Software sale receipts are not royalty when only copyrighted articles are sold, and the DTAA prevails.

Receipts from sale of shrink-wrapped software to Indian resellers and end users were held not to constitute royalty because no copyright rights were transferred; consideration for a copyrighted article was distinguished from consideration for use of copyright. The retrospective amendment to section 9(1)(vi) of the Income-tax Act could not expand the meaning of royalty under the India-US DTAA, and the treaty characterization prevailed. Applying the Supreme Court ruling in Engineering Analysis, the software receipts were treated as non-taxable as royalty and the addition was deleted in favour of the assessee.

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Issues: Whether receipts from sale of shrink-wrapped software were taxable in India as royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 12(3) of the Double Taxation Avoidance Agreement between India and the United States of America.

Analysis: The receipts arose from sale of software products to Indian resellers/end users without transfer of any copyright rights. The controlling legal position, as applied, was that consideration for use of a copyrighted article is distinct from consideration for the use of or transfer of copyright. The retrospective amendment to section 9(1)(vi) could not enlarge the scope of royalty under the DTAA, and the treaty provisions governed the characterization of the receipts. The ruling of the Supreme Court in Engineering Analysis was treated as settling the issue, and the addition was directed to be deleted.

Conclusion: The receipts from sale of software were not taxable as royalty and the addition was deleted in favour of the assessee.

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