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Issues: (i) Whether consideration received for supply of software was taxable as royalty under the Act and Article 12 of the DTAA. (ii) Whether the assessee had a permanent establishment in India and whether any business profits could be attributed to India.
Issue (i): Whether consideration received for supply of software was taxable as royalty under the Act and Article 12 of the DTAA.
Analysis: The software supply was held to be a transfer of a copyrighted article and not a transfer of copyright or a right to use copyright. The contractual restrictions showed that the assessee obtained only copies of software for use in operations, without rights of commercial exploitation, source-code access, or any transfer of proprietary rights. Following the coordinate bench decisions in the assessee's own and connected cases, the payment could not be characterised as royalty under the Act or Article 12 of the DTAA.
Conclusion: The issue was decided in favour of the assessee; the receipts from supply of software were not taxable as royalty.
Issue (ii): Whether the assessee had a permanent establishment in India and whether any business profits could be attributed to India.
Analysis: The relevant agreements showed an independent contractual arrangement on a principal-to-principal basis. There was no material to show deputation of personnel to India, any office or business activity in India, or authorisation of the Indian entity to conclude contracts on behalf of the assessee. On those facts, the requirements for agency PE or service PE were not satisfied, and in the absence of a PE, no attribution of business profits could arise.
Conclusion: The issue was decided in favour of the assessee; no permanent establishment existed in India and no profits were attributable.
Final Conclusion: The assessee succeeded on the substantive taxability issues, and the Revenue's appeal failed while the assessee's appeal was allowed.
Ratio Decidendi: Consideration for supply of software is not royalty where the recipient acquires only a copyrighted article without any transfer of copyright, and in the absence of a permanent establishment in India, no business profits can be attributed to India.
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