Software-linked service receipts not taxable as FTS where the make available test is not met; natural justice challenge failed.

Adequate opportunity was found to have been given before the DRP, so the natural justice objection failed, and past treatment in earlier years did not bind the Revenue because there is no res judicata in income-tax proceedings. On the substantive tax issue, receipts from software-linked maintenance support, education and training services were held not taxable as fees for technical services because they were intrinsically connected with the software licences and the Revenue failed to establish the treaty's make available condition. The related service receipts were therefore deleted, and the software licence receipts were not sustained as royalty on the same linked-transaction reasoning.

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Issues: (i) Whether the DRP order suffered from violation of the principles of natural justice and whether the assessee could rely on the rule of consistency and judicial discipline to dispute re-characterisation of receipts; (ii) Whether receipts from sale of software licences were taxable as royalty and whether maintenance support, education and training services were taxable as fees for technical services.

Issue (i): Whether the DRP order suffered from violation of the principles of natural justice and whether the assessee could rely on the rule of consistency and judicial discipline to dispute re-characterisation of receipts.

Analysis: The assessee had been afforded adequate opportunity and had also availed of it. The objections based on natural justice were treated as general and academic. The Tribunal further held that there is no res judicata in income-tax proceedings and each assessment year is a separate unit, so past treatment in earlier years does not preclude a different view for the year under appeal.

Conclusion: The challenge on natural justice and consistency failed and was decided against the assessee.

Issue (ii): Whether receipts from sale of software licences were taxable as royalty and whether maintenance support, education and training services were taxable as fees for technical services.

Analysis: The Tribunal accepted that the software-related support, maintenance, education and training services were intrinsically and inextricably connected with the software licences and were rendered in connection with their utilisation. Relying on the coordinate Bench decisions in the assessee's own case and the settled position that, where software receipts are not taxable as royalty, closely linked related services cannot be independently characterised as fees for technical services, the Tribunal also found that the Revenue had not shown satisfaction of the make available condition under the treaty. The receipts from these related services therefore could not be taxed as FTS, and the software licence receipts were not sustained as royalty on the reasoning adopted for the linked transactions.

Conclusion: The addition on the related service receipts was deleted and the assessee succeeded on the substantive royalty and FTS issue.

Final Conclusion: The appeal succeeded only in part, with the Tribunal upholding the rejection of the procedural objections but granting relief on the substantive taxability of the software-related receipts.

Ratio Decidendi: Where software receipts are not taxable as royalty, services that are intrinsically linked to the utilisation of that software cannot be taxed as fees for technical services in the absence of proof that the treaty's make available condition is satisfied.

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