Software licence receipts treated as business income, not royalty, where no copyright rights were transferred under the treaty.

A non-exclusive, non-transferable licence to use standard software, without transfer of copyright, source code, derivative rights or know-how for independent exploitation, was held not to constitute royalty under the India-China DTAA; the receipts were treated as business income and, absent a permanent establishment, not taxable in India. Interest under section 234B was deleted because a non-resident whose income is subject to tax deduction at source cannot be fastened with advance-tax liability on the facts applied. Interest under section 234A was remanded for verification of the filing date against the applicable due date.

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Issues: (i) Whether receipts from supply/licensing of software were taxable as royalty under the India-China DTAA or constituted business income; (ii) whether interest under section 234A was leviable; (iii) whether interest under section 234B was leviable.

Issue (i): Whether receipts from supply/licensing of software were taxable as royalty under the India-China DTAA or constituted business income.

Analysis: The agreement showed a non-exclusive, non-transferable and non-assignable licence to incorporate standard/off-the-shelf software into vehicles, with no transfer of copyright, source code, derivative rights, or any right to exploit the software beyond limited use. The end-user licence arrangement did not alter the character of the transaction, as the distributor merely resold the licensed software and the end user received only restricted use rights. The payment was therefore not for use of copyright or for imparting information concerning industrial, commercial or scientific experience.

Conclusion: The receipts were not royalty and were business income not taxable in India in the absence of a permanent establishment; this issue was decided in favour of the assessee.

Issue (ii): Whether interest under section 234A was leviable.

Analysis: The record indicated that the return was filed within the extended due date, but the factual position regarding the filing date vis-a -vis the applicable due date required verification by the assessing authority.

Conclusion: The issue was restored to the assessing authority for fresh verification and decision in accordance with law.

Issue (iii): Whether interest under section 234B was leviable.

Analysis: In the case of a non-resident whose income was subject to tax deduction at source, advance-tax liability could not be fastened in the manner sought by the Revenue. The interest levy was therefore unsustainable on the facts and legal position applied.

Conclusion: Interest under section 234B was deleted; this issue was decided in favour of the assessee.

Final Conclusion: The assessment was not sustained on the royalty issue, the levy of interest under section 234B was set aside, and the matter under section 234A was sent back for verification, resulting in a partial success for the assessee.

Ratio Decidendi: A payment for a non-exclusive, non-transferable licence to use standard software, without transfer of copyright or know-how for independent exploitation, is not royalty but business income under the applicable treaty.

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