Trade mark licence payments treated as royalty, triggering tax deduction at source under the Income-tax Act.

A contractual licence permitting use of a trade mark on products constituted royalty under Explanation 2(i) to section 9(1)(vi) of the Income-tax Act, 1961 because the licensor owned the mark and granted a non-exclusive right to use it for sale, promotion and advertising. The fact that the payment was recurring did not change its character. Once treated as royalty, the assessee was required to deduct tax at source under section 195, and the findings under section 201(1) with consequential interest under section 201(1A) were sustained.

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Issues: Whether the payment made for use of the trade mark was royalty chargeable under the Income-tax Act, 1961 and, consequently, whether the assessee was liable to deduct tax at source under section 195.

Analysis: The payment was made under a licence arrangement by which the assessee was permitted to use the trade mark on its products. The agreement showed that the licensor owned the mark and granted a non-exclusive licence to use it in connection with sale, promotion and advertising of the products. On these facts, the payment was held to be in the nature of royalty within the meaning of Explanation 2(i) to section 9(1)(vi) of the Income-tax Act, 1961. Once the payment was treated as royalty, the obligation to deduct tax at source under section 195 followed. The objection that the payment was recurring and therefore not royalty was rejected.

Conclusion: The payment was royalty and the assessee was liable to deduct tax at source under section 195. The findings under section 201(1) and the consequential interest under section 201(1A) were sustained.

Final Conclusion: The additions and withholding tax liability were upheld, and the assessee's appeals failed.

Ratio Decidendi: A payment made for a contractual licence to use a trade mark on products constitutes royalty under section 9(1)(vi) of the Income-tax Act, 1961, attracting the obligation to deduct tax at source under section 195.

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