SAP system access was not royalty; no copyright right, qualifying process, or permanent establishment meant no Indian tax.

Access to an SAP system for data exchange and report generation was held not to constitute equipment royalty, because the relevant domestic definition for the year did not then include equipment royalty and the taxpayer could rely on the more beneficial treaty-linked domestic rule. The payment also did not amount to process royalty, as it was only limited access to an ERP platform and not use of a qualifying process, and the deeming provisions in Explanations 5 and 6 were inapplicable. It further was not royalty for software or copyright use, since no copyright right or licence to commercially exploit software was transferred. Treated as business profits, the amount was not taxable in India absent a permanent establishment.

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Issues: (i) Whether consideration received for access to the SAP system was taxable as equipment royalty under section 9(1)(vi) of the Income-tax Act, 1961. (ii) Whether the payment could be taxed as process royalty, including under Explanations 2, 5 and 6 to section 9(1)(vi). (iii) Whether the payment was taxable as royalty for use of computer software or a copyright right under clause (v) and Explanation 4 to section 9(1)(vi). (iv) Whether the amount, if treated as business profits under the DTAA, could be taxed in India in the absence of a permanent establishment.

Issue (i): Whether consideration received for access to the SAP system was taxable as equipment royalty under section 9(1)(vi) of the Income-tax Act, 1961.

Analysis: For the relevant assessment year, the definition of royalty in Explanation 2 to section 9(1)(vi) did not include equipment royalty. Clause (iv a), which introduced that concept, was inserted only later with effect from 1 April 2002. In view of section 90(2), the assessee was entitled to rely on the more beneficial domestic law. Since the domestic provision then applicable did not cover equipment royalty, the payment could not be assessed on that basis.

Conclusion: The answer is against the Revenue and in favour of the Assessee.

Issue (ii): Whether the payment could be taxed as process royalty, including under Explanations 2, 5 and 6 to section 9(1)(vi).

Analysis: The payment was for limited access to the SAP system for exchange of data and generation of reports, not for transfer of rights in, use of, or imparting information concerning any process of the kind contemplated by clauses (i) to (iii) of Explanation 2. Explanation 6, which enlarges the meaning of process to cover transmission by satellite, cable, optic fibre or similar technology, was held to be directed to live transmission and not to access to an ERP system used as a standard business facility. Explanation 5 also did not apply because the payment was not consideration in respect of any right, property or information as contemplated by that deeming provision.

Conclusion: The answer is against the Revenue and in favour of the Assessee.

Issue (iii): Whether the payment was taxable as royalty for use of computer software or a copyright right under clause (v) and Explanation 4 to section 9(1)(vi).

Analysis: The assessee had only provided access to the SAP system; it had not transferred any right or licence in respect of copyright or granted a right to commercially exploit software. The governing principle was that royalty for software requires transfer of rights in a copyright, not merely use of a copyrighted article. Explanation 4 also did not assist the Revenue because there was no transfer of the right to use computer software, only access to a system for internal business purposes.

Conclusion: The answer is against the Revenue and in favour of the Assessee.

Issue (iv): Whether the amount, if treated as business profits under the DTAA, could be taxed in India in the absence of a permanent establishment.

Analysis: Once the amount was held not to be royalty, it fell to be examined as business profits under the treaty. Under the DTAA, such profits are taxable in India only if the foreign enterprise has a permanent establishment in India. On the facts found, the assessee had no permanent establishment in India, so the profits were not taxable in India.

Conclusion: The answer is against the Revenue and in favour of the Assessee.

Final Conclusion: The assessment could not be sustained on any of the proposed royalty theories, and the treaty position also prevented taxation in India as business profits. No substantial question of law arose for interference.

Ratio Decidendi: For the relevant year, access to a software-enabled business system without transfer of copyright rights, software rights, or a qualifying process does not constitute royalty under section 9(1)(vi); absent a permanent establishment, the resulting business profits are not taxable in India under the DTAA.

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