Software supply receipts, dependent agent PE and TDS credit were addressed under the India-Israel DTAA.

Software supply receipts were held not to constitute royalty under Article 12 of the India-Israel DTAA because the customer received only a limited right to use copyrighted software, with no transfer of copyright rights or comparable treaty-defined rights; the receipts were therefore not taxable in India as royalty. The Indian subsidiary was also found not to be a dependent agent permanent establishment, as no materially different facts or independent agency basis supported PE attribution. TDS credit was directed to be allowed after verification of the factual figures and granted to the extent correctly substantiated.

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Issues: (i) Whether consideration received for supply of software was taxable as royalty under the India-Israel DTAA. (ii) Whether the Indian subsidiary constituted a dependent agent permanent establishment of the assessee in India. (iii) Whether credit for tax deducted at source was required to be allowed after verification.

Issue (i): Whether consideration received for supply of software was taxable as royalty under the India-Israel DTAA.

Analysis: The software receipts were examined in the light of the prior orders in the assessee's own case and the terms of the software supply arrangement. The rights granted were limited to use of the software as a copyrighted article, and no copyright rights were found to have been transferred. The amendment arrangement did not materially alter the earlier contractual position. On the treaty language, payments for use of software in these circumstances did not fall within the definition of royalty, nor could they be treated as consideration for a process.

Conclusion: The receipts from supply of software were not royalty under Article 12 of the India-Israel DTAA and were not taxable as such in India.

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

Analysis: The issue was covered by the Tribunal's earlier decision in the assessee's own case, and no materially different facts were shown. The Indian subsidiary had acted on an independent basis, and the basis for treating it as a dependent agent PE was not made out on the record.

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

Issue (iii): Whether credit for tax deducted at source was required to be allowed after verification.

Analysis: The claim for TDS credit was directed to be verified on the factual figures and allowed to the extent found correct.

Conclusion: TDS credit was to be granted after verification.

Final Conclusion: The appeal succeeded on the substantive taxability issues and was allowed in part, with consequential relief on TDS credit subject to verification.

Ratio Decidendi: Supply of software amounts to royalty only when the payer acquires copyright rights or comparable treaty-defined rights, not merely a limited right to use a copyrighted article; where no permanent establishment or dependent agent PE is established, the receipts remain outside Indian taxation as business profits under the applicable treaty.

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