Software licence cross-charge was not royalty where no copyright rights or equipment use were transferred under a non-exclusive arrangement.

Non-exclusive, non-transferable and revocable software licences procured centrally from Microsoft and cross-charged to group entities did not create royalty income where no proprietary interest, sub-licence right, or right to reproduce, modify or reverse engineer the software was transferred. The receipt was a mere reimbursement of licence cost, and there was no evidence of any IT infrastructure or equipment being provided so as to constitute equipment royalty. Applying the principle that royalty arises only on transfer or use of copyright rights contemplated by the copyright statute, the ITAT Delhi held that mere access to standard software is not parting with copyright. The addition was unsustainable and the amount was not taxable as royalty.

---

---

Issues: Whether the amounts received by the assessee from its group entity towards software licence cost were taxable as royalty for use of equipment or for use of copyright.

Analysis: The software licences were procured centrally from Microsoft for group entities on a non-exclusive, non-transferable and revocable basis. The arrangement did not confer any proprietary interest, sub-licence right, right to reproduce, modify or reverse engineer the software, and the receipts were a mere cross-charge of licence cost. On the facts, the assessee was not shown to have parted with any copyright or to have provided an IT infrastructure or equipment giving rise to equipment royalty. The principle applied was that a payment can be characterised as royalty only where there is a transfer or use of rights in copyright contemplated by the copyright statute; a mere right to access and use standard software does not amount to parting with copyright.

Conclusion: The receipt was not taxable as royalty and the addition was not sustainable; the issue was decided in favour of the assessee.

Ratio Decidendi: A non-exclusive licence to use standard software, without transfer of any proprietary interest or copyright rights, does not constitute royalty within the meaning of section 9(1)(vi) of the Income-tax Act, 1961.

---