Software licence receipts not royalty; no dependent agent permanent establishment found, and tax credit direction had to be implemented.

Receipts from supply of software under a limited licence were held not to constitute royalty, because no copyright rights were transferred and the payer received only a right to use the copyrighted article; the amounts were therefore assessable as business income under the Act and the treaty. The Tribunal also found no fresh factual basis to treat TTI India as a dependent agent permanent establishment, so the corresponding business profits were not taxable in India on that footing. On credit, the Assessing Officer was required to verify and implement the Dispute Resolution Panel's direction. The appeal was thus partly allowed.

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Issues: (i) whether receipts from supply of software were taxable as royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 12 of the India-Israel Double Taxation Avoidance Agreement; (ii) whether TTI India constituted a dependent agent permanent establishment of the assessee in India; (iii) whether the Assessing Officer was required to give credit as directed by the Dispute Resolution Panel.

Issue (i): whether receipts from supply of software were taxable as royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 12 of the India-Israel Double Taxation Avoidance Agreement.

Analysis: The software supply agreements showed that the assessee retained ownership of the intellectual property and granted only a limited right to use the software. No right to exploit copyright was transferred, and the alleged source-code issue was found to be academic on the facts, as the escrow arrangement was never executed. Following the assessee's earlier years' orders, the receipt was held to be outside the treaty definition of royalty.

Conclusion: The receipts from supply of software were not taxable as royalty and were assessable as business income subject to the Act and the treaty.

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

Analysis: The record did not disclose any fresh factual basis to depart from the assessee's earlier favourable findings on permanent establishment. The Tribunal found no reason to distinguish the earlier year's decision holding that TTI India did not function as a dependent agent PE on the relevant facts.

Conclusion: TTI India was not treated as a dependent agent permanent establishment, and the corresponding business profits were not taxable in India on that basis.

Issue (iii): whether the Assessing Officer was required to give credit as directed by the Dispute Resolution Panel.

Analysis: The Dispute Resolution Panel had directed verification and grant of credit, and no contrary basis was recorded to displace that direction.

Conclusion: The Assessing Officer was directed to implement the Dispute Resolution Panel's direction on credit.

Final Conclusion: The assessee succeeded on the substantive taxability and permanent establishment issues, while the credit-related direction was left to be implemented by the Assessing Officer, resulting in a partial allowance of the appeal.

Ratio Decidendi: A payment for software under a limited licence, where no copyright rights are transferred and the payer receives only the right to use the copyrighted article, is not royalty; and permanent establishment cannot be inferred without a factual foundation showing that the alleged agent satisfies the treaty test.

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