Embedded software in integrated equipment is goods supply, not royalty, so no withholding tax duty arose.

Payment for software embedded in supplied equipment was treated as consideration for an integrated goods supply, because the software had no independent existence or separate use and no copyright rights were transferred. Applying the distinction between a copyrighted article and a copyright right, the tribunal held that the amount was not royalty; the retrospective domestic law amendment did not change the treaty position, and in the absence of a permanent establishment in India no tax was chargeable. Accordingly, no withholding obligation arose under section 195.

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Issues: Whether payment made for purchase of software embedded in supplied equipment constituted royalty liable to withholding tax under section 195 of the Income-tax Act, 1961.

Analysis: The contract was for an integrated supply of hardware with embedded software, and the software had no independent existence or separate use apart from the equipment. Following the jurisdictional High Court decisions on identical facts, such embedded software was treated as part of the goods supplied rather than as a transfer of copyright rights. The distinction between a copyrighted article and a copyright right was applied, and the retrospective amendment to domestic law did not alter the treaty position relied on by the assessee. In the absence of a permanent establishment of the supplier in India, the payment was not chargeable to tax in India and no obligation to deduct tax at source arose.

Conclusion: The payment for embedded software was not royalty and was not subject to deduction of tax at source under section 195; the Revenue's appeals failed.

Ratio Decidendi: Where software is supplied as an inseparable part of integrated equipment and no copyright rights are transferred, the consideration is for supply of goods and not royalty, so no withholding obligation arises under section 195.

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