Software supply receipts were treated as business income, not royalty, where no copyright rights were transferred and no permanent establishment existed.

Software supply receipts were treated as business income rather than royalty because the arrangement did not transfer copyright rights; the customer received only a limited right to use the software as a copyrighted article, and the supplementary agreement and source-code issue did not change that character. On the same treaty-based reasoning, the Indian subsidiary was not regarded as a dependent agent permanent establishment, so the receipts were not taxable in India. Reimbursement of expenses was also not taxed as fees for technical services because the subsidiary was not treated as a permanent establishment for that purpose. The appeal was allowed on the basis of the Tribunal's earlier decisions in the same assessee's case.

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Issues: (i) whether the receipts from supply of software were taxable in India as royalty or business income and whether the Indian subsidiary constituted a dependent agent permanent establishment; (ii) whether reimbursement of expenses was taxable as fees for technical services and whether the Indian subsidiary could be treated as a permanent establishment for that purpose.

Issue (i): whether the receipts from supply of software were taxable in India as royalty or business income and whether the Indian subsidiary constituted a dependent agent permanent establishment.

Analysis: The Tribunal followed its earlier orders in the assessee's own case and held that the software supply arrangement did not involve transfer of copyright rights. The assessee remained the owner of the intellectual property, and the customer received only a limited right to use the software as a copyrighted article. On the facts found, the supplementary agreement did not materially alter the original arrangement, and the source-code issue did not change the legal character of the receipts. The Tribunal also followed its earlier finding that the Indian subsidiary was not a dependent agent permanent establishment under the applicable treaty framework.

Conclusion: The receipts were not taxable as royalty and the Indian subsidiary was not treated as a dependent agent permanent establishment; the receipts were assessable only as business profits, which were held not taxable in India on the facts of the case.

Issue (ii): whether reimbursement of expenses was taxable as fees for technical services and whether the Indian subsidiary could be treated as a permanent establishment for that purpose.

Analysis: The Tribunal applied its consistent view in the assessee's earlier years that the Indian subsidiary could not be treated as a permanent establishment. On that basis, the reimbursement amount could not be fastened with tax as fees for technical services in the manner proposed by the Revenue, and the issue was governed by the same factual and legal position already accepted in the assessee's favour.

Conclusion: The reimbursement of expenses was not taxable as fees for technical services in the manner sustained by the lower authorities.

Final Conclusion: The appeal was allowed in full on the basis of the Tribunal's earlier decisions in the assessee's own case, and the disputed receipts were held not taxable in India on the reasoning adopted by the Tribunal.

Ratio Decidendi: A payment for supply of software does not become royalty merely because the software is licensed for use, unless copyright rights themselves are transferred, and in the absence of a treaty-based permanent establishment the corresponding business receipts are not taxable in India.

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