Treaty treatment of telecom, software and support payments excludes royalty and included-services character absent rights or make-available effect.

Telecommunication connectivity charges were treated as payment for standard third-party bandwidth access, with no transfer of a right to use equipment or process and no satisfaction of the make-available test under the India-USA DTAA. Consideration for shrink-wrapped software was treated as payment for a copyrighted article, not for any copyright or right to use copyright, so it did not qualify as royalty under the treaty. Support and maintenance fees also failed the treaty test for fees for included services because no technical knowledge, skill, know-how, or process was made available. For a non-resident subject to withholding tax, interest under sections 234B and 234C required recomputation in accordance with law.

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Issues: (i) Whether IPLC or link charges were taxable as royalty or fees for technical services or included services under the Act and the India-USA DTAA; (ii) Whether consideration for sale of shrink-wrapped software constituted royalty; (iii) Whether support and maintenance fees were taxable as fees for included services; (iv) Whether interest under sections 234B and 234C was chargeable.

Issue (i): Whether IPLC or link charges were taxable as royalty or fees for technical services or included services under the Act and the India-USA DTAA.

Analysis: The payment was found to be only for standard telecommunication connectivity procured from third-party service providers. There was no transfer of any right to use equipment or process, and the recipient had no control or possession over the underlying infrastructure. The services also did not satisfy the make available requirement under Article 12(4) of the India-USA DTAA.

Conclusion: The IPLC or link charges were not taxable as royalty or as fees for technical or included services, and the issue was decided in favour of the assessee.

Issue (ii): Whether consideration for sale of shrink-wrapped software constituted royalty.

Analysis: The software licence was non-exclusive and non-transferable, with restrictions on copying, reverse engineering, sublicensing, and third-party distribution. What was transferred was only a copyrighted article and not any copyright or right to use copyright. The treaty definition of royalty was narrower than the domestic amendment and prevailed under section 90(2).

Conclusion: The software receipts did not constitute royalty and were not taxable as such, and the issue was decided in favour of the assessee.

Issue (iii): Whether support and maintenance fees were taxable as fees for included services.

Analysis: The support and maintenance services were linked to the software supplied, but taxability under Article 12 depended on the treaty conditions. Since the underlying software receipts were not royalty and the services did not make available technical knowledge, experience, skill, know-how, or process, the receipts could not be taxed as fees for included services.

Conclusion: The support and maintenance fees were not taxable as fees for included services, and the issue was decided in favour of the assessee.

Issue (iv): Whether interest under sections 234B and 234C was chargeable.

Analysis: The assessee was a non-resident foreign company whose receipts were subject to tax deduction at source. In such a situation, advance tax liability did not arise in the same manner as for a resident assessee, and interest could not be sustained on the assessed shortfall without appropriate recomputation.

Conclusion: The levy of interest was not sustained as made and the matter required recomputation in accordance with law, to the benefit of the assessee.

Final Conclusion: The additions and related interest levy were set aside or deleted in substance, resulting in complete relief to the assessee in all the appeals.

Ratio Decidendi: For treaty purposes, telecommunication connectivity charges are not royalty or fees for included services unless there is a transfer of a right to use equipment or process or the service makes available technical knowledge or skills; similarly, software receipts are not royalty where only a copyrighted article is supplied and no copyright is transferred.

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