Software licence cross-charges are neither fee for included services nor royalty absent transfer of technical know-how or copyright rights.

Receipts arising from cross-charged third-party software licence costs were not taxable as fee for included services because Article 12(4) of the India-Canada DTAA requires technical or consultancy services that "make available" technical knowledge, skill or know-how, and mere use of software did not satisfy that test. The same receipts were also not taxable as royalty under Article 12(3) because payment for a non-exclusive software licence for a copyrighted article, without any transfer of copyright or right of commercial exploitation, is not royalty. The addition made on this basis could not be sustained.

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Issues: (i) Whether receipts from cross-charged third-party software licence costs were taxable as fee for included services under Article 12(4) of the India-Canada DTAA and section 9(1)(vii) of the Income-tax Act, 1961. (ii) Whether the same receipts were taxable as royalty under Article 12(3) of the India-Canada DTAA.

Issue (i): Whether receipts from cross-charged third-party software licence costs were taxable as fee for included services under Article 12(4) of the India-Canada DTAA and section 9(1)(vii) of the Income-tax Act, 1961.

Analysis: Fee for technical services under Article 12(4) requires technical or consultancy services that also satisfy the "make available" condition in clause (b). The expression "make available" means that the recipient must be enabled to apply the technical knowledge, experience, skill, know-how or processes on its own in future without recourse to the service provider. Mere use of software, or payment connected with use of a product embodying technology, does not by itself amount to making available technical knowledge or skill. On the facts, the group entities only used third-party software licences and did not receive any technical knowledge or skill capable of independent future application.

Conclusion: The receipts were not taxable as fee for included services.

Issue (ii): Whether the same receipts were taxable as royalty under Article 12(3) of the India-Canada DTAA.

Analysis: Consideration for use of a non-exclusive software licence for a copyrighted article, without conferring any copyright or right of commercial exploitation, does not constitute royalty under the DTAA. The payment was for use of software supplied by third-party vendors and not for transfer of any copyright interest. The ratio of the Supreme Court on software payments was applied to hold that such receipts do not fall within royalty.

Conclusion: The receipts were not taxable as royalty.

Final Conclusion: The addition made on account of GIT charges could not be sustained, and the assessee succeeded on the core taxability issue.

Ratio Decidendi: Payments for mere use of third-party software licences are not taxable as FIS unless technical knowledge is made available to the recipient, and they are not royalty where only a copyrighted article is supplied without any transfer of copyright rights.

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