Activation charges for inbuilt hardware features are not technical services or royalty, so no tax deduction at source arises.

Activation charges paid to enable additional functions already embedded in hardware supplied by a foreign vendor were treated as part of the composite sale consideration, not as separate fees for technical services. Because the features were standard and already inbuilt, and no independent technical service element was shown, the payment also did not constitute royalty. On that basis, the assessee had no tax deduction at source obligation on the payment under the applicable income-tax and treaty provisions.

---

---

Issues: Whether activation charges paid for enabling additional features embedded in hardware supplied by a foreign vendor were chargeable as fees for technical services or royalty, and whether tax was deductible at source on such payment.

Analysis: The payment for activation was held to be part of the composite sale of the equipment and not a separate technical service. The embedded features formed part of the standard product supplied to the assessee, and the later activation merely enabled additional functions already inbuilt in the hardware. Applying section 9(1)(vii) of the Income-tax Act, 1961 and Article 12(3)(b) of the India-Ireland DTAA, the Tribunal held that fees for technical services contemplates rendering of a service, and a payment for use of a standard product or facility does not, by itself, become technical service income. On the facts, the revenue could not distinguish the activation charges from the original sale consideration, nor establish any independent technical service element. The payment was also not treated as royalty.

Conclusion: The activation charges were not taxable as fees for technical services or royalty, and the assessee was not liable to deduct tax at source.

Ratio Decidendi: Where activation charges are merely for enabling inbuilt features of a standard product and do not involve an independent rendering of technical service, such consideration is not fees for technical services under section 9(1)(vii) of the Income-tax Act, 1961.

---