Software licence receipts not royalty where only use rights are granted, with no transfer of copyright rights.

Receipts from a perpetual software licence were not taxable as royalty under section 9(1)(vi) of the Income-tax Act or Article 12(3) of the India-USA DTAA because the licence granted only the right to use the software, without access to source code or any transfer of copyright rights. The issue was covered by the Supreme Court principle that consideration for resale or distribution of computer software under an end user licence agreement is not royalty for use of copyright. The assessment addition was therefore deleted.

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Issues: Whether receipts from the sale of a perpetual software licence were taxable in India as royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 12(3) of the India-USA Double Taxation Avoidance Agreement.

Analysis: The receipts arose from a standard software licence granted without access to source code and without any transfer of copyright rights. The issue was covered by the binding Supreme Court ruling that consideration for resale or distribution of computer software under an end user licence agreement does not constitute royalty for use of copyright in the software and does not give rise to taxable income in India on that basis.

Conclusion: The receipts were not taxable as royalty and the addition was unsustainable.

Final Conclusion: The assessee's software licence receipts were held to be outside the royalty charge under the treaty and the Act, and the assessment addition was deleted.

Ratio Decidendi: Consideration for a software licence that does not confer copyright rights, but only permits use of the copyrighted article, is not royalty for tax purposes.

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