Software sales and cloud-service receipts were treated as non-royalty income under the India-USA tax treaty.

Receipts from sale of software were treated as sale of a copyrighted article, not transfer of copyright, and were therefore not royalty under Article 12 of the India-USA DTAA; in the absence of a permanent establishment, they were also not taxable as business income under Article 7. Receipts from cloud services were similarly held not to be royalty, because subscription or use of cloud services did not involve payment for copyright rights or any comparable royalty-bearing right. Ancillary grounds on TDS credit and surcharge were rendered infructuous, while interest and penalty issues were consequential and did not require separate substantive adjudication.

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Issues: (i) Whether receipts from sale of software were taxable as royalty or were in the nature of business income under the India-USA DTAA; (ii) Whether receipts from cloud services were taxable as royalty under the India-USA DTAA; (iii) Whether the ancillary grounds relating to TDS credit, surcharge and education cess, interest, and penalty survived for adjudication.

Issue (i): Whether receipts from sale of software were taxable as royalty or were in the nature of business income under the India-USA DTAA.

Analysis: The assessment treated the software-sale receipts as royalty, but the dispute was covered by earlier decisions in the assessee's own case and by higher judicial precedents holding that sale of software products constitutes sale of a copyrighted article and does not amount to transfer of copyright. On that basis, the receipts were not taxable as royalty under Article 12. In the absence of a permanent establishment, the receipts could not be taxed as business income under Article 7.

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

Issue (ii): Whether receipts from cloud services were taxable as royalty under the India-USA DTAA.

Analysis: The cloud-services receipts were held to be governed by the same line of authority applied in comparable tribunal decisions. The subscription/use of cloud services was not treated as payment for use of copyright or for any right amounting to royalty, and the Revenue did not show any distinguishing feature to depart from the settled view.

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

Issue (iii): Whether the ancillary grounds relating to TDS credit, surcharge and education cess, interest, and penalty survived for adjudication.

Analysis: The TDS-credit and surcharge-related grounds had already been addressed by subsequent relief and were therefore rendered infructuous. The interest and penalty grounds were consequential in nature and did not call for separate substantive adjudication.

Conclusion: These grounds were not allowed on merits and were disposed of as infructuous or consequential.

Final Conclusion: The appeals were substantially allowed on the core royalty issues relating to software sales and cloud services, while the remaining ancillary grounds were dismissed or treated as infructuous.

Ratio Decidendi: Consideration for sale of software products and cloud-service subscriptions does not constitute royalty where no copyright rights are transferred and, absent a permanent establishment, such receipts are not taxable as business income under the treaty.

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