Software licence payments and support fees are not royalty when no copyright is transferred and only limited user rights are granted.

Supply of standard software, together with incidental support and maintenance services, was treated as consideration for use of a copyrighted article rather than royalty where no copyright was transferred, the supplier retained intellectual property rights, and the customer received only a revocable, non-exclusive and non-transferable licence; the receipts were therefore outside section 9(1)(vi) and Article 12 of the India-Ireland DTAA. The alleged refund required factual verification, and tax liability was to be recomputed if the refund had not in fact been granted. The challenge to initiation of penalty proceedings was premature because no concluded penalty order was under appeal.

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Issues: (i) Whether the amounts received for supply of standard software and incidental support and maintenance services were taxable as royalty under the Income-tax Act and the India-Ireland DTAA; (ii) Whether the alleged refund of Rs. 3,25,976/- was actually granted and required recomputation of tax liability; (iii) Whether initiation of penalty proceedings was liable to be interfered with at this stage.

Issue (i): Whether the amounts received for supply of standard software and incidental support and maintenance services were taxable as royalty under the Income-tax Act and the India-Ireland DTAA.

Analysis: The agreement and statements of work showed supply of standard software, not tailor-made software, and no transfer of copyright in the software. The assessee retained intellectual property rights, granted only a revocable, non-exclusive and non-transferable licence, and the payment was for use of a copyrighted article together with connected services. Applying the governing principles on software transactions, the receipts did not fall within the scope of royalty under section 9(1)(vi) of the Income-tax Act, 1961 or Article 12 of the treaty.

Conclusion: The issue was decided in favour of the assessee and against the Revenue.

Issue (ii): Whether the alleged refund of Rs. 3,25,976/- was actually granted and required recomputation of tax liability.

Analysis: The assessee disputed the factual assumption that the refund had been granted. The matter required verification by the Assessing Officer, and if no such refund had been allowed, the tax liability had to be recomputed accordingly.

Conclusion: The issue was allowed for statistical purposes in favour of the assessee.

Issue (iii): Whether initiation of penalty proceedings was liable to be interfered with at this stage.

Analysis: The challenge was held to be premature because no concluded penalty order was under appeal at that stage.

Conclusion: The issue was decided against the assessee.

Final Conclusion: The addition treating the software and related service receipts as royalty was deleted, the refund issue was sent for verification, and the challenge to penalty initiation was not entertained at this stage, resulting in a partial success for the assessee.

Ratio Decidendi: Consideration for supply of standard software without transfer of copyright, even when coupled with connected services, is not royalty where the recipient acquires only a limited licence to use the copyrighted article and no proprietary rights in the software are assigned.

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