Software licence payments were held not to be royalty or fees for technical services under the treaty.

Offshore supply of software under a non-exclusive, non-transferable licence was held not to give rise to royalty or fees for technical services under the Income-tax Act and the India-Netherlands DTAA. The arrangement conveyed only a restricted right to use the software for internal purposes; it did not transfer any rights in or over copyright, since ownership of intellectual property, source code, modification, derivative, reverse engineering and commercial exploitation rights remained with the licensor. Incidental copying or storage did not alter that character. The receipt also was not fees for technical services, because no technical knowledge, skill, know-how or processes were made available, and installation, commissioning and training were outside the supplier's scope. The issue was decided in favour of the assessee.

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Issues: Whether consideration received for offshore supply of software under a non-exclusive, non-transferable licence amounted to royalty or fees for technical services under the Income-tax Act, 1961 and the India-Netherlands DTAA.

Analysis: The software was supplied from outside India and consideration was received outside India, with title to the tangible media passing abroad and no permanent establishment in India. The controlling question was whether the agreement conveyed any rights in or over copyright, or merely permitted use of a copyrighted product. Applying the distinction between transfer of copyright and transfer of copyrighted article, the licence terms showed that the customer obtained only a restricted right to use the software for internal purposes, while ownership of intellectual property rights, source code, modification rights, derivative rights, reverse engineering rights, and commercial exploitation remained with the licensor. Any copying or storage was only incidental to permitted use and did not amount to conferment of copyright rights. The contract also did not involve technical services or make available technical knowledge, experience, skill, know-how, or processes, since installation, commissioning, and training were excluded from the applicant's scope and entrusted to an affiliate.

Conclusion: The receipt was not royalty and was not fees for technical services; the issue was decided in favour of the assessee.

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