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"The software distribution agreement entered into by Adobe Ireland does not grant the distributor/ end user any right in the copyright (which remains with Adobe Ireland), but merely a copy of the computer program i e. a copyrighted article/ a shrink wrap product. This is evident from the following clause of the attached agreement between Adobe Ireland and Ingram:

"Software Products means copies of the Software and the User Documentation supplied to Distributor as shrink wrap or TLP products for the categories of Adobe Software listed in the License Fee Lists that are supplied by Adobe to Distributor pursuant to this Agreement.

(iv) The assessee's main argument is that there is a clear distinction between acquisition of copyright in the computer program on one hand and the acquisition of packaged software, which incorporates a copy of the copyrighted program, on the other hand. As per DTAA definition even a partial use of the copyright by the end user will be treated as a royalty. Under the VPP Model of licensing of the appellant only single copy of software is sent to the organization and the same is copied on to numerous computers of various end users. In such licensing method the copying rights are inherent which are at par with rights to OEM. Therefore in such method of licensing even the copy right have been transferred. Therefore, the sale in this method of licensing is similar to OEM and is clearly taxable as royalty. Even in FPP licensing system the end user has a right to use the software to enable the user to operate the programme and to allow the user to copy the program to the user's computer hard drive. Therefore, the end user has acquired the limited rights to copy the software on its computer hard drive and the payment is towards the use of copyright of literary/scientific work Therefore, it is immaterial whether the same is sold as shrink wrap or otherwise, the consideration for the same win still be treated as royalty. It is also immaterial whether the copying is "infringement' under copyright or not. All the provisions of copy right will not be relevant to determine the nature of payments under DTAA or I.T. Act if the payment is for the use of any copyright it will fall in the category of Royalty."

12.2 The character of payments received in transactions involving the transfer of computer software depends on the nature of the rights that the transferee acquires under the particular arrangement regarding the use and exploitation of the program. The rights in computer programs are a form of intellectual property. Research into the practices of OECD member countries has established that all but one protects rights in computer programs either explicitly or implicitly under copyright law. Although the term "computer software" is commonly used to describe both the program in which the intellectual property rights (copyright) subsist and the medium on which it is embodied, the copyright law of most OECD member countries recognises a distinction between the copyright in the program and software which incorporates a copy of the copyrighted program. Transfers of rights in relation to software occur in many different ways ranging from the alienation of the entire rights in the copyright in a program to the sale of a product which is subject to restrictions on the use to which it is put. The consideration paid can also take numerous forms. These factors may make it difficult to determine where the boundary lies between software payments that are property to be regarded as royalties and the other types of payment. The difficulty of determination is compounded by the ease of reproduction of computer software, and by the fact that acquisition of software frequently entails the making of a copy by the acquirer in order to make possible the operation of the software.

14. In other types of transactions, the rights acquired in relation to the copyright are limited to those necessary to enable the user to operate the program, for example, where the transferee is granted limited rights to reproduce the program. This would be the common situation in transactions for the acquisition of a program copy. The rights transferred in these cases are specific to the nature of computer programs. They allow the user to copy the program, for example onto the user's computer hard drive or for archival purposes. In this context, it is important to note that the protection afforded in relation to computer programs under copyright law may differ from country to country. In some countries the act of copying the program onto the hard drive or random access memory of a computer would, without a license, constitute a breach of copyright However, the copyright laws of many countries automatically grant this right to the owner of software which incorporates a computer program. Regardless of whether this right is granted under law or under a license agreement with the copyright holder, copying the program onto the computer's hard drive or random access memory or making an archival copy is an essential step in utilising the program. Therefore, rights in relation to these acts of copying, where they do no more than enable the effective operation of the program by the user, should be disregarded in analysing the character of the transaction for tax purposes. Payments in these types of transactions would be dealt with as commercial income in accordance with Article 7.