Service permanent establishment, software licence characterization, and no section 234B interest for a non-resident

A service permanent establishment may arise under the India-USA DTAA where a turnkey arrangement and coordinated project activities in India are carried out by the non-resident and its Indian subsidiary, including expatriate personnel rendering services in India for more than 90 days. A restricted software licence that confers only operational use rights, without transferring essential copyright rights, is treated as payment for a copyrighted article rather than royalty; the receipts are therefore business profits. Interest under section 234B is not leviable on a non-resident where the income is subject to tax deduction at source and advance tax liability does not arise in the same manner.

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Issues: (i) Whether the Indian subsidiary constituted a permanent establishment of the non-resident assessee under the India-USA DTAA; (ii) Whether receipts from licensing software were royalty or business profits; (iii) Whether interest under section 234B was leviable on the non-resident assessee.

Issue (i): Whether the Indian subsidiary constituted a permanent establishment of the non-resident assessee under the India-USA DTAA.

Analysis: The contracts with the Indian customer showed a turnkey arrangement in which the assessee and its Indian subsidiary were jointly responsible for supply, installation, commissioning, testing and operational completion of the project. Expatriate personnel associated with the assessee's group rendered services in India for more than 90 days within the relevant period, and the activities fell within the inclusive service-permanent-establishment concept under the treaty.

Conclusion: The Indian subsidiary was held to be a service permanent establishment of the assessee, against the assessee.

Issue (ii): Whether receipts from licensing software were royalty or business profits.

Analysis: The software transaction was examined in the light of the Copyright Act, 1957 and the treaty. The licence conferred only a restricted right to use the software for operational purposes and did not transfer any of the essential rights in copyright. The payment was therefore for a copyrighted article and not for copyright itself, and the binding Special Bench decision on the same issue was followed.

Conclusion: The software receipts were held not to be royalty and were treated as business profits, in favour of the assessee.

Issue (iii): Whether interest under section 234B was leviable on the non-resident assessee.

Analysis: The levy of interest was tested against the principle that where the non-resident's income is subject to tax deduction at source, advance tax liability does not arise in the same manner. The Supreme Court authority on the point was applied.

Conclusion: Interest under section 234B was held not leviable, in favour of the assessee.

Final Conclusion: The appeals were disposed of by sustaining the finding on permanent establishment, rejecting the revenue's royalty theory, and deleting the interest levy under section 234B, with only the dismissed and consequential grounds not affecting the substantive outcome.

Ratio Decidendi: A restricted licence to use software that does not convey the essential rights in copyright is a transfer of a copyrighted article and not royalty, and personnel rendering treaty-covered services in India for the requisite duration can create a service permanent establishment.

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