Software payments and technical services under treaty law: limited software access was not royalty, and maintenance failed the make available test.

Limited access to CAD/CAM software was analysed under the royalty provisions of the Income-tax Act and the India-Sweden DTAA; although Explanation 4 to section 9(1)(vi) broadens royalty under domestic law, Article 12(3) of the treaty requires use of, or right to use, copyright, which was not transferred, so the receipt was not royalty under the DTAA. Maintenance services for GSS software were examined as fees for technical services; while they fell within section 9(1)(vii), the treaty's more favourable "make available" standard applied through the MFN clause, and the services did not enable independent future use of technical knowledge, so the receipt was not taxable under the DTAA. The additions were set aside.

---

---

Issues: (i) Whether the amount received for limited access to CAD/CAM software was taxable as royalty under the Income-tax Act, 1961 and the India-Sweden DTAA; (ii) Whether the amount received for maintenance services in respect of GSS software was taxable as fees for technical services under the Income-tax Act, 1961 and the India-Sweden DTAA.

Issue (i): Whether the amount received for limited access to CAD/CAM software was taxable as royalty under the Income-tax Act, 1961 and the India-Sweden DTAA.

Analysis: The retrospective insertion of Explanation 4 to section 9(1)(vi) clarified that consideration for the use or right to use computer software, including by licence, falls within royalty under the Act. However, treaty protection under section 90(2) requires the DTAA to be examined for more beneficial treatment. Under Article 12(3) of the India-Sweden DTAA, royalty arises only where the payment is for the use of, or the right to use, copyright. The receipt here was only for a limited right to use software for internal business purposes, with no transfer of any copyright or right in copyright. The treaty definition was therefore not satisfied.

Conclusion: The amount was not taxable as royalty under the DTAA and was held in favour of the assessee.

Issue (ii): Whether the amount received for maintenance services in respect of GSS software was taxable as fees for technical services under the Income-tax Act, 1961 and the India-Sweden DTAA.

Analysis: The payment was found to be for maintenance of existing software and not for granting access to software. On that basis, it constituted consideration for technical or consultancy services under section 9(1)(vii) of the Act. For treaty purposes, Article 12 and the Protocol introduced the most favoured nation clause, so that the narrower "make available" standard from the India-Portugal DTAA could be imported. The services did not make available any technical knowledge, experience, skill, know-how or processes to enable the recipient to use them independently in future. The treaty threshold was therefore not met.

Conclusion: The amount was not taxable as fees for technical services under the DTAA and was held in favour of the assessee.

Final Conclusion: The additions on both disputed receipts were set aside, as the treaty provisions prevailed over the Act where more beneficial, and the appeal succeeded in full.

Ratio Decidendi: Where a payment for software-related use does not involve transfer of copyright, it is not royalty under the DTAA; and technical services are taxable as fees for technical services under a treaty only if the services make available technical knowledge, experience, skill, know-how or processes to the recipient.

---