Drawings and design payments were not royalty where only copyrighted articles were supplied, so no TDS was required.

Payments for drawings and designs supplied by a foreign parent were treated as consideration for copyrighted articles sold on a principal-to-principal basis, not as a transfer of rights in copyright. Because the restrictive legends showed that no underlying copyright was assigned, the payment did not constitute royalty under section 9(1)(vi) or Article 12 of the India-Austria DTAA, and no tax deduction at source was required under section 195. On that basis, the demand raised under section 201 and the related interest under section 201(1A) were not sustainable.

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Issues: Whether the payments made for drawings and designs supplied by the foreign parent company constituted royalty so as to require deduction of tax at source under section 195, and whether the demand raised under section 201 and interest under section 201(1A) were sustainable.

Analysis: The decisive question was whether the assessee had acquired merely a right to use the designs, or had purchased copyrighted articles on a principal-to-principal basis. The design materials were supplied for specific use in manufacture, and the restrictive legends on the hard copies showed that no right in the underlying copyright was transferred. The transaction was therefore treated as a sale of copyrighted articles, not a transfer of rights in copyright. On that footing, the payment did not fall within royalty under section 9(1)(vi) or Article 12 of the India-Austria DTAA, and the TDS provisions were not attracted.

Conclusion: The payments were not royalty, no tax was deductible at source, and the demand under section 201 together with interest under section 201(1A) was not sustainable. The issue was decided in favour of the assessee.

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