Royalty characterization of alloy lease rentals rejected where no right to use technology or design was transferred.

Lease rentals for alloy supplied to refurbish bushings were held not to constitute royalty under the Income-tax Act or the India-USA DTAA because the assessee only provided platinum-rhodium alloy for use in refurbishment and did not transfer any right to use the bushing design or related technology. Royalty requires payment to the person holding the relevant exclusive right, and that condition was absent on the stated facts. The receipt was therefore treated as consideration for alloy supply rather than royalty, and the addition made on that basis was directed to be deleted.

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Issues: Whether the amount received for leasing alloy could be taxed as royalty under the Income-tax Act, 1961 and the India-USA DTAA.

Analysis: The assessee only supplied alloy comprising platinum and rhodium for use in refurbishing bushings, and charged lease rentals on the basis of the weight of alloy leased. The intellectual property relating to the bushing design and technology was held through a separate licensing arrangement with another entity, and the assessee had not granted any right to use intellectual property connected with the bushings. Royalty requires payment to the person having the exclusive right in the property or right used, and the present receipt was only consideration for alloy supplied for refurbishment purposes. The amount therefore could not again be characterised as royalty under the treaty or under the domestic deeming provision invoked by the Assessing Officer.

Conclusion: The issue was decided in favour of the assessee and the addition treating the lease rentals as royalty was directed to be deleted.

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