Software distribution receipts are not royalty where no copyright rights are transferred; business income treatment applies.

Receipts from supply of software products to Indian distributors and end users were held not to constitute royalty under section 9(1)(vi) of the Income-tax Act, 1961 or Article 12 of the India-USA DTAA because the arrangements granted only a limited right to resell or use the software and did not transfer any rights in the copyright itself. Applying Engineering Analysis, the ruling reiterated that royalty arises only where copyright rights are granted, not where a copyrighted article is merely sold or licensed on a non-exclusive, non-transferable basis. The receipts were therefore treated as business income and not chargeable to tax in India under the treaty or the pre-amended provision.

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Issues: Whether receipts from supply of software products to Indian distributors and end users constituted 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 software arrangements granted only a limited right to resell or use the software and did not confer any right in the copyright itself. Applying the governing principle that royalty arises only where there is a grant of rights in a copyright and not merely a transfer of a copyrighted article, the Supreme Court's decision in Engineering Analysis was held to be fully applicable. The receipts were therefore not taxable as royalty under the treaty or the pre-amended statutory provision, and were to be treated as business income not chargeable in India under the DTAA.

Conclusion: The issue was decided in favour of the assessee.

Ratio Decidendi: Payments for software distribution or use are not royalty unless the payer obtains rights in the copyright itself; a mere non-exclusive, non-transferable licence to sell or use software is insufficient to attract royalty taxation under the Act or the applicable DTAA.

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