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14. In ground no.2, the assessee has challenged addition of ` 11,28,51,401, received from sale of software as royalty.

15. Brief facts are, in the course of assessment proceedings,the Assessing Officer noticed that the assessee has earned receipts from sale of software licenses provided along with the equipment / hardware sold in India. However, such receipts from sale of software licenses were not offered as income. Therefore, the Assessing Officer called upon the assessee to explain why such receipt from sale of software should not be treated as royalty and brought to tax. In response, it was submitted that the assessee has sold imaging equipment (MRI machines) which require specific software to activate / run the equipment which is required to be installed on the systems of the ultimate customers (end users). It was submitted that the software licenses are always sold along with the sale of equipment / hardware. When the equipment is installed at the customer's premises, the software is activated by using the code provided along with the equipment. Thus, the licensing of software follows the Agfa Healthcare N.V. purchase of equipment, meaning thereby, sale of software is inextricably linked to the sale of equipment. The equipment and software put together constitute one single product sold by the assessee. It was submitted that without the relevant software the hardware component cannot function and is redundant. Similarly, the software does not have any independent use and merely facilitates the functioning of the equipment / hardware. Thus, it was submitted that the sale of software licenses cannot be considered as standalone transaction de-hors the sale of equipment. Thus, it was submitted that the sale of software cannot be treated as royalty either under section 9(1)(vi) of the Act or under Article-12(3)(a) of India-Belgium DTAA. Further, it was submitted, the software being embedded to hardware, it has to be considered as part of the hardware, hence, cannot be treated as royalty both under the Act as well as DTAA. In support of such contention, assessee relied upon a number of decisions.

17. The learned Authorised Representative submitted, sale of MRI machines along with embedded software was carried out by the assessee in India through AHIPL. He submitted, for this purpose the assessee has entered into a distribution agreement with AHIPL which is treated as local sales organization (LSO). In this context, he drew our attention to a copy of the said agreement at Page-46 of the paper book. Referring to Article-2 of the agreement, the learned Authorised Representative submitted that the assessee explicitly reserves the right to sell the products directly and to invoice those sales directly to the customers without intervention of the LSO and the LSO is eligible for an agency commission of 3% on the sales effected directly to third party customers in India. Referring to the restrictions and obligations of the parties under the agreement, the learned Authorised Representative submitted, while the assessee is required to supply the LSO with all necessary information for the sale and service of the product, technical back-up, training to employees, necessary sample and demo material, the LSO is required to purchase the product from the assessee only and shall not purchase any similar or closely related Agfa Healthcare N.V. product from any other party without the prior written consent of the assessee during the tenure of the agreement. The LSO is also required to make sales forecast for the product. He submitted, under the terms of the agreement, LSO is required to bear the re-structuring cost relating to the business or the operations of the LSO. He submitted, the agreement between the parties was for indefinite period and the trade mark of the equipment lies with the assessee. The learned Authorised Representative submitted, along with the machine operating software is also provided which is embedded to the system. He submitted, the software provided with the equipment is customer specific and the key to operate the software is given to the end user. He submitted, neither the equipment can operate without software which is in-built nor the software has independent existence. The learned Authorised Representative submitted, charging of price separately in the invoice is purely for the purpose of custom duty and nothing else. He submitted, for that reason alone it cannot be said that the assessee has sold the software independently. The learned Authorised Representative submitted, in case of LSO i.e., AHIPL the Assessing Officer while examining the nature of payment made to the assessee for sale of software treated it as royalty and held that AHIPL was required to deduct tax at source. AHIPL having not deducted tax while making such payment to the assessee, the Assessing Officer Agfa Healthcare N.V. passed orders under section 201(1) and 201(1A) of the Act for assessment years 2008-09 to 2012-13 holding that the payment made to the assessee being of the nature of royalty, AHIPL was required to deduct tax at source, under section 195 of the Act. The learned Authorised Representative submitted, when the disputed issue ultimately reached Tribunal, the Tribunal held that the payment made by AHIPL to the assessee is not in the nature of royalty, hence, there is no need to deduct tax at source. The aforesaid decision was again followed by the Tribunal in case of AHIPL (LSO) while deciding the issue in assessment year 2013-14 and 2014-15. He drew our attention to the relevant observations of the Tribunal on the issue. Thus, he submitted, that once it is held in case of the payer that the payment made for sale of software is not in the nature of royalty, it covers the issue in case of the assessee as well. Thus, he submitted, the payment received by the assessee cannot be treated as royalty and brought to tax.

17. We have carefully analyzed the facts of the case and arguments made by the Ld. Counsel for the assessee as well as counter arguments made by the Ld. Departmental Representative.

The undisputed facts before us are that none of the customers have purchased only machine or only software. There was no customer who purchased only software. Ld. Counsel for the assessee drew our attention on various pages of the paper book to establish that the machine sold by the assessee could not be made operational or functional in the absence of operating software along with the application software. These facts were not controverted by the Ld. Departmental Representative during the course of hearing in response to a specific query put to him by the Bench. It is noted that complete details have been given by the assessee in the paper book at Page-222 and 224. Our attention was also drawn on certificate from the assessee enclosed at Page-225 of the paper book certifying that software supplied by the assessee to end user was for integration with the machine supplied by the assessee and that this software had no other independent use as such, except to enable such machine to function. We have also gone through the End User License Agreement (EULA) entered into by the assessee with the customers wherein there are various clauses which indicate that the software supplied by the assessee was meant only and exclusively for the purpose of making the said machine functional. Clause 2.1 of the agreement provides that customer is granted non-exclusive, non-transferable limited license to use the software and related knowhow on the machine for the sole purpose of scanning the internal / external feature of rough diamond and creating a three dimensional image of these features of rough diamond. Clause 2.2 of the agreement puts certain restrictions upon the customers for any other use of the software in any other machine. This clause restrains the customer from duplicating the software or making any copies, modifications, isolating the software and making it available as a standalone data base or product, removing any product identification, copyright or other proprietary notice from the software or decompiling, disassembling, reverse engineering, or making any other attempt to reconstruct or discover the source code, etc. This clause clearly lays down that customer shall not reproduce the software or any of the documentation provided in connection with the software or related knowhow. It is further noted that clause Agfa Healthcare N.V. 6.2 of the said agreement lays down that the assessee is and shall remain sole and exclusive owner of the right, title and interest in the software and related know. This software cannot be used by the customer except for the operation of the machine. It is further noted by us that the machine was equipped with requisite security controls and hardware locks to stop any type of misuse of software. Clause 10.2 of one of the agreement available at Page-49 is reproduced hereunder for the sake of ready reference:-

21. The Kolkata Bench of the Tribunal in the case of HITT Holland Institute of Traffic Technology B.V. Vs. Deputy Director of Income Tax (supra) while dealing with somewhat similar issue has held that where software is imbedded in equipment supplied for mere purpose of operating equipment, it is not a case giving independent right to use software, amount paid for supply of software is not taxable in India as ‗Royalty' u/s. 9(1)(vi) of the Act.

22. Thus, in view of the facts of the case, documents on record and the various decisions discussed above, we are of the considered view that the software is imbedded in the imaging equipment and inseparable part of hardware. The software without the equipment and the equipment without the software cannot put to use independently. The software and the machine is customer specific and is licensed to the end user. Under such circumstances there is no question of segregating any part of consideration paid for equipment and the software. Accordingly, the grounds raised by the assessee in appeals are allowed. Our view is further fortified by the decision of the Hon'ble Delhi High Court in the case of Commissioner of Income Tax Vs. ZTE Corporation (supra) has held :