Software licence payments and management support fees were held outside royalty and technical services taxation under a restrictive treaty test.

Software-use receipts were treated as non-royalty where the non-resident retained copyright and granted only a restricted licence to use the software, because the payment related to a copyrighted article and not to transfer of copyright rights. Management service fees were held not taxable as fees for technical services under the treaty's make-available test, since the support was consumed on rendition and did not transmit technical knowledge, skill, experience or know-how for independent future use. Education cess was also held not leviable on tax computed under the treaty. The additions treating the software receipts and service fees as taxable income were deleted.

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Issues: (i) Whether receipts from grant of software-use rights were taxable as royalty. (ii) Whether management service fees were taxable as fees for technical services in the absence of making available technical knowledge. (iii) Whether education cess was leviable on tax computed under the treaty.

Issue (i): Whether receipts from grant of software-use rights were taxable as royalty.

Analysis: The software agreement showed that the assessee retained copyright in the software and only granted the Indian entity a restricted licence to access and use the software. The payment was for use of a copyrighted article and not for transfer of copyright. The reasoning followed the principle that ownership of copyright is distinct from ownership of the physical or licensed software medium, and that no royalty arises where no copyright rights are parted with.

Conclusion: The receipts were not taxable as royalty and this issue was decided in favour of the assessee.

Issue (ii): Whether management service fees were taxable as fees for technical services in the absence of making available technical knowledge.

Analysis: The services rendered were a mixed bundle of managerial, technical and consultancy support, but they were consumed on rendition and did not transmit technical knowledge, experience, skill or know-how enabling the Indian entity to apply them independently in future. The restrictive treaty test requiring making available was applied, and the services were held not to satisfy that condition.

Conclusion: The management service fees were not taxable as fees for technical services and this issue was decided in favour of the assessee.

Issue (iii): Whether education cess was leviable on tax computed under the treaty.

Analysis: On the facts, the levy of education cess on treaty-based taxation was disallowed by following the view that the treaty rate is inclusive and the cess cannot be added separately where treaty taxation governs the charge.

Conclusion: Education cess was not leviable and this issue was decided in favour of the assessee.

Final Conclusion: The additions treating software receipts as royalty and management service fees as fees for technical services were deleted, and the levy of education cess was also set aside.

Ratio Decidendi: Where a non-resident merely licenses use of software without parting with copyright, the consideration is not royalty; and services that do not make available technical knowledge to the recipient do not constitute fees for technical services under a restrictive treaty definition.

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