Fee for Included Services test under the India-USA DTAA requires capability transfer, not mere software support.
Receipts from software updates, patches and on-call support services were held not taxable as Fee for Included Services under Article 12(4)(b) of the India-USA DTAA because the revenue failed to show that technical knowledge, skill, experience or processes were made available to the Indian recipient. Separate invoicing for the two service streams and the continued provision of support indicated that no independent capability was transferred. On refund interest under section 244A, the terminal date for computation was not finally decided; the claim was remitted to the Assessing Officer for verification and recomputation in accordance with law.
Issues: (i) Whether the receipts from supply of software updates and patches and on-call support services were taxable as Fee for Technical Services / Fee for Included Services under Article 12 of the India-USA Double Taxation Avoidance Agreement. (ii) Whether interest on refund under section 244A of the Income-tax Act, 1961 was to be computed up to the date of issuance of the refund voucher.
Issue (i): Whether the receipts from supply of software updates and patches and on-call support services were taxable as Fee for Technical Services / Fee for Included Services under Article 12 of the India-USA Double Taxation Avoidance Agreement.
Analysis: The receipts comprised two distinct streams, namely, software updates and patches and on-call support services, and the record showed separate invoicing for them. The receipts could not be taxed as royalty in view of the settled legal position, and the attempt to tax them as Fee for Included Services under Article 12(4)(b) required proof that technical knowledge, know-how, skill, experience or processes were made available to the recipient. The revenue did not bring cogent material to establish that the Indian customers became to perform the services independently in future. Continued rendition of the support services also indicated absence of any such transfer of capability.
Conclusion: The receipts were not taxable as Fee for Included Services under Article 12(4)(b) of the India-USA Double Taxation Avoidance Agreement, and the issue was decided in favour of the assessee.
Issue (ii): Whether interest on refund under section 244A of the Income-tax Act, 1961 was to be computed up to the date of issuance of the refund voucher.
Analysis: The claim required verification of the assessee's contention regarding the terminal date for calculation of statutory interest. The matter was therefore directed to be examined by the Assessing Officer in accordance with law.
Conclusion: The claim was remitted for verification and recomputation in accordance with law.
Final Conclusion: The assessment additions were deleted on the principal taxability issue, while the refund-interest claim was sent back only for limited verification, resulting in a partial relief to the assessee.
Ratio Decidendi: For income to qualify as Fee for Included Services under the India-USA treaty, the revenue must establish that the service recipient was made able to apply the technical knowledge or skill independently, and mere provision of support services without such transfer does not satisfy the treaty test.