Software licence and maintenance payments: non-exclusive, non-transferable use without copyright transfer is not royalty or included services.

Payments for a non-exclusive, non-transferable end-user software licence, where no source code or copyright is transferred, are treated as royalty only if they involve transfer of copyright rights; applying Engineering Analysis, such payments are not royalty under section 9(1)(vi) or Article 12 of the India-USA DTAA. Annual maintenance charges are not taxable as fee for technical services or included services merely because they are linked to software supply; Article 12(4)(a) does not apply once the licence fee is not royalty, and Article 12(4)(b) applies only where technical knowledge, experience, skill or know-how is made available to the recipient. On these principles, the additions were deleted and no substantial question of law arose.

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Issues: (i) Whether consideration received for granting end user software licence rights was taxable as royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 12 of the India-USA DTAA. (ii) Whether annual maintenance charges were taxable as fee for technical services or fee for included services under section 9(1)(vii) of the Income-tax Act, 1961 and Article 12 of the India-USA DTAA.

Issue (i): Whether consideration received for granting end user software licence rights was taxable as royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 12 of the India-USA DTAA.

Analysis: The licence granted to customers was found to be non-exclusive and non-transferable, with no access to source code. In such circumstances, no copyright in the software was transferred. The issue was covered by the Supreme Court decision in Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT, which held that payments for use of software in such a manner do not amount to royalty.

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

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

Analysis: The annual maintenance charges were treated by the revenue as ancillary or subsidiary to the alleged royalty, but once the licence fee itself was held not to be royalty, Article 12(4)(a) had no application. The services were also examined under Article 12(4)(b), and it was found that the assessee had not made available technical knowledge, experience, skill or know-how to the recipients.

Conclusion: The receipts were not taxable as fee for technical services or fee for included services and the issue was decided in favour of the assessee.

Final Conclusion: No substantial question of law arose and the revenue's challenge to the tribunal's deletion of the additions was rejected.

Ratio Decidendi: Payments for a non-exclusive, non-transferable software licence without transfer of copyright are not royalty, and maintenance payments are not taxable as included services unless the services make available technical knowledge, experience, skill or know-how to the recipient.

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