India-USA DTAA limits royalty and fees for included services: software, connectivity, and support payments fail the make-available test.

Under the India-USA DTAA, IPLC or link charges were analysed as standard connectivity payments and held not to constitute fees for technical services, fees for included services, or royalty because no technical knowledge, skill, know-how, or process was made available. Shrink-wrapped software supply was treated as a transfer of a copyrighted article, not a copyright right, so the receipt was not royalty, and the domestic amendment to section 9(1)(vi) was not read as enlarging the treaty meaning. Support and maintenance fees, and technical and consultancy service fees, also failed the treaty make-available test and were therefore not taxable as fees for included services. Interest under section 234B was considered in the case of a non-resident foreign company subject to withholding.

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Issues: (i) whether receipts from IPLC / link charges were taxable as fees for technical services / fees for included services or royalty; (ii) whether consideration received for supply of shrink-wrapped software was taxable as royalty; (iii) whether support and maintenance fees linked to the software were taxable as fees for included services; (iv) whether service fees for technical and consultancy services were taxable as fees for included services; and (v) whether interest under section 234B was leviable.

Issue (i): whether receipts from IPLC / link charges were taxable as fees for technical services / fees for included services or royalty.

Analysis: The receipts were examined in the light of the India-USA DTAA and the settled position that technical services are taxable as fees for included services only if they satisfy the treaty conditions, including the make available requirement where applicable. The connectivity and bandwidth arrangement was treated as a standard service and not as use of equipment or transfer of a process. The reasoning followed the earlier order in the assessee's own case and the view that no technical knowledge, experience, skill, know-how, or process was made available, and the payment was not royalty either.

Conclusion: The addition on this count was deleted and the issue was decided in favour of the assessee.

Issue (ii): whether consideration received for supply of shrink-wrapped software was taxable as royalty.

Analysis: The licence terms showed that the customer received only a non-exclusive, non-transferable right to use a copyrighted article for internal purposes, with restrictions against copying, sublicensing, reverse engineering, and distribution. The distinction between transfer of a copyright and sale of a copyrighted article was applied. The treaty definition of royalty was held to control, and the domestic amendment to section 9(1)(vi) was not treated as enlarging the treaty meaning.

Conclusion: The receipt from software supply was held not taxable as royalty and the issue was decided in favour of the assessee.

Issue (iii): whether support and maintenance fees linked to the software were taxable as fees for included services.

Analysis: The support and maintenance services were found to be ancillary to the software supply and dependent upon the tax treatment of the software receipts. Since the software receipt itself was held not taxable as royalty, clause (a) of the treaty definition was not attracted. The services also did not satisfy the make available test under clause (b), because no technical knowledge, skill, experience, know-how, or process was imparted to the recipient.

Conclusion: The addition on this count was deleted and the issue was decided in favour of the assessee.

Issue (iv): whether service fees for technical and consultancy services were taxable as fees for included services.

Analysis: The services were tested against Article 12 of the treaty. Mere rendering of technical input was held insufficient unless the services made available technical knowledge, experience, skill, know-how, or process, or involved development and transfer of a technical plan or design. On the facts, the treaty threshold was not met.

Conclusion: The addition on this count was deleted and the issue was decided in favour of the assessee.

Issue (v): whether interest under section 234B was leviable.

Analysis: The assessee, being a non-resident foreign company, was treated as having tax deductible at source on the relevant receipts, and the levy of advance tax interest was examined in the light of the binding jurisdictional precedent on non-resident tax liability and withholding. The matter was directed to be recomputed accordingly.

Conclusion: The interest issue was decided in favour of the assessee for statistical purposes.

Final Conclusion: The additions made by the tax authorities were substantially deleted, and only the interest issue survived for recomputation, resulting in a partly allowed appeal.

Ratio Decidendi: Under the India-USA DTAA, receipts are taxable as fees for included services only when the treaty conditions are satisfied, and royalty cannot be enlarged beyond the treaty meaning by a domestic amendment; a payment for a copyrighted article, standard connectivity, or support services without making available technical knowledge is not taxable as royalty or fees for included services.

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