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Hon'ble Delhi High Court was seized of an issue, wherein customized software used for :- 10 -:

designing highways, railways, airports, ports etc was licenced to an Indian customer who used such software in its business. Their lordships held that such software, by virtue of the relevant agreements, could be used only for assessee's own business and could not be loaned, rented, sold, sub-licenced or transferred to a third party. Their lordships therefore held that mere transfer of right to use a copyrighted material did not give rise to any royalty income in terms of article 12(3) of India -US DTAA. Thus, there seems to be an apparent contradiction in the view regarding right to use copyrighted software between Hon'ble Karnataka High Court and Hon'ble Delhi High Court. Assessee in such a situation, in our opinion can always fall back on the judgment in their favour, so long as there is no jurisdictional High Court judgment on the issue. However, we have to see whether assessee's case falls within the same parameter of facts as they were there before Hon'ble Delhi High Court. Annex 1 of the agreement entered by the assessee with its Italian principal has been reproduced by the ld. Commissioner of Income Tax (Appeals) in its order and this is once again reproduced hereunder for brevity.

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Reading of the rights given through the above agreement clearly show that, though assessee and its principal could make unlimited copies of the licenced software/third party software, it could be used only for assessee's internal business use. Assessee could not sub-licence, assign or transfer such software. It was a non-exclusive and non-transferable licence. Right to make copies was only for assessee's own use and not for sale or transfer. Obviously, assessee only had a right to use copyrighted software. Assessee did not get any right in the copyright in the software. Copyright in the software continued to vest with Intergraph, Italy. Assessee was effectively given only the right to use the copyrighted software for a limited term.

14. Now the question is whether the payments effected by the assessee for the right to use the copyrighted software for a limited term could be considered as income accruing or arising in India to its foreign principal, considering Explanations 4 to 6 added to Section 9(1) (vi) of the Act with retrospective effect from 01.06.1976. No doubt these explanations do widen the ambit of the term Royalty to include therein transfer of all right or any right for use or right to use a computer software including granting of a licence. However, admittedly, there has been no amendment whatsoever in India's DTAA with Italy in so far as definition of the term Royalty is concerned. Co-ordinate Bench of this Tribunal in the case of Dasault Systemes Simulia Corporation (supra) had considered a similar issue where software products were acquired by the assessee from a party abroad for distribution in India. Co-ordinate Bench held at para 6 of its order dated 30.11.2016 as under:-

13.9. Injunctive relief. The parties agree that a material breach of this Agreement adversely affecting Synopsys' Intellectual Property Rights in the Licensed Product, Design Techniques or Documentation would cause irreparable injury to Synopsys for which monetary damages would not be an adequate remedy and Synopsys shall be entitled to equitable relief in addition to any remedies it may have hereunder or at law."

45. As is clear from the description of the agreement it is an end-user software licence agreement. Clause 2.1 deals with grant of rights. It provides, Software License Synopsys hereby grants licencee a non-exclusive, non-transferable license, without right of sub-licence of use the licensed software and design techniques only in the quantity authorized by a licensee in accordance with the documentation in the use area. Licensee may make a reasonable number of copies of the licensed software for backup and/or archival purposes only. Merely because the words non-exclusive and non-transferable is used in the said licence it does not take away the software out of the definition of the copyright. The word licenced software has been defined. Similarly, the words design, design technique is also defined. The word documentation is also defined and it is not in dispute what is granted is a license. Even if it is not transfer of exclusive right in the copyright, the right to use the confidential information embedded in the software in terms of the aforesaid licence makes it abundantly clear that there is transfer of certain rights which the owner of copyright possess in the said computer software/programme in respect of the copyright owned. In terms of the DTAA the consideration paid for the use or right to use the said confidential information in the form of computer programme software itself constitutes royalty and attracts tax. It is not necessary that there should be a transfer of exclusive right in the copyright as contended by the assessee. The consideration paid is for rights in respect of the copyright and for the user of the confidential information embedded in the software/computer programme. Therefore, it falls within the mischief of Explanation (2) of clause (vi) of sub-section (1) of section 9 of the Act and there is a liability to pay the tax.