Software licence and support payments not royalty or fees for included services absent transfer of copyright or make-available test

A non-exclusive, non-transferable licence to use copyrighted software was treated as payment for a copyrighted article, not royalty, because no copyright rights were assigned or sublicensed; no tax deduction at source was therefore required. Maintenance support fees were not taxable in India under the India-USA DTAA because they did not make available technical knowledge, skill, or know-how, and the foreign recipient had no permanent establishment in India. Training fees were also outside fees for included services for the same reason and were not subject to withholding under section 195. The withholding tax demand accordingly did not survive.

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Issues: (i) Whether the payment for a non-exclusive, non-transferable licence to use copyrighted software was royalty and liable to tax deduction at source; (ii) whether the maintenance fees for software support were taxable in India under the India-USA DTAA; (iii) whether the training fees paid to the foreign recipient constituted fees for included services under the India-USA DTAA and attracted section 195 of the Income-tax Act, 1961.

Issue (i): Whether the payment for a non-exclusive, non-transferable licence to use copyrighted software was royalty and liable to tax deduction at source.

Analysis: The licence granted only a right to use the copyrighted software for internal business purposes. No right in the copyright itself was transferred, assigned, or sublicensed. A distinction was drawn between payment for a copyrighted article and payment for use of copyright. The payment therefore did not fall within the treaty definition of royalty.

Conclusion: The payment was not royalty and no obligation arose to deduct tax at source; the finding of default was unsustainable and was in favour of the assessee.

Issue (ii): Whether the maintenance fees for software support were taxable in India under the India-USA DTAA.

Analysis: The maintenance support did not make available any technical knowledge, skill, or know-how to the assessee. The recipient had no permanent establishment in India, so the amount could not be taxed as fees for included services or as business profits in India.

Conclusion: The maintenance fees were not chargeable to tax in India and no withholding obligation arose; the finding of default was in favour of the assessee.

Issue (iii): Whether the training fees paid to the foreign recipient constituted fees for included services under the India-USA DTAA and attracted section 195 of the Income-tax Act, 1961.

Analysis: The training services did not make available any technology or technical skill to the assessee. The payment was treated as ancillary to the software transaction and, in the absence of a permanent establishment in India, could not be taxed as business profits.

Conclusion: The training fees were not taxable in India and no tax was required to be withheld; the finding of default was in favour of the assessee.

Final Conclusion: The additions and demand raised under the withholding tax provisions did not survive, and the appeal was allowed with the consequential issues following the same result.

Ratio Decidendi: A non-exclusive, non-transferable licence to use copyrighted software is payment for a copyrighted article and not royalty, and maintenance or training payments are not taxable as fees for included services unless they make available technical knowledge or skill and the non-resident has a taxable presence in India.

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