Software licence and support payments, lease line charges, training fees, and secondment reimbursements were not royalty or technical service fees.

Payments for software licences granting only a restricted right to use a copyrighted article, together with allied IT support, were treated as neither royalty nor fees for technical services because no copyright rights or technical knowledge were transferred and the treaty definition was not enlarged by later domestic amendments. Lease line charges were likewise viewed as connectivity or bandwidth facility payments, not royalty, and training fees failed the make available test because no transferable technical knowledge was imparted. Salary reimbursements for seconded expatriates were characterised as deputation-related cost recovery rather than fees for technical services, so no further withholding default arose. Once the primary withholding claims failed, grossing up under section 195A also did not survive.

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Issues: (i) whether payments for software licences and allied IT support charges were taxable as royalty or fees for technical services and required tax deduction at source under section 195; (ii) whether lease line charges were taxable as royalty and liable to tax deduction at source; (iii) whether training fees were fees for technical services or fees for included services under the treaty; (iv) whether reimbursement of salary paid to seconded expatriate employees constituted fees for technical services and attracted tax deduction at source; and (v) whether grossing up under section 195A was warranted.

Issue (i): whether payments for software licences and allied IT support charges were taxable as royalty or fees for technical services and required tax deduction at source under section 195.

Analysis: The software agreements showed only a limited, non-exclusive, non-transferable right to use the software for internal business purposes, with no right to copy, modify, sub-license, or commercially exploit the software. The payment was therefore for a copyrighted article and not for transfer of copyright rights. The treaty definition of royalty was narrower than the expanded domestic definition, and the later domestic amendments to section 9(1)(vi) could not be read into the treaty. The IT support and related connectivity charges were merely support facilities and did not make available technical knowledge, skill, or experience.

Conclusion: The payments were not royalty or fees for technical services, and no tax was deductible at source; the assessee succeeded on this issue.

Issue (ii): whether lease line charges were taxable as royalty and liable to tax deduction at source.

Analysis: The lease line payments were held not to involve transfer of any right to use equipment in the treaty sense, and the domestic amendment widening the concept of royalty did not alter the treaty position. The charges were, in substance, for bandwidth or connectivity facilities and alternatively were only reimbursements without income element.

Conclusion: The lease line charges were not taxable as royalty and no withholding obligation arose; the assessee succeeded on this issue.

Issue (iii): whether training fees were fees for technical services or fees for included services under the treaty.

Analysis: The training was web-based and non-interactive, without imparting any transferable technical knowledge or enabling the recipient to apply technology independently. The Revenue did not establish any transfer of technology or satisfaction of the make available condition.

Conclusion: The training fees were not fees for technical services or fees for included services, and no tax was deductible at source; the assessee succeeded on this issue.

Issue (iv): whether reimbursement of salary paid to seconded expatriate employees constituted fees for technical services and attracted tax deduction at source.

Analysis: The expatriates were deputed under a secondment arrangement and their salaries were subjected to tax deduction as salary. On the facts, the payments were reimbursement of salary cost for personnel working under the assessee's control, and the situation was closer to deputation for business support than independent technical service provision. The payment had already suffered withholding as salary, so there was no basis to treat the assessee as in default for another withholding characterisation.

Conclusion: The salary reimbursements were not liable to be treated as fees for technical services, and no default under sections 201(1) and 201(1A) survived; the assessee succeeded on this issue.

Issue (v): whether grossing up under section 195A was warranted.

Analysis: Once the principal withholding demands failed, the basis for grossing up also ceased to survive.

Conclusion: The grossing-up addition was unsustainable.

Final Conclusion: The assessee was not in default for non-deduction of tax at source on the disputed payments, and all consequential demands of tax and interest were set aside.

Ratio Decidendi: A payment for a software licence that grants only a restricted right to use a copyrighted article, without transfer of copyright rights, is not royalty under the treaty; domestic amendments enlarging royalty do not automatically expand the treaty definition, and routine support, training, connectivity, or salary-reimbursement payments are not taxable as fees for technical services unless technical knowledge or technology is actually made available.

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