Software licence receipts are not royalty where no copyright rights are transferred, following the Engineering Analysis principle.

Consideration received for sale or supply of off-the-shelf software was not royalty under Article 12(3) of the India-Singapore DTAA or section 9(1)(vi), because the transactions involved only resale or use under non-exclusive licence and distribution arrangements, not a transfer of copyright or other proprietary rights. Applying Engineering Analysis Centre of Excellence Pvt. Ltd. and later binding software-distribution rulings, the ITAT noted that the assessee had no right to reproduce or alter the software and merely supplied it within the existing licence structure. The receipts were therefore not taxable as royalty, and the addition made on that basis was unsustainable.

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Issues: Whether consideration received on sale or supply of off-the-shelf software was taxable as royalty under Article 12(3) of the India-Singapore DTAA and section 9(1)(vi) of the Income-tax Act, 1961.

Analysis: The dispute turned on whether the software transactions involved a transfer of copyright or merely a right to use copyrighted software under distribution or end-user licence arrangements. The Supreme Court in Engineering Analysis Centre of Excellence Pvt. Ltd. held that payments made for resale or use of computer software through such arrangements do not amount to royalty where no proprietary interest in copyright is parted with. The same principle had been followed in later binding decisions applying the ratio to software licensing and resale models, including Microsoft-linked software distribution. On the facts, the assessee had no right to reproduce or alter the software and only supplied software under the existing licence structure, so the receipts could not be characterised as royalty.

Conclusion: The software receipts were not royalty and the addition made on that basis was unsustainable; the issue was decided in favour of the assessee.

Final Conclusion: The revenue's challenge to the deletion of the software-related addition failed, and the assessee's treatment of the receipts as non-royalty was upheld.

Ratio Decidendi: Payments for the resale or use of computer software under non-exclusive licence or distribution arrangements are not royalty unless there is a transfer of copyright or other proprietary rights in the software.

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