Cloud software subscription payments are not royalty unless they confer a right to use copyright under the treaty and tax law.

The Delhi HC reiterated that royalty arises only where a payer obtains the use of, or right to use, copyright or another protected proprietary right under Article 12(3) of the India-Ireland DTAA and Section 9(1)(vi) of the Income-tax Act. Applying Engineering Analysis, it held that subscription payments for cloud-based software access involve only access to services or copyrighted material, not any transfer of copyright rights. The court found no basis to confine the Supreme Court ruling to embedded software or to treat cloud subscription fees differently. Accordingly, such payments are not royalty under the treaty or the Act, and the revenue appeal fails.

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Issues: Whether subscription payments received for cloud services constitute royalty under Article 12(3) of the India-Ireland DTAA and Section 9(1)(vi) of the Income-tax Act, 1961.

Analysis: The applicable principle is that royalty arises only where the payer obtains the use of, or the right to use, copyright or other rights specifically covered by the treaty and the Act. The distinction between a transfer of copyright and a mere grant of access to copyrighted material is material. Applying the binding exposition in Engineering Analysis and the related decisions relied upon, subscription for cloud-based software access does not amount to use of or right to use copyright. The mere ability to access software or services, without any transfer of copyright rights, does not satisfy the definition of royalty. The Court found no basis to restrict the Supreme Court ruling to embedded software or to treat cloud subscription fees differently on the royalty question.

Conclusion: The subscription payments are not royalty under Article 12(3) of the India-Ireland DTAA or Section 9(1)(vi) of the Income-tax Act, 1961, and the revenue appeal fails.

Ratio Decidendi: A payment for access to software or cloud services is not royalty unless it confers a right to use copyright or a corresponding proprietary interest recognised by the treaty or the Act.

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