Software royalty and make-available tests defeat Indian tax on offshore software and shared-services receipts.

Receipts from sale of off-the-shelf software were held to be consideration for a copyrighted article, not royalty, because the arrangement granted only a non-exclusive, non-transferable right to resell and use the software without any transfer of copyright. The treaty definition was applied as more beneficial than the unilateral amendment to section 9(1)(vi), so the software receipts were not taxable in India as royalty. Receipts from shared back-office and support services were also not fees for technical services, because they did not make available technical knowledge, skill or know-how and failed the make-available test. In the absence of attribution to a permanent establishment, those receipts were not taxable in India as business profits.

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Issues: (i) Whether receipts from sale of off-the-shelf software constituted royalty taxable under section 9(1)(vi) of the Income-tax Act, 1961 and Article 12 of the India-Sweden Double Taxation Avoidance Agreement; (ii) Whether receipts from shared services provided from Sweden constituted fees for technical services taxable in India.

Issue (i): Whether receipts from sale of off-the-shelf software constituted royalty taxable under section 9(1)(vi) of the Income-tax Act, 1961 and Article 12 of the India-Sweden Double Taxation Avoidance Agreement.

Analysis: The software arrangement showed a non-exclusive and non-transferable right to resell and use the software, with no transfer of copyright or proprietary rights to the distributor or end-user. The payment was for a copyrighted article and not for any parting with rights in the copyright itself. The earlier decision in the assessee's own case and the later Supreme Court ruling in Engineering Analysis supported the distinction between a transfer of copyright and a transfer of a copyrighted article. The unilateral amendment to section 9(1)(vi) did not enlarge the treaty definition where the treaty was more beneficial.

Conclusion: The software receipts were not royalty and were not taxable in India as royalty.

Issue (ii): Whether receipts from shared services provided from Sweden constituted fees for technical services taxable in India.

Analysis: The services consisted of back-office and support functions such as accounting, reporting, filings, audit support, invoicing, banking, payroll and related administration. These services did not involve transfer of technical knowledge, skill or experience to the Indian entity and did not satisfy the make-available condition. By virtue of the MFN clause in the protocol to the India-Sweden treaty, the more restricted scope of the India-Portugal and India-USA treaties applied, and the receipts could not be brought to tax as technical services. They also could not be taxed as business profits in the absence of attribution to a permanent establishment.

Conclusion: The shared-services receipts were not fees for technical services and were not taxable in India on that basis.

Final Conclusion: The assessee succeeded on both substantive grounds, and the addition treating the software receipts and shared-services receipts as taxable income was deleted.

Ratio Decidendi: A non-exclusive licence to use or resell software without transfer of copyright is consideration for a copyrighted article and not royalty, and back-office services do not become fees for technical services unless they make available technical knowledge, skill or know-how to the recipient.

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