Receipt basis taxation, software licence payments, and ad hoc transfer pricing adjustments were rejected on settled treaty principles.

Royalty and fees for technical services were analysed under the treaty framework as taxable on receipt basis, and the assessment on accrual basis was rejected in line with earlier decisions in the assessee's own case. Consideration for supply of software was held not to constitute royalty where the arrangement involved only a restricted, non-exclusive licence without transfer of copyright, so the receipts were not taxable as royalty under either the Act or the treaty. The transfer pricing adjustment on technical service transactions was also deleted because the arm's length price had been fixed by an ad hoc uplift without a proper method-based analysis, and the record disclosed no defect in the assessee's study.

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Issues: (i) Whether royalty and fees for technical services income was taxable on receipt basis or accrual basis; (ii) whether consideration for supply of software constituted royalty; (iii) whether the transfer pricing adjustment on technical service transactions was sustainable.

Issue (i): Whether royalty and fees for technical services income was taxable on receipt basis or accrual basis.

Analysis: The issue was covered by earlier decisions in the assessee's own case and by the binding view that, under the applicable treaty framework, royalty and fees for technical services were taxable upon payment or receipt. The assessment could not be sustained on accrual basis where the treaty language and the settled position in the assessee's own litigation supported taxation on actual receipt.

Conclusion: The issue was decided in favour of the assessee and the income was held taxable on receipt basis.

Issue (ii): Whether consideration for supply of software constituted royalty.

Analysis: The software receipts were examined in the light of the contractual restrictions, the integrated nature of the software with the equipment, and the later binding ruling on software payments. Applying the settled principle that a limited, non-exclusive licence to use software without transfer of copyright does not amount to royalty, the receipts from software supply were held not chargeable as royalty either under the Act or under the treaty.

Conclusion: The issue was decided in favour of the assessee and the software receipts were held not to be royalty.

Issue (iii): Whether the transfer pricing adjustment on technical service transactions was sustainable.

Analysis: The adjustment was made on an ad hoc basis without a proper method-compliant determination of arm's length price. The assessee's reconciliation explanation, the receipt-basis accounting, and the lack of any defect in the transfer pricing study meant that a blanket mark-up could not be imposed. The comparable treatment of the related Indian entities also weighed against the adjustment.

Conclusion: The issue was decided in favour of the assessee and the transfer pricing adjustment was deleted.

Final Conclusion: The appeal succeeded on the substantive tax and transfer pricing controversies, while the remaining grounds were either consequential or infructuous, resulting in only a partial relief to the assessee.

Ratio Decidendi: Where treaty language and binding precedent require taxation on receipt basis, and where software is supplied under a restricted licence without transfer of copyright, the receipts cannot be assessed as royalty; further, an arm's length price cannot be fixed by an ad hoc uplift without method-based analysis under the transfer pricing rules.

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