Software royalty and technical services rules: no royalty without copyright transfer, and treaty limits controlled bandwidth and support service receipts.

Consideration for off-the-shelf software was held not to be royalty where the arrangement involved only a licence or resale right and no transfer of copyright, so the covered software receipts were not taxable as royalty. Receipts from telecom bandwidth facility were also held outside royalty, because the treaty definition was not automatically enlarged by domestic law amendments, and the bandwidth charges did not fall within the applicable treaty provision. Information technology support services were likewise not taxable as fees for technical services, as they did not make available technical knowledge, experience or skill, and no royalty character was established. The disputed additions were therefore deleted on the principal issues, with only a limited concession for two entities left undisturbed.

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Issues: (i) Whether consideration for sale of off-the-shelf software was taxable as royalty; (ii) Whether receipts from use of telecom bandwidth facility were taxable as royalty; (iii) Whether receipts from information technology related support services were taxable as royalty or fees for technical services.

Issue (i): Whether consideration for sale of off-the-shelf software was taxable as royalty.

Analysis: The binding law recognised that payments for resale or use of computer software under end-user or distribution arrangements do not amount to royalty unless there is a transfer of copyright in the software. The assessee's issue had already been decided in earlier years, and the Tribunal followed the Supreme Court's ratio that a licence to use software, without parting with copyright rights, does not generate royalty income. The Tribunal also accepted the limited concession regarding two new recipient companies for which the agreements were not available.

Conclusion: The issue was decided in favour of the assessee for the covered software receipts, with the limited concession-based treatment of the two new companies left undisturbed.

Issue (ii): Whether receipts from use of telecom bandwidth facility were taxable as royalty.

Analysis: The Tribunal applied the earlier coordinate bench view that amendments to the domestic royalty definition could not be automatically imported into the treaty where the treaty language was not correspondingly widened. On parity of facts, bandwidth charges were held not to constitute royalty under the applicable treaty provision.

Conclusion: The addition on account of bandwidth receipts was deleted in favour of the assessee.

Issue (iii): Whether receipts from information technology related support services were taxable as royalty or fees for technical services.

Analysis: The Tribunal found that the services did not make available technical knowledge, experience or skill to the recipient within the meaning of the treaty. Following the earlier coordinate bench ruling on identical facts, the receipts could not be characterised as fees for technical services, and no royalty character was established either.

Conclusion: The addition on account of information technology related support services was deleted in favour of the assessee.

Final Conclusion: The common reasoning led to deletion of the disputed additions on the principal issues, with the appeals resulting in a mixed but overall assessee-favourable outcome.

Ratio Decidendi: Consideration for use or resale of software without transfer of copyright is not royalty, and treaty provisions govern where the domestic law definition is broader but the treaty does not correspondingly expand; services do not amount to technical services unless technical knowledge is made available.

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