Receipt-based taxation, embedded software valuation, and no section 234B interest where income is fully subject to tax deduction at source.

Royalty and fees for technical services were held taxable only on receipt where the applicable treaty provision required actual receipt, so accrual-based taxation was rejected. The value of software supplied as an inseparable part of equipment was not treated as royalty, because the software was not separately sold and the embedded-use principle applied. Interest under section 234B was held not leviable where the income was wholly subject to tax deduction at source, since no advance tax liability arose. The disputed additions and interest adjustment were therefore decided in favour of the assessee.

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Issues: (i) whether royalty and fees for technical services were taxable on receipt basis or accrual basis; (ii) whether the value of software supplied along with equipment could be treated as royalty in the hands of the assessee; (iii) whether interest under section 234B of the Income-tax Act, 1961, could be charged where the income was subject to tax deduction at source.

Issue (i): whether royalty and fees for technical services were taxable on receipt basis or accrual basis.

Analysis: The issue had already been decided in the assessee's own case for earlier years. The governing treaty provision required assessment of royalty and fees for technical services only when the amounts were actually received. The earlier view had also been upheld by the jurisdictional High Court.

Conclusion: The income was taxable on receipt basis and not on accrual basis, in favour of the assessee.

Issue (ii): whether the value of software supplied along with equipment could be treated as royalty in the hands of the assessee.

Analysis: The software was supplied as part of the equipment supply and was not separately sold. The earlier decision in the assessee's own case had applied the principle that payment for use of software embedded in equipment did not constitute royalty under the Income-tax Act or the treaty. The same reasoning had been followed in subsequent years.

Conclusion: The value of software could not be treated as royalty, in favour of the assessee.

Issue (iii): whether interest under section 234B of the Income-tax Act, 1961, could be charged where the income was subject to tax deduction at source.

Analysis: The jurisdictional High Court had held that where the entire income was liable to tax deduction at source, the assessee had no corresponding liability to pay advance tax and interest under section 234B did not arise. That view was followed in the assessee's own earlier year.

Conclusion: Interest under section 234B was not leviable, in favour of the assessee.

Final Conclusion: All three disputed additions or adjustments were resolved against the Revenue, and the assessment was sustained only to the extent accepted by the appellate order in favour of the assessee.

Ratio Decidendi: Where a treaty specifically taxes royalty and fees for technical services on receipt, such income cannot be brought to tax on accrual; software supplied as an inseparable part of equipment supply is not royalty merely by its independent valuation; and no interest under section 234B arises when the income is wholly subject to tax deduction at source.

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