Software licence receipts are not royalty, and related maintenance charges are not fees for included services where no copyright rights are transferred.

Consideration for a non-exclusive, non-transferable and non-sublicensable licence to use software, where no copyright rights are transferred, is not royalty under the treaty. Ancillary maintenance receipts connected with support, bug fixing and technical assistance also do not become fees for included services merely because they accompany the software supply, and the make available test was not satisfied. The additions were deleted and the assessee succeeded.

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Issues: (i) Whether receipts from sale of software licences constituted royalty; (ii) whether receipts from maintenance services were taxable as fees for included services.

Issue (i): Whether receipts from sale of software licences constituted royalty.

Analysis: The receipts arose from supply of software under arrangements that did not transfer any copyright or any right in the nature of copyright. The end-users and distributor were permitted only to use copyrighted software as an article, without any right to reproduce, sub-license, transfer, reverse engineer, or otherwise exploit copyright. The applicable treaty position, as clarified by the Supreme Court, is that consideration for such use of software is not payment for transfer of copyright rights and therefore does not fall within the concept of royalty.

Conclusion: The software licence receipts were not taxable as royalty and the finding was in favour of the assessee.

Issue (ii): Whether receipts from maintenance services were taxable as fees for included services.

Analysis: The maintenance charges related to support, bug fixing, and technical assistance connected with the software licence. Once the software receipts themselves were held not to be royalty, the ancillary maintenance receipts could not be brought within the treaty provision for fees for included services on the basis that they were ancillary and subsidiary to royalty. The 'make available' test was also not satisfied on the facts found.

Conclusion: The maintenance service receipts were not taxable as fees for included services and the finding was in favour of the assessee.

Final Conclusion: The additions made by the Assessing Officer were deleted and the Revenue's challenge to the appellate order failed.

Ratio Decidendi: Consideration for a non-exclusive, non-transferable, and non-sublicensable licence to use software, where no copyright rights are transferred, is not royalty under the treaty, and ancillary maintenance receipts linked to such software supply do not become fees for included services merely because they accompany the licence.

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