Software licence receipts and royalty tax treatment: non-exclusive, non-transferable use rights were treated as non-royalty.

Receipts from software licence sales to an Indian distributor and end users were analysed under section 9(1)(vi) of the Income-tax Act, 1961 and Article 12 of the India-Singapore DTAA. The governing principle applied was that payments are not royalty where the recipient obtains only a non-exclusive, non-transferable right to resell or use software, without any transfer of copyright or any right to exploit copyright under sections 14(a) or 14(b) of the Copyright Act, 1957. As the agreements were materially the same as earlier arrangements and were covered by Engineering Analysis, the software receipts were treated as non-royalty and the addition on that basis was deleted.

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Issues: Whether receipts from sale of software licences to the Indian distributor and other customers were taxable as royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 12 of the India-Singapore DTAA.

Analysis: The dispute was covered by the earlier binding ruling on the same software distribution and end-user licence arrangements. The governing principle applied was that where the distributor or end user receives only a non-exclusive, non-transferable permission to resell or use software, without any transfer of copyright or any right to exploit the copyright in sections 14(a) or 14(b) of the Copyright Act, 1957, the consideration is not royalty. The Tribunal noted that the agreements for the year under consideration remained materially the same and that the Supreme Court in Engineering Analysis had held that such payments do not give rise to taxable royalty and do not attract withholding under section 195 of the Income-tax Act, 1961.

Conclusion: The software sale/licence receipts were not taxable as royalty, and the addition made on that basis was deleted.

Final Conclusion: The assessee succeeded on the core transfer-pricing and treaty characterisation issue, and the assessment addition treating software receipts as royalty did not survive.

Ratio Decidendi: A payment for software resale or use is not royalty unless the arrangement transfers a copyright interest or a right to exploit copyright; a mere non-exclusive, non-transferable licence to resell or use software falls outside royalty taxation under the treaty and the Income-tax Act, 1961.

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