Software receipts, dependent agent PE, reimbursement and non-resident interest are taxed by treaty characterisation and withholding rules.

Software supply receipts are characterised as business income rather than royalty where the customer receives only limited use rights, copyright ownership remains with the supplier, and no effective source code transfer occurs. A dependent agent permanent establishment is not established on a principal-to-principal arrangement absent authority to conclude contracts or sufficient dependence. Expense reimbursements are not fees for technical services unless they make available technical knowledge, skill, know-how, or process. Interest under section 234B is generally not leviable on a non-resident where the income is subject to withholding, applying the relevant treaty and precedent-based position.

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Issues: (i) whether consideration received for supply of software was taxable as royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 12 of the India-Israel DTAA; (ii) whether the Indian subsidiary constituted a dependent agent permanent establishment of the assessee in India; (iii) whether reimbursement of expenses was taxable as fees for technical services under Article 13 of the India-Israel DTAA; and (iv) whether interest under section 234B of the Income-tax Act, 1961 was leviable.

Issue (i): whether consideration received for supply of software was taxable as royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 12 of the India-Israel DTAA.

Analysis: The software supply agreement, read with the supplementary agreement, did not show any material change from the earlier years. The assessee continued to retain ownership of the intellectual property, the buyer only received limited use rights, and the alleged source code arrangement was not actually implemented through any escrow delivery. The issue had already been decided in the assessee's own case for earlier years on identical facts, and no legally material distinction was found for the year under appeal.

Conclusion: The software receipts were not royalty under Article 12 and were to be treated as business income, subject to the Act and the treaty. The issue was decided in favour of the assessee.

Issue (ii): whether the Indian subsidiary constituted a dependent agent permanent establishment of the assessee in India.

Analysis: The subsidiary acted under an independent agreement on principal-to-principal terms, and the record did not establish authority to conclude contracts or the degree of dependence required for a dependent agent permanent establishment. The earlier year's finding that the assessee had no permanent establishment in India was followed, and the order of the lower authority did not demonstrate any basis to depart from that conclusion.

Conclusion: The Indian subsidiary was not a dependent agent permanent establishment of the assessee. The issue was decided in favour of the assessee.

Issue (iii): whether reimbursement of expenses was taxable as fees for technical services under Article 13 of the India-Israel DTAA.

Analysis: The reimbursement did not involve making available technical knowledge, skill, know-how, or process. The Tribunal relied on the earlier year's treatment of identical receipts and on the treaty-based character of the payment, holding that domestic-law characterisation could not override the treaty position on the facts found.

Conclusion: The reimbursement was not fees for technical services. The issue was decided in favour of the assessee.

Issue (iv): whether interest under section 234B of the Income-tax Act, 1961 was leviable.

Analysis: The assessee was a non-resident whose receipts were subject to withholding, and the governing precedent held that such interest was not leviable in these circumstances.

Conclusion: Interest under section 234B was not leviable. The issue was decided in favour of the assessee.

Final Conclusion: The assessee succeeded on the substantive tax characterisation issues relating to software receipts, permanent establishment, reimbursement receipts, and interest liability, and the appeals were only partly sustained against the revenue's additions.

Ratio Decidendi: Where the contractual arrangement confers only limited rights to use software without transfer of copyright rights or actual transfer of source code, the receipts are not royalty under the applicable treaty and, in the absence of a permanent establishment, are taxable only as business income or not at all under the treaty framework; reimbursement without making available technical knowledge is not fees for technical services, and interest under section 234B is not leviable on a non-resident whose income is subject to withholding.

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