Offshore supply and software payments were held non-taxable, with no royalty classification and no section 234B interest.

Offshore supply of hardware was treated as non-taxable in India because title and risk did not pass in India, the acceptance test was not determinative, and the contract/facts did not establish a business connection or permanent establishment for attributing profits. Consideration for software distribution was held not to be royalty, following the principle that payments for resale or use of software without transfer of copyright rights are business income and not taxable as royalty under the Act or treaty. Interest under section 234B was also held unsustainable for the relevant pre-2013 period in the circumstances covered by the governing Supreme Court ruling.

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Issues: (i) whether the assessee had a business connection or permanent establishment in India so as to justify taxation of profits from supply of hardware and attribution of income in India; (ii) whether consideration for supply of software constituted royalty taxable in India; (iii) whether interest under section 234B of the Income-tax Act, 1961 could be levied for the relevant assessment year.

Issue (i): whether the assessee had a business connection or permanent establishment in India so as to justify taxation of profits from supply of hardware and attribution of income in India.

Analysis: The contract terms and the factual matrix were found not to show that title or risk in the equipment passed in India. The acceptance test was held not to be the determinative event for passage of property, and the place of negotiation, signing, or formal acceptance was treated as irrelevant where the offshore supply was completed outside India. The material relied upon by the lower authority was held not to distinguish the year in question from the earlier binding decision in the assessee's own case. On that basis, the assessee was held to have no business connection or permanent establishment in India for the offshore supply segment.

Conclusion: In favour of the assessee. No business connection or permanent establishment in India was found, and no attribution of profits on the hardware supply survived.

Issue (ii): whether consideration for supply of software constituted royalty taxable in India.

Analysis: The issue was held to be covered by the later Supreme Court ruling on computer software payments, which concluded that payments for resale or use of software under distribution arrangements do not amount to royalty or give rise to taxable income in India where no copyright right is transferred. Applying that principle, the software receipts were treated as business income not chargeable as royalty under the treaty or the Act.

Conclusion: In favour of the assessee. The software consideration was not taxable as royalty.

Issue (iii): whether interest under section 234B of the Income-tax Act, 1961 could be levied for the relevant assessment year.

Analysis: The issue was decided by following the Supreme Court ruling that, for the relevant pre-2013 period, interest under section 234B is not leviable in such circumstances.

Conclusion: In favour of the assessee. Interest under section 234B was not sustainable for the relevant year.

Final Conclusion: The assessee succeeded on the substantive taxability issues and the Revenue's challenges failed, resulting in deletion of the disputed additions and relief on interest for the year in question.

Ratio Decidendi: Offshore supply is not taxable in India where property and risk pass outside India and the acceptance test does not govern transfer of title; payments for software under such arrangements are not royalty absent transfer of copyright rights; and section 234B interest is not leviable for the relevant pre-2013 period in these circumstances.

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