Software licence payments to a non-resident were treated as royalty and fees for included services, triggering withholding tax.

Periodical payments to a non-resident for internet-based software use were treated as royalty and fees for included services, because the licence granted the right to use software infrastructure on the foreign server platform and the consideration was linked to usage sessions. The analysis mapped article 12(3)(b) and article 12(4)(a) of the India-USA treaty to sections 9(1)(vi) and 9(1)(vii) of the Income-tax Act, 1961. As the receipts fell within article 12, article 7 on business profits did not apply, and the absence of a permanent establishment in India did not remove Indian taxability. Section 195 was therefore attracted.

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Issues: Whether periodical payments made to a non-resident for the use of software on the internet constitute royalty or fees for included services, and are consequently subject to deduction of tax at source under the India-USA tax treaty and the Income-tax Act.

Analysis: The licence agreement showed that the payments were made for the right to use scientific/commercial software infrastructure on the non-resident's server platform, with monthly royalty linked to usage sessions. The arrangement was not one of mere downloading or sale of software; instead, the consideration fell within the treaty meaning of royalties under article 12(3)(b) and also included technical/support services ancillary to that use under article 12(4)(a). Those treaty expressions were held to correspond with section 9(1)(vi) and section 9(1)(vii) of the Income-tax Act, 1961. Since the income was covered by article 12, article 7 relating to business profits did not apply, and the absence of a permanent establishment in India did not take the receipts outside Indian taxability. On that footing, section 195 was attracted because the sums were chargeable to tax in India.

Conclusion: The payments were held to be royalties and fees for included services, not business profits, and tax was required to be deducted at source.

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