Software royalties and dependent agent PE attribution fail where agent is paid arm's length remuneration.

Consideration for supply of software copies was treated as business income, not royalty, following Engineering Analysis; absent a taxable royalty character and any taxable presence, no Indian tax liability arose on that stream. The alleged dependent agency permanent establishment also did not give rise to further attributable profits where the Indian agent was remunerated at arm's length for the functions performed, assets employed and risks assumed; in that position, the PE was tax-neutral and the revenue's attribution claim failed. The additions based on royalty characterisation and further profit attribution therefore could not survive.

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Issues: (i) whether receipts from sale of software products were taxable as royalty or as business income under the treaty and the Income-tax Act, and (ii) whether the alleged dependent agency permanent establishment attracted any further tax where the Indian agent was remunerated at arm's length.

Issue (i): whether receipts from sale of software products were taxable as royalty or as business income under the treaty and the Income-tax Act.

Analysis: The software-sale issue stood covered by the Supreme Court ruling in Engineering Analysis, under which consideration for supply of software copies was not treated as royalty merely because the software was commercially exploited in India. In the absence of a taxable royalty character, the receipts were assessable only under the business income article, and, without a taxable presence, no Indian tax liability could arise on that stream.

Conclusion: The issue was decided in favour of the assessee.

Issue (ii): whether the alleged dependent agency permanent establishment attracted any further tax where the Indian agent was remunerated at arm's length.

Analysis: The binding jurisdictional precedent applied the principle that a dependent agency permanent establishment is tax-neutral where the Indian agent receives arm's length remuneration for the functions performed, assets employed and risks assumed. In that situation, the profits attributable to the alleged permanent establishment are fully absorbed by the agent's remuneration, leaving nothing further to attribute to the foreign enterprise. As the revenue did not establish any inadequacy in the arm's length remuneration, the existence of the alleged permanent establishment became academic and other grounds became infructuous.

Conclusion: The issue was decided in favour of the assessee.

Final Conclusion: The additions based on royalty characterisation and on attribution of further profits to the alleged dependent agency permanent establishment could not survive, and the appeal succeeded.

Ratio Decidendi: Where software supply consideration is not royalty and the Indian agent is paid arm's length remuneration, no further income can be attributed to the foreign enterprise in India on the basis of an alleged dependent agency permanent establishment.

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