Software licensing and cloud access receipts are not royalty absent transfer of copyright or use rights.

Receipts from software licensing or resale are not royalty where the customer acquires only a copyrighted article and no copyright rights are transferred. Applying that settled principle, the software receipts were held not taxable as royalty. Cloud subscription receipts were also not royalty because customers merely accessed online services without any right to reproduce, possess, or control the underlying software or infrastructure, and no use-right in equipment or copyright was conferred. The royalty-based additions were therefore unsustainable, and the assessment was set aside.

---

---

Issues: (i) Whether receipts from licensing/sale of software products were taxable as royalty in India. (ii) Whether receipts from cloud services were taxable as royalty in India.

Issue (i): Whether receipts from licensing/sale of software products were taxable as royalty in India.

Analysis: The dispute turned on whether payments for software distribution/licensing represented consideration for the use of copyright or merely for the transfer of copyrighted articles. The binding legal position, as reaffirmed by the Supreme Court, is that consideration for resale or distribution of software does not amount to royalty where no copyright right is transferred to the customer. On the facts, the assessee's software receipts arose from arrangements already covered by that principle, and no distinguishing feature was shown to take the case outside the settled rule.

Conclusion: The issue is decided in favour of the assessee; the software receipts were not taxable as royalty.

Issue (ii): Whether receipts from cloud services were taxable as royalty in India.

Analysis: The cloud subscription arrangements did not grant any right to reproduce, possess, or control the underlying software or infrastructure. The customers merely accessed online services, with the systems and data centre remaining under the provider's control outside India. Such access was held not to constitute use of, or right to use, equipment, software, or copyright so as to attract royalty characterization under the treaty or domestic law.

Conclusion: The issue is decided in favour of the assessee; the cloud service receipts were not taxable as royalty.

Final Conclusion: The additions made on the footing that the software and cloud receipts constituted royalty were unsustainable, and the assessment was set aside.

Ratio Decidendi: Payments for software distribution or online cloud access are not royalty unless they involve a transfer of copyright rights, or a right to use the underlying software or equipment, with possession, control, or reproduction rights conferred on the customer.

---