Embedded software payments are not royalty when supplied with hardware and no copyright rights are transferred.

Consideration for software embedded in telecommunication equipment was treated as part of the hardware supply, because the software had no independent existence and no copyright rights were transferred to the customer. On that basis, the payment was not characterised as royalty under section 9(1)(vi) of the Income-tax Act, 1961 or Article 13 of the India-France tax treaty. The analysis followed earlier decisions and the Supreme Court's principle that use or resale of computer software, without transfer of copyright, does not create royalty income. The Revenue's additions were therefore unsustainable.

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Issues: Whether consideration for software embedded in telecommunication equipment supplied to customers in India was taxable as royalty under Section 9(1)(vi) of the Income-tax Act, 1961 and Article 13 of the Double Taxation Avoidance Agreement between India and France.

Analysis: The dispute was covered by earlier decisions holding that software embedded in hardware does not have an independent existence and is supplied as an integral part of the equipment. The settled view applied the principle that where the software is inseparable from the hardware and no copyright rights are transferred to the customer, the payment cannot be characterised as royalty. The decision also followed the Supreme Court's ruling that consideration for the use or resale of computer software, in the absence of any transfer of copyright, does not constitute royalty taxable in India.

Conclusion: The amount received for embedded software was not taxable as royalty under the Act or under the tax treaty, and the additions made by the Revenue were unsustainable.

Ratio Decidendi: Consideration for software supplied as an integral part of hardware, without transfer of any right in copyright, is not royalty and is not taxable as such under Section 9(1)(vi) of the Income-tax Act, 1961 or the applicable tax treaty.

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