Treaty "make available" and software licence royalty tests defeated taxability of the disputed receipts.

Manpower support linked to engineering and design services was held not taxable as fees for technical or included services because the personnel performed supervisory and coordination functions without making available technical knowledge, skill, know-how or processes to the recipient; in the absence of a permanent establishment in India, the receipt was also not taxable as business profits. Sale of software licences obtained from third parties for redistribution was held not to constitute royalty, as no copyright rights were transferred and the treaty royalty provision requires use of, or right to use, copyright. The additions on both counts were deleted.

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Issues: (i) Whether the amount received for manpower support in connection with engineering and design services was taxable as fees for technical services or fees for included services; (ii) Whether the amount received on sale of software licences was taxable as royalty.

Issue (i): Whether the amount received for manpower support in connection with engineering and design services was taxable as fees for technical services or fees for included services.

Analysis: The services rendered through the project engineer and design lead were confined to supervisory and coordination functions to ensure timely delivery, issue resolution and review participation. The services were technical in character, but they did not transmit technical knowledge, experience, skill, know-how or processes to the recipient for post-service use. The contractual arrangement showed no deliverable or transfer of technical design from the assessee, and therefore the treaty requirement of making available was not satisfied. In the absence of a permanent establishment in India, the receipts could not be taxed as business profits either.

Conclusion: The receipt was not chargeable to tax and the issue was decided in favour of the assessee.

Issue (ii): Whether the amount received on sale of software licences was taxable as royalty.

Analysis: The transaction was a sale of software licences obtained from third parties for further distribution, and not a transfer of copyright or parting with any copyright right. Under the treaty definition of royalty, taxability depends on use of, or right to use, copyright and not on mere acquisition of software products for use or resale. On that footing, the receipt did not fall within the royalty article.

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

Final Conclusion: The additions made on both counts were deleted, leaving the assessee with no tax liability on the disputed receipts.

Ratio Decidendi: Under the relevant treaty, technical or consultancy services are taxable as fees for included services only when they make available technical knowledge, experience, skill, know-how or processes, and a software distribution transaction is not royalty unless copyright rights are transferred.

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