Software sale receipts, maintenance and training fees held taxable as business profits, not royalty or technical services under the DTAA.

Receipts from software sales were held not to be royalty under the DTAA because the transaction transferred only a right to use the product, not copyright, and a retrospective domestic amendment could not expand the treaty definition. The connected annual maintenance charges were treated on the same footing and also assessed as business profits. Training fees for software users were likewise held to fall outside fees for technical services, as they were ancillary to the software transaction and covered by the business profits article. An estimated addition on consultancy receipts and miscellaneous income was deleted because the books were not rejected and no defects were shown.

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Issues: (i) Whether receipts from sale of software were taxable as royalty or assessable as business profits under the DTAA; (ii) whether annual maintenance charges connected with the software sale were taxable as royalty or business profits; (iii) whether training fees relating to software users were taxable as fees for technical services or business profits; (iv) whether estimated addition on consultancy receipts and miscellaneous income was sustainable in the absence of rejection of books.

Issue (i): Whether receipts from sale of software were taxable as royalty or assessable as business profits under the DTAA.

Analysis: The software supplied was a copyrighted product sold through a distributor arrangement, while intellectual property rights remained with the overseas owner. The end-user licence conferred only a right to use the product and did not transfer copyright. The Court also held that the retrospective domestic amendment enlarging the definition of royalty under the Income-tax Act did not, by itself, amend the treaty definition. Further, the treaty definition of royalties did not cover computer software by name, and the receipts were connected with the assessee's permanent establishment in India, attracting the business profits article.

Conclusion: The receipts from software sales were not royalty and were taxable as business profits in favour of the assessee.

Issue (ii): Whether annual maintenance charges connected with the software sale were taxable as royalty or business profits.

Analysis: The maintenance receipts were treated by the tax authority as having the same character as the software sale receipts. Since the software sale receipts themselves were held to be business profits and not royalty, the connected maintenance receipts, on the authority's own reasoning, could not be independently segregated as royalty income.

Conclusion: The annual maintenance charges were assessable as business profits in favour of the assessee.

Issue (iii): Whether training fees relating to software users were taxable as fees for technical services or business profits.

Analysis: The training services were found to be ancillary and subsidiary to the software sale. As the underlying software transaction was not royalty under the treaty, the connected training consideration fell outside the treaty definition of fees for technical services and was covered by the business profits article.

Conclusion: The training fees were not fees for technical services and were taxable as business profits in favour of the assessee.

Issue (iv): Whether estimated addition on consultancy receipts and miscellaneous income was sustainable in the absence of rejection of books.

Analysis: The addition was made by applying a profit rate without pointing out defects in the books or rejecting the accounts. In the absence of any material justifying such disturbance of the declared figures, the estimation was unsustainable.

Conclusion: The estimated addition was deleted in favour of the assessee.

Final Conclusion: The entire dispute was resolved in favour of the assessee, with all challenged additions and characterisations set aside and the receipts held taxable under the business profits article of the DTAA where applicable.

Ratio Decidendi: Where a treaty specifically defines royalty, a domestic retrospective expansion of the corresponding statutory definition does not alter the treaty text unless the treaty is itself amended, and a payment for a software product or ancillary services that does not transfer copyright is taxable as business profits rather than royalty.

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