Income earned by NR from supply of hardware alongwith embedded software was business receipt and not royalty

13 November 2014
A question came before Tax Tribunal as to whether software embedded in hardware would constitute royalty or business profits.The facts of the case and decision of tax tribunal is as under:


  • The assessee was a company incorporated in France and was a tax resident of France. It was in the business of manufacturing, trading and supplying of equipment and services for GSM cellular radio telephones system.
  • During the assessment proceedings, the Assessing Officer asked the assessee to furnish the details of revenue received from India. However, the assessee did not furnish any details. On the other hand, it requested to take the sales in India at Euro 27 million.
  • Since the assessee did not give the exact figures of sales and details thereof, the Assessing Officer estimated the assessee's revenue in India at US $ 40 million.
  • Before the Commissioner (Appeals), the assessee filed an application under rule 46A of 1962 Rules in which it filed additional evidence which included the details of sales for the financial year under consideration showing the sales at Euro 27,307,776.
  • The Assessing Officer objected to the admission of additional evidence on the ground that sufficient opportunity was allowed to the appellant during assessment proceedings but the assessee did not furnish the required information.
  • The Commissioner (Appeals) after considering the Assessing Officer's objection, admitted the additional evidence. He also accepted figure of sales shown by the assessee.


  • From a perusal of the assessment order, it was found that the Assessing Officer asked the assessee to furnish the details of the revenue received from India. The assessee requested the Assessing Officer to take the revenue at Euro 27 million. Thereafter, the Assessing Officer, without allowing any further opportunity, estimated the same at US $ 40 million. When the Assessing Officer was not satisfied with the assessee's estimate, he should have allowed at least one more opportunity to the assessee intimating it that if it did not furnish the details, then the sales would be estimated at US $ 40 million.
  • Therefore, when before the Commissioner (Appeals) the assessee furnished complete details of the sales made in India, he was fully justified in admitting the same as additional evidence. He allowed the opportunity to the Assessing Officer to verify such additional evidence and the Commissioner (Appeals) has recorded the finding that no discrepancy in the details of sales made in India was pointed out by the Assessing Officer in the remand report.
  • He, therefore, directed the Assessing Officer to accept the sales at Euro 27,307,776 as per the details furnished by the assessee.
  • Considering the facts of the case, there is no infirmity in the order of the Commissioner (Appeals) and the Assessing Officer is directed to adopt the sales as per the details of sales furnished by the assessee in appellate proceedings.
  • Further, in appellate proceedings, the assessee, for the first time, has raised an argument that the sales made to 'A' Limited should be excluded. No such argument was raised either before the Assessing Officer or before the Commissioner (Appeals). Before the Assessing Officer, the assessee stated that the sales may be taken at Euro 27 million on estimated basis. The Assessing Officer did not accept the same and estimated the sales at US $ 40 million. Before the Commissioner (Appeals), the assessee itself furnished the complete details of the sales amounting to Euro 27,307,776 and the same was accepted by the Commissioner (Appeals). Therefore, ground raised by assessee is neither arising from the order of the Assessing Officer nor from the order of the Commissioner (Appeals). The sales have been accepted as per the details furnished by the assessee itself before the Commissioner (Appeals). In view of the above, there is no merit in this ground of the assessee's appeal. The same is rejected.
  • Coming to question of taxability of amount received by assessee, following order passed by Tribunal in assessee's own case relating to earlier assessment year, it is held that the revenue received by the assessee on account of supply of software which was embedded in hardware was not in the nature of royalty. Thus, the entire receipt from supply of equipment including hardware and software would be treated as business receipt and would be taxed as business profits in accordance with article 7 of the Double Taxation Avoidance Agreement.