Outright purchase of designs and drawings is not royalty where ownership passes without a restricted right to use.

A fixed-price outright purchase of designs and drawings from a German party was treated as acquisition of ownership in technical documents, not as payment for the use of, or a restricted right to use, those designs. On that basis, the amount did not constitute royalty under section 9 of the Income-tax Act, 1961 or the applicable DTAA, and tax was not required to be deducted under section 195(2). The Tribunal distinguished authority dealing with specialised technical information supplied for exclusive use under continuing restrictions, and held that the Finance Act, 2007 amendment to section 9 did not change the result because the payment did not fall within clauses (v), (vi) or (vii).

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Issues: Whether the amount paid for outright purchase of designs and drawings from a German party constituted royalty chargeable to tax under section 9 of the Income-tax Act, 1961 and the DTAA so as to require deduction of tax under section 195(2).

Analysis: The payment was for purchase of designs and drawings at a fixed price. The decisive feature was that the transaction was an outright purchase of technical documents, not a payment for the use of designs or a restricted right to use them. The cited High Court decision on supply of specialised technical information was distinguished because, there, the foreign party had supplied information for exclusive use by the Indian company under continuing restrictions, whereas the present case involved sale of drawings without such restrictions. The Tribunal followed its earlier view that payment made for acquiring ownership in the property is not royalty. The amendment to section 9 by the Finance Act, 2007 did not alter the position because it applied only to income falling within clauses (v), (vi) and (vii) of section 9(1), and the amount in question did not fall within those clauses.

Conclusion: The payment was not royalty and was not taxable in the hands of the non-resident on that basis; the assessee was not required to deduct tax under section 195(2).

Final Conclusion: The revenue's challenge failed and the assessee's treatment of the remittance was upheld.

Ratio Decidendi: A fixed-price outright purchase of designs and drawings, without a restricted right to use, does not constitute royalty under section 9(1) of the Income-tax Act, 1961 or the applicable DTAA.

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