Royalty for trade-mark use in India held taxable as income deemed to accrue under treaty-consistent source rules.

Royalty paid for a licence to use a trade-mark in India was treated as deemed to accrue or arise in India under section 9(1)(vi) because the right was exercised in India to earn income from an Indian source. The treaty source rule in article 12(7) was read consistently with the statute, and the two sub-paragraphs were held not to be mutually exclusive. Since the trade-mark was used in India for business operations generating income there, the agreement did not provide a more beneficial contrary result, so the royalty remained taxable in India.

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Issues: Whether royalty paid by a non-resident for grant of a licence to use a trade-mark in India is deemed to accrue or arise in India and is taxable in India under the Income-tax Act and the applicable double taxation agreement.

Analysis: The royalty was payable by a non-resident, but the agreements showed that the payment was made in consideration of the right to use the trade-mark in India through the Indian company during the phase-out period. Under section 9(1)(vi) of the Income-tax Act, royalty is deemed to accrue or arise in India not only when paid by a resident for use in a business carried on in India, but also when it is payable in respect of rights or property used for making or earning income from any source in India. The trade-mark was used in India for the business operations generating income there, so the statutory deeming provision was attracted. Under article 12(7) of the treaty, royalties can also be deemed to arise in India where the right or property giving rise to the royalty is used in India; the two sub-paragraphs were held not to be mutually exclusive, and the interpretation consistent with the statute was preferred. Since the right to use the trade-mark was exercised in India, the treaty did not afford a more beneficial contrary result.

Conclusion: The royalty was liable to Indian tax and was deemed to accrue or arise in India.

Final Conclusion: The ruling answered the referred question in the affirmative and upheld Indian taxability of the royalty payment.

Ratio Decidendi: Royalty for use of intellectual property in India is deemed to accrue or arise in India when the property is used to earn income in India, and the treaty source rule is construed to harmonise with that statutory deeming provision where the right is exercised in India.

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