Software licence receipts and maintenance charges not treated as royalty or included services absent transfer of technical know-how.

Receipts from a non-exclusive, non-transferable software licence under an end-user licence agreement are treated as consideration for use of standardised software, not as royalty, where no source code or rights in the underlying process are transferred. Annual software maintenance charges are also not fee for included services unless technical knowledge, experience, skill, know-how or processes are made available to the recipient; if the licence payment is not royalty, the maintenance charge cannot be ancillary to royalty on that basis. A separate rate-application claim under section 115 required factual verification and was remanded for fresh examination.

---

---

Issues: (i) Whether receipts from sale of software licence under an end user licence agreement were taxable as royalty under Article 12(3) of the India-USA DTAA and section 9(1)(vi) of the Income-tax Act, 1961; (ii) Whether annual software maintenance charges were taxable as fee for included services under Article 12(4) of the India-USA DTAA and section 9(1)(vii) of the Income-tax Act, 1961; (iii) Whether the claim relating to application of tax at 40% instead of 10% under section 115(1)(b)(B) of the Income-tax Act, 1961 required remand.

Issue (i): Whether receipts from sale of software licence under an end user licence agreement were taxable as royalty under Article 12(3) of the India-USA DTAA and section 9(1)(vi) of the Income-tax Act, 1961.

Analysis: The licence granted was non-exclusive and non-transferable, the customers had no access to source code, and no right in any process was transferred. The customers were permitted only to use standardised software for their internal purposes. Following the coordinate bench decision in the assessee's own case and the binding principle that consideration for use of copyrighted software through EULA does not amount to royalty, the receipt could not be taxed as royalty.

Conclusion: The issue was decided in favour of the assessee. The receipt from software licence sale was held not taxable as royalty.

Issue (ii): Whether annual software maintenance charges were taxable as fee for included services under Article 12(4) of the India-USA DTAA and section 9(1)(vii) of the Income-tax Act, 1961.

Analysis: The maintenance charges were treated by the revenue authorities as ancillary to the alleged royalty. Once the licence receipt itself was held not to be royalty, the charges could not fall under Article 12(4)(a) as ancillary or subsidiary to royalty. The Department also failed to show that technical knowledge, experience, skill, knowhow or processes were made available to the recipient, so Article 12(4)(b) was not satisfied.

Conclusion: The issue was decided in favour of the assessee. The maintenance charges were held not taxable as fee for included services.

Issue (iii): Whether the claim relating to application of tax at 40% instead of 10% under section 115(1)(b)(B) of the Income-tax Act, 1961 required remand.

Analysis: The claim had not been examined by the Assessing Officer, and verification of the assessee's entitlement was necessary before a decision could be taken in accordance with law.

Conclusion: The issue was remanded to the Assessing Officer for verification and fresh decision.

Final Conclusion: The assessee succeeded on the substantive taxability issues concerning software licence receipts and software maintenance charges, while the rate-application issue was sent back for reconsideration, resulting in partial relief overall.

Ratio Decidendi: Consideration for a limited software licence under an EULA does not constitute royalty, and maintenance charges are not fee for included services unless technical knowledge or skills are made available to the recipient.

---