Embedded software payments are not royalty where software is supplied as part of hardware without copyright transfer.

Consideration for embedded software supplied as an integral part of telecom hardware was treated as not taxable in India as royalty under section 9(1)(vi) and Article 13(3) of the India-France DTAA, because no copyright right was transferred and the software formed part of the equipment supply. The analysis followed binding precedent holding that payments for resale or use of computer software under distribution arrangements do not amount to royalty on those facts, including in light of the retrospective explanations inserted to section 9(1)(vi). On that settled position, the Revenue's challenge to deletion of the addition could not be sustained, and the appeal was dismissed.

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Issues: Whether consideration for supply of software embedded in telecom equipment was taxable in India as royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 13(3) of the India-France DTAA, including the effect of the retrospective explanations inserted to section 9(1)(vi).

Analysis: The dispute was governed by earlier decisions on the same question, where supply of embedded software forming an integral part of the hardware was held not to constitute royalty. The same view had been affirmed by the jurisdictional High Court and subsequently by the Supreme Court, which held that amounts paid for resale or use of computer software through distribution arrangements did not amount to royalty and did not give rise to income taxable in India on those facts. In view of that settled position, the Revenue's challenge to the deletion of the addition could not be sustained.

Conclusion: The issue was decided against the Revenue and in favour of the assessee; the software receipts were not taxable as royalty on the facts of the case.

Final Conclusion: The appeal did not merit interference and was dismissed in light of the binding precedent governing software supplies.

Ratio Decidendi: Embedded software supplied as an integral part of hardware, without transfer of a copyright right, does not constitute royalty for tax purposes under the Income-tax Act or the applicable treaty.

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