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12. Before proceeding further it would be relevant to recapitulate facts in brief. The assessee is engaged in providing health care imaging equipments to hospitals and various diagnostic centres. The assessee is a local Distribution of Agfa Brand imaging equipments, accessories, consumables, etc. The assessee is procuring these imaging equipments from vendors located in Australia, Canada and Belgium. The imaging equipments require specific software/operating system so as to make the machines workable. The contentions of the assessee are that the imaging equipment is pre loaded with the software and is activated with the activation key/code at the time of installation of equipment at the customer‟s premises. The software installed in the equipment is machine specific and customer specific. There are variants of software provided along with the machines which are activated depending upon the need and requirements of the customers. The software supplied along with the machines cannot be used in the imaging machines of any other Brand. Similarly, the imaging machines supplied by the assessee cannot be put to use without the software/operating system developed for AGFA Brand machines. In other words, the machines ITA Nos. 216 to 218, 1361, 1362, 444 to 446, 1572 & 1573/PUN/2014 and software used to activate/initialize the machines are useless without each other. The machine is software dependent. The machine and the software are inextricable linked to each other.

17. After the imaging equipment is installed at the premises of the customers, the software is activated with the Code/product key to initialize the equipment and to make it functional. Once, the product key is punched into the system, after verification of hardware, license details of the software and the customer the equipment is activated and is ready to use as per the requirements of the end user.

18. Now, the next question which arises for consideration is, Whether the part of payments made for purchase of equipment would also include payment for „Royalty‟ in respect of software received along with the equipment. In the instant case, the authorities below have fasten the tax liability on the assessee on the presumption that the payment towards the acquisition of software is in the nature of „Royalty‟. Since, the assessee has failed to deduct tax at source on such payment the assessee has violated the provisions of section 195 of the Act.

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 ITA Nos. 216 to 218, 1361, 1362, 444 to 446, 1572 & 1573/PUN/2014 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 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:-