Embedded software supply was treated as business income, not royalty, and Section 234B interest was held inapplicable.

Consideration for embedded software supplied with telecom equipment was treated as business income, not royalty, because the software was integral to the hardware, not independently exploitable, and no copyright rights under the Copyright Act were transferred; separate invoicing and nomenclature did not change the real nature of the transaction. The Court also noted that where treaty-based tax treatment of the non-resident income applied on the facts, interest under Section 234B was not leviable. Both issues were decided against the Revenue and in favour of the assessee.

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Issues: (i) Whether consideration received for supply of embedded software along with telecom equipment constituted royalty under Section 9(1)(vi) of the Income-tax Act, 1961 and Article 12(3) of the Indo-China Double Taxation Avoidance Agreement. (ii) Whether interest under Section 234B of the Income-tax Act, 1961 was leviable.

Issue (i): Whether consideration received for supply of embedded software along with telecom equipment constituted royalty under Section 9(1)(vi) of the Income-tax Act, 1961 and Article 12(3) of the Indo-China Double Taxation Avoidance Agreement.

Analysis: The software supplied with the hardware was held to be integral to the equipment and not independently exploitable by the customer. The Court distinguished between transfer of a copyright and transfer of a copyrighted article, and held that the licence restrictions, absence of source-code access, and the nature of the supply showed that no copyright rights under Section 14 of the Copyright Act, 1957 were parted with. Mere separate invoicing or nomenclature did not alter the true character of the transaction. Applying the earlier software-supply precedents, the receipt was treated as business income and not royalty.

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

Issue (ii): Whether interest under Section 234B of the Income-tax Act, 1961 was leviable.

Analysis: The liability to interest was governed by the settled position that where the tax treatment of the non-resident's income follows the treaty position already recognised by the Court, interest under Section 234B was not exigible on the facts presented. The Court followed the binding precedent relied upon for this issue and held that the interest demand could not survive.

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

Final Conclusion: Both questions framed by the Court were answered against the Revenue. The Revenue's appeals failed and the assessee succeeded on the substantive tax issues.

Ratio Decidendi: Supply of software that is inseparable from hardware and does not involve transfer of any copyright rights is consideration for goods or business income and not royalty; interest under Section 234B does not arise where the governing treaty and precedent exclude such levy on the facts of the case.

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