DTAA treatment of support services and software payments: no fees for included services or royalty absent make available or copyright rights

Cross charges for corporate support services were not fees for included services under Article 12(4) of the India-US DTAA because the services were broad support functions and did not make available technical knowledge, experience, skill, know-how or processes to the Indian entities. Cross charges for software and related facilities were not royalty under Article 12(3) because the Indian entities obtained no copyright or equivalent proprietary rights in the software, and payment for use of software or facilities alone was insufficient. On both treaty grounds, the withholding-tax position could not be sustained, and the assessee was entitled to the certificate sought.

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Issues: (i) Whether the cross charges for corporate support services constituted fees for included services under Article 12(4) of the India-US Double Taxation Avoidance Agreement. (ii) Whether the cross charges for software and related facilities constituted royalty under Article 12(3) of the India-US Double Taxation Avoidance Agreement.

Issue (i): Whether the cross charges for corporate support services constituted fees for included services under Article 12(4) of the India-US Double Taxation Avoidance Agreement.

Analysis: The services were examined in their factual setting and found to be wide-ranging support functions, including HR, IT, management, finance, tax, legal, procurement and risk support. The definition of fees for included services under the treaty requires either ancillary and subsidiary linkage to royalty-bearing property or the making available of technical knowledge, experience, skill, know-how or processes. The ruling applied the settled meaning of "make available" as requiring transfer of technology or knowledge that enables the recipient to independently apply it after the service ends. On the description of the services, there was no material showing that the Indian entities acquired or absorbed such technical knowledge or were enabled to perform the services themselves without continuing dependence on the provider.

Conclusion: The cross charges did not amount to fees for included services.

Issue (ii): Whether the cross charges for software and related facilities constituted royalty under Article 12(3) of the India-US Double Taxation Avoidance Agreement.

Analysis: The software and IT infrastructure were centrally procured or maintained for group use, but there was no material to show that the Indian entities obtained any copyright or other proprietary right in the software. The settled principle applied was that payment for use of software or facilities does not become royalty unless the payer acquires copyright rights or an equivalent interest in the protected work. The binding effect of the Supreme Court's ruling on software payments was followed, and the pending review petition did not dilute its authority.

Conclusion: The cross charges did not constitute royalty.

Final Conclusion: The withholding-tax rejection could not be sustained on either treaty ground, and the assessee was entitled to the certificate sought.

Ratio Decidendi: Under the India-US DTAA, services are taxable as fees for included services only when they satisfy the treaty's ancillary-subsidiary test or make available technical knowledge, experience, skill, know-how or processes, and software-related payments are not royalty unless copyright or corresponding rights are transferred.

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