Profit attribution and software licensing: restricted PE functions and no copyright rights meant business income, not royalty.

A non-resident's Indian permanent establishment was found to have performed only limited negotiation and support functions, so profit attribution was restricted to 8% of turnover rather than the higher estimate proposed by the Revenue. Software licensing receipts were held not to be royalty because the licensee obtained only a restricted right to use the software and no rights in the underlying copyright; the amounts were treated as business profits from a copyrighted article. Interest under sections 234A and 234B was also not sustained for the non-resident, following the view that advance tax liability did not arise where tax was deductible at source.

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Issues: (i) Whether the profit attributable to the assessee's Indian operations through its permanent establishment could be restricted to 8% of the turnover instead of 40%; (ii) whether consideration received for licensing software amounted to royalty or was taxable as business income from sale of a copyrighted article; (iii) whether interest under sections 234A and 234B was leviable on the non-resident assessee.

Issue (i): Whether the profit attributable to the assessee's Indian operations through its permanent establishment could be restricted to 8% of the turnover instead of 40%.

Analysis: The assessee's Indian role was limited to negotiations and related support, while global accounts and comparable material showed that the Assessing Officer's 40% attribution had no proper basis. The Tribunal relied on the nature of the Indian activities and the guidance in rule 10(ii) of the Income-tax Rules to hold that a lower attribution was justified. The estimate made by the Commissioner (Appeals) was supported by the record and was consistent with the limited functions performed in India.

Conclusion: The restriction of attributable profit to 8% was upheld and the issue was decided against the Revenue.

Issue (ii): Whether consideration received for licensing software amounted to royalty or was taxable as business income from sale of a copyrighted article.

Analysis: The software was supplied under a non-exclusive, non-transferable licence, but the licensee obtained only the right to use the software and not any rights in the underlying copyright. The Tribunal applied the distinction between a copyright and a copyrighted article, and held that restrictions on duplication, modification, transfer, and commercial exploitation meant that the payer had not acquired any copyright rights within the meaning of section 9(1)(vi) of the Income-tax Act, 1961 read with section 14 of the Copyright Act, 1957 and the corresponding treaty provision. The receipts were therefore treated as business profits and not royalty.

Conclusion: The software receipts were not royalty and the issue was decided in favour of the assessee.

Issue (iii): Whether interest under sections 234A and 234B was leviable on the non-resident assessee.

Analysis: Following the settled view that where tax is deductible at source from payments to a non-resident there is no liability to pay advance tax, the Tribunal found no basis to interfere with the order deleting interest.

Conclusion: Levy of interest under sections 234A and 234B was not sustained and the issue was decided in favour of the assessee.

Final Conclusion: The Revenue's appeal failed on all substantive grounds, and the assessee obtained relief on the merits of attribution, software receipts, and interest.

Ratio Decidendi: Where a non-resident supplies software under a licence that conveys only a restricted right to use and no rights in the underlying copyright, the consideration is not royalty; and profit attribution to an Indian permanent establishment must reflect only the functions actually carried on in India.

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