Software licence and ICT service payments were not taxable as royalty or technical fees under treaty principles.

Software licence reimbursements were held not to constitute royalty because, under the treaty and domestic royalty provisions, use of copyrighted software without transfer of any copyright right does not amount to royalty; the Supreme Court ruling in Engineering Analysis was applied. ICT service charges were also held not to be fees for technical services under the India-Netherlands DTAA because the services did not make available technical knowledge, experience, skill, know-how or processes, and the ancillary-and-subsidiary test was not satisfied. On both grounds, the additions were deleted and the assessee succeeded.

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Issues: (i) Whether reimbursements received towards SAP software licence fees and Microsoft licence fees were taxable as royalty; (ii) Whether ICT service charges were taxable as fees for technical services under the India-Netherlands DTAA.

Issue (i): Whether reimbursements received towards SAP software licence fees and Microsoft licence fees were taxable as royalty.

Analysis: The software receipts were examined in the light of the treaty definition of royalty and the domestic law provisions governing royalty. The binding Supreme Court ruling in Engineering Analysis Centre of Excellence Pvt. Ltd. was applied. On that basis, payments made for use of copyrighted software under end-user or distribution arrangements, without transfer of any copyright right, do not amount to royalty. The attempt to distinguish that ruling on the facts was rejected.

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

Issue (ii): Whether ICT service charges were taxable as fees for technical services under the India-Netherlands DTAA.

Analysis: The services were tested against the treaty definition of fees for technical services and the relevant make-available standard. The reasoning adopted in the co-ordinate bench decision on similar information technology services was followed. The services did not transmit technical knowledge, experience, skill, know-how or processes to the recipient so as to enable it to perform the services independently in future. The ancillary-and-subsidiary limb was also not attracted on the facts.

Conclusion: The ICT service charges were not taxable as fees for technical services, and this issue was decided in favour of the assessee.

Final Conclusion: The addition made on both royalty and FTS grounds was deleted, and the assessee's appeal was allowed.

Ratio Decidendi: Payment for use of software is not royalty unless a copyright right is transferred, and services are not fees for technical services unless they make available technical knowledge or skills to the recipient or otherwise squarely fall within the treaty definition.

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