Treaty-based royalty taxation turns on receipt basis; embedded software in equipment supply is not separate royalty

Royalty and fees for technical services were held taxable on receipt basis under the applicable treaty framework, not merely on accrual, following the assessee's earlier decisions and Bombay High Court support. The software component supplied with equipment was treated as an inseparable part of the equipment supply and not as a separately sold item, so it could not be split out and characterised independently as royalty. Both issues were decided in favour of the assessee, and the Revenue's appeal failed in full.

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Issues: (i) Whether royalty and fees for technical services were taxable on receipt basis or on accrual basis; (ii) whether the value attributable to software supplied with equipment could be treated as royalty.

Issue (i): Whether royalty and fees for technical services were taxable on receipt basis or on accrual basis.

Analysis: The dispute was governed by the applicable treaty provision and the earlier decisions in the assessee's own case. The finding accepted by the appellate authority was that royalty and fees for technical services were assessable in the year of actual receipt and not merely on accrual. That view was also supported by the Bombay High Court, which held that the amount could be taxed only on receipt basis in terms of the treaty framework.

Conclusion: The issue was decided in favour of the assessee and against the Revenue.

Issue (ii): Whether the value attributable to software supplied with equipment could be treated as royalty.

Analysis: The software was found to be an integral part of the equipment supplied and was not separately sold. The earlier Tribunal rulings had held that the payment for such software, when embedded in the equipment supply, could not be split off and characterised as royalty. Following that consistent view, the addition made by treating the software component as royalty was not sustained.

Conclusion: The issue was decided in favour of the assessee and against the Revenue.

Final Conclusion: The Revenue's appeal failed in full, and the relief granted by the appellate authority was sustained.

Ratio Decidendi: Where treaty provisions require taxation of royalty or fees for technical services on receipt basis, and software is supplied as an inseparable part of equipment rather than as a separate item, the software component cannot be independently treated as royalty.

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