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Issues: (i) Whether receipts from Indian customers towards sale of software constituted royalty under section 9(1)(vi) of the Income-tax Act and Article 12 of the DTAA between India and USA. (ii) Whether receipts from Indian customers towards annual maintenance services, implementation and consultancy services were taxable as fees for technical services.
Issue (i): Whether receipts from Indian customers towards sale of software constituted royalty under section 9(1)(vi) of the Income-tax Act and Article 12 of the DTAA between India and USA.
Analysis: The issue was stated to be covered by the decision of the Supreme Court in Engineering Analysis Centre of Excellence Pvt. Ltd., which held that consideration for sale of software does not amount to royalty within section 9(1)(vi) of the Income-tax Act or the corresponding treaty provision. On that basis, the software receipts could not be brought to tax as royalty.
Conclusion: The receipts from sale of software did not constitute royalty and were not taxable on that basis.
Issue (ii): Whether receipts from Indian customers towards annual maintenance services, implementation and consultancy services were taxable as fees for technical services.
Analysis: Once the underlying software receipts were held not to be royalty, the related miscellaneous receipts arising from the same software transactions could not independently be brought to tax as fees for technical services. The Revenue was unable to dislodge this position.
Conclusion: The receipts towards annual maintenance, implementation and consultancy services were not taxable as fees for technical services.
Final Conclusion: The additions made in respect of software sale receipts and related service receipts were deleted, and the assessee succeeded in the appeal.
Ratio Decidendi: Consideration for sale of software, absent transfer of copyright rights, does not constitute royalty, and related incidental receipts cannot be taxed as fees for technical services merely because they arise from the same software transaction.
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