Arm's length remuneration and software supply receipts: no further PE attribution and no royalty without copyright rights.

Arm's length remuneration paid to the Indian affiliate was treated as sufficient compensation for the functions performed, so no further profits were attributable to the alleged dependent agent permanent establishment for those same activities. The software receipts were also held not to be royalty, because royalty arises only where the payer acquires a copyright right and not where software is merely supplied or resold for use without transfer of copyright. The commentary therefore states that transfer pricing at arm's length can exhaust profit attribution for compensated functions, and that software supply receipts do not become royalty absent copyright rights.

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Issues: (i) Whether, where the Indian affiliate was remunerated at arm's length, any further profits could be attributed to the alleged dependent agent permanent establishment in India. (ii) Whether consideration received for supply of software to Indian customers constituted royalty.

Issue (i): Whether, where the Indian affiliate was remunerated at arm's length, any further profits could be attributed to the alleged dependent agent permanent establishment in India.

Analysis: The arm's length remuneration already paid to the Indian entity was accepted as sufficient compensation for the functions performed. In such a situation, the taxable profits attributable to the permanent establishment stand exhausted, and no further attribution is warranted merely because a permanent establishment is alleged to exist. The issue was treated as covered by the settled principle that transfer pricing at arm's length can conclude the profit attribution exercise for the functions and risks already compensated.

Conclusion: No further profits were attributable to the alleged permanent establishment. The finding was in favour of the assessee.

Issue (ii): Whether consideration received for supply of software to Indian customers constituted royalty.

Analysis: The software transactions were examined in the light of the governing treaty definition and the statutory provision dealing with royalty. The controlling principle applied was that a payment is royalty only where the payer acquires a right to use copyright, and not where software is merely resold or supplied for use without transfer of any copyright interest. The earlier view treating such receipts as royalty was rejected in the light of the Supreme Court ruling on computer software payments.

Conclusion: The receipts from supply of software did not constitute royalty. The finding was in favour of the assessee.

Final Conclusion: The additions on account of further attribution to the alleged permanent establishment and treatment of software receipts as royalty did not survive, resulting in partial relief to the assessee.

Ratio Decidendi: Where the Indian entity performing functions for the non-resident is remunerated at arm's length, no additional profits are attributable to the non-resident's permanent establishment for those compensated functions, and payment for supply of software is not royalty unless it involves transfer of copyright rights.

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