Software licence payments and maintenance charges were not taxable as royalty or fees for technical services under the treaty framework.

Payment for limited use and maintenance of software was analysed under the India-France treaty and the underlying licence terms. Because the assessee obtained only a right to use the software for its own business needs, without any right to sublicense or exploit copyright, the consideration was not royalty. The maintenance component could potentially fall within fees for technical services, but the Protocol's most favoured nation clause imported the narrower India-Portugal standard, under which services are taxable only if they make available technical knowledge, experience, skill, know-how or processes; that test was not met. The receipts were also treated as linked to shipping operations and therefore not chargeable in India, so no withholding obligation arose.

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Issues: Whether payment for use and maintenance of LARA, DIVA and Ocean software constituted royalty or fees for technical services so as to be chargeable in India and attract disallowance under section 40(a)(i) for failure to deduct tax at source.

Analysis: The payment was examined in the setting of the India-France treaty and the underlying agreements. The software was licensed only for the assessee's own business needs, without any right to sublicense or exploit copyright, so the consideration was not for use of copyright and did not fall within royalty under the treaty. The maintenance element was capable of falling within fees for technical services under domestic law and the treaty, but the Protocol to the treaty imported the more restrictive scope from the India-Portugal treaty through the most favoured nation clause. Under that imported standard, technical services would be taxable only if they made available technical knowledge, experience, skill, know-how or processes, which was not shown on the facts. Independently, the receipts were also treated as inextricably linked to shipping operations and therefore covered by the treaty article dealing with shipping profits, so they were not chargeable to tax in India.

Conclusion: The payment was not chargeable to tax in India in the hands of the foreign recipient, and the assessee had no obligation to withhold tax on the amount; the disallowance under section 40(a)(i) was unsustainable.

Final Conclusion: The addition was deleted and the assessee's appeal succeeded, with consequential relief on the ancillary grounds.

Ratio Decidendi: A payment for limited use of software, without transfer of copyright or right to sublicense, is not royalty under the treaty, and where the treaty's more restrictive technical-services definition is imported through an MFN clause, tax withholding is not required unless the services make available technical knowledge or skills.

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