Software distribution receipts and support fees held outside royalty under treaty analysis; limitation issue failed and interest recomputation followed.

The extended limitation period was computed from service of the withdrawal order on the jurisdictional tax authority, and the assessee failed to prove earlier valid service; the assessment was therefore not time-barred. Receipts from sale of off-the-shelf software were held not to be royalty because the agreements granted only a non-exclusive right to distribute copyrighted articles, without any right to use or exploit copyright, and the India-Finland Treaty definition of royalty was treated as exhaustive so domestic deeming amendments could not enlarge it absent treaty amendment. The same treaty analysis applied to maintenance, support and upgrade receipts, which were also held outside royalty. Interest under sections 234A and 234B was restored for consequential recomputation.

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Issues: (i) whether the assessment was barred by limitation under the extended time limit linked to receipt of the withdrawal order from the Authority for Advance Ruling; (ii) whether receipts from sale of off-the-shelf software were taxable as royalty under the Income-tax Act and the India-Finland Tax Treaty; (iii) whether receipts from maintenance, support services and upgrades were taxable as royalty; and (iv) the consequence for interest under sections 234A and 234B of the Income-tax Act, 1961.

Issue (i): whether the assessment was barred by limitation under the extended time limit linked to receipt of the withdrawal order from the Authority for Advance Ruling.

Analysis: The extended limitation was held to run from receipt of the order by the jurisdictional tax authority, and the assessee did not establish that the order had been duly served earlier on the relevant authority. The dispatch register and the asserted oral confirmation were found insufficient to prove service on the jurisdictional officer or to shift the commencement of limitation.

Conclusion: The assessment was not time-barred and this issue was decided against the assessee.

Issue (ii): whether receipts from sale of off-the-shelf software were taxable as royalty under the Income-tax Act and the India-Finland Tax Treaty.

Analysis: The agreements showed only a non-exclusive right to distribute the software products as copyrighted articles, without any right to use, reproduce, modify, or exploit the copyright itself. The treaty definition of royalty was treated as exhaustive, and the later domestic-law explanations could not be read into the treaty absent a corresponding bilateral amendment. On that basis, the receipts were characterised as business income and not as royalty.

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

Issue (iii): whether receipts from maintenance, support services and upgrades were taxable as royalty.

Analysis: The maintenance, support and upgrade arrangements were treated as incidental to the supply and use of the software product and not as consideration for any right to use copyright. The same treaty analysis was applied, and the receipts were held outside the scope of royalty.

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

Issue (iv): what was the effect on interest under sections 234A and 234B of the Income-tax Act, 1961.

Analysis: Since the taxability of the main receipts was set aside, the interest computation was held to be consequential and required reconsideration in the light of the final tax outcome.

Conclusion: The interest issues were restored for consequential recomputation.

Final Conclusion: The additions treating the software-related receipts as royalty were deleted, the limitation challenge failed, and the interest matter was left to follow the revised tax computation, resulting in partial relief to the assessee.

Ratio Decidendi: A payment for distribution of software as a copyrighted article, without transfer of copyright or commercial exploitation rights, is business income and not royalty; domestic amendments cannot enlarge an already defined treaty term unless the treaty is correspondingly amended.

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