Software licence payments are not royalty where no copyright rights are transferred, and treaty protection applies.

Consideration paid by resident end-users or distributors to non-resident suppliers for computer software under end-user licence or distribution arrangements was held not to be royalty where the arrangement granted only a non-exclusive right to use or access the software and did not transfer any interest in copyright. The domestic definition could not displace the more beneficial treaty position, which had to be applied consistently with settled copyright principles. On that basis, the software payments were not taxable in India as royalty, and the issue was decided in favour of the assessee.

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Issues: Whether consideration paid by resident Indian end-users or distributors to non-resident suppliers for computer software under licence or distribution arrangements is taxable as royalty under the Income-tax Act, 1961 and the applicable treaty.

Analysis: The issue was governed by the law already settled by the Supreme Court on software transactions. Payments for the resale or use of software through end-user licence or distribution agreements do not, by themselves, amount to consideration for the use of copyright merely because the software is licensed for use. A non-exclusive licence that permits access to or use of software without transferring any interest in the copyright does not fall within the meaning of royalty. The broader domestic-law definition cannot prevail where the treaty definition is more beneficial, and the treaty position must be applied consistently with the settled interpretation of copyright law.

Conclusion: The software payments in question do not constitute royalty and do not give rise to taxable income in India; the issue is answered in favour of the assessee.

Ratio Decidendi: Consideration for mere use of or access to computer software under a non-exclusive licence, without transfer of any rights in copyright, is not royalty for tax purposes.

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