Embedded software in hardware is not royalty when supplied as part of a composite sale of goods.

Consideration for software supplied as an embedded component of hardware was treated as payment for goods, not royalty, because the software had no independent existence and merely enabled the equipment to function. Where the hardware and software were supplied as a composite unit, the payment could not be characterised as a separate licence fee or brought to tax under both domestic royalty provisions and the applicable treaty. On those facts, section 9(1)(vi) was not attracted, and the embedded software receipts were outside royalty taxation.

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Issues: Whether consideration for supply of software embedded in hardware supplied to customers constituted royalty under Section 9(1)(vi) of the Income-tax Act and the relevant double taxation avoidance agreement.

Analysis: The Court followed the earlier binding decision holding that where software is embedded in the hardware system supplied as a composite unit, the software has no independent existence, cannot be treated as separately licensed for royalty purposes, and merely facilitates the functioning of the equipment. On those facts, the payment received for such supply is for goods and not royalty, and the same receipt cannot be assessed under two different heads or treaty articles.

Conclusion: The supply of embedded software did not constitute royalty, and Section 9(1)(vi) was not attracted.

Final Conclusion: No substantial question of law arose, and the Revenue's challenge failed.

Ratio Decidendi: Software supplied as an integral, embedded component of hardware, without independent existence or separate exploitable copyright rights, is not royalty but part of a sale of goods.

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