Software licence receipts were not royalty because the agreement granted only limited use rights, not copyright ownership.

Receipts from licensing software under a non-exclusive, non-transferable enterprise-use licence were not royalty under section 9(1)(vi) of the Income-tax Act or Article 12 of the India-Singapore Treaty, because the arrangement did not transfer copyright or other proprietary rights. Restrictions on assignment, sublicensing, decompilation, reverse engineering, disclosure and derivative works showed only limited use rights, while source code escrow was treated as a continuity safeguard, not a parting with copyright. Multiple-user installation and CPU use were incidental to the licence terms. Applying Engineering Analysis, the consideration was for copyrighted software, so the royalty additions could not be sustained.

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Issues: Whether the receipts from licensing software to the Indian customer were taxable in India as royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 12 of the India-Singapore Treaty.

Analysis: The agreement granted only a non-exclusive, non-transferable licence for enterprise-wide use, with restrictions against assignment, sublicensing, decompilation, reverse engineering, disclosure, and derivative works. The permitted limited exceptions did not amount to a transfer of proprietary rights in the software. Source code escrow was treated as a protective arrangement to ensure continuity of business operations and not as parting with copyright. The use of software by multiple users and installation on multiple CPUs was viewed as incidental to the licence terms and convenience of use, not as conferring a copyright interest or a right contemplated by section 14A or section 14B of the Copyright Act. In light of the governing principle applied in Engineering Analysis, the consideration was not for the use of copyright but for the use of copyrighted software.

Conclusion: The receipts were not taxable as royalty in India and the additions made on that basis could not be sustained. The issue was decided in favour of the assessee.

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