour of the assessee.

Ratio Decidendi: Amounts paid under software resale and distribution arrangements that do not confer any copyright interest or right to use copyright are not royalty and do not give rise to taxable income as royalty.

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