Software licence royalty, technical support taxable, and hardware sale outside Indian tax absent a permanent establishment.

A non-exclusive, non-transferable licence to use copyrighted software and accompanying documentation was treated as royalty because the recipient obtained only use rights while copyright remained with the supplier; the linked consideration was therefore taxable in India. Installation, testing and training services were held to be technical in character and ancillary to the software licence, so they were taxable as fees for technical services or included services. Hardware supplied under the same arrangement was treated as an outright sale, and absent a permanent establishment in India, the related business profits were not taxable in India.

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Issues: (i) Whether the consideration attributable to supply of software and related documentation under the contracts was royalty taxable in India; (ii) Whether the consideration for installation, testing and training services was taxable as fees for technical services or included services; (iii) Whether the consideration for supply of hardware was taxable in India as business profits.

Issue (i): Whether the consideration attributable to supply of software and related documentation under the contracts was royalty taxable in India.

Analysis: The software and documentation were not sold outright. The recipient received only a non-transferable, non-exclusive right to use the copyrighted software and associated documentation, while ownership and copyright remained with the supplier. Under Section 9(1)(vi) of the Income-tax Act, 1961 and Article 12 of the DTAA, consideration for the use of or the right to use copyright falls within royalty. The contract restrictions on copying, distribution, public performance and public display reinforced that the transaction was a licence of copyright and not a sale of copyrighted article.

Conclusion: The consideration for software and related documentation was royalty and was taxable in India.

Issue (ii): Whether the consideration for installation, testing and training services was taxable as fees for technical services or included services.

Analysis: The installation, testing and training were integral to the software supply and were technical in character. Under Section 9(1)(vii) of the Income-tax Act, 1961 such consideration answers the description of fees for technical services, and under Article 12 of the DTAA it also constitutes included services when ancillary and subsidiary to the enjoyment of the royalty-bearing right. The services were therefore not independent of the software licence but were connected to its effective use.

Conclusion: The consideration for installation, testing and training services was taxable in India as fees for technical services or included services.

Issue (iii): Whether the consideration for supply of hardware was taxable in India as business profits.

Analysis: The hardware component was treated as outright sale, but the supplier had no permanent establishment in India. Under Article 7 of the DTAA, business profits are taxable in India only to the extent attributable to a permanent establishment situated in India. On the facts recorded, the limited presence of personnel for installation and related activities did not establish a permanent establishment for the hardware supply.

Conclusion: The consideration for supply of hardware was not taxable in India.

Final Conclusion: Only the amounts relatable to software, documentation, and installation, testing and training were held chargeable to tax in India, while the hardware component was excluded from Indian tax.

Ratio Decidendi: Consideration for a non-exclusive and non-transferable licence to use copyrighted software constitutes royalty, and connected technical support services are taxable when they are ancillary to that licensed use, whereas hardware sale is not taxable in India absent a permanent establishment.

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