Collaborative research payments were not royalty; withholding tax and related interest under the Income-tax Act were not attracted.

Payments made to a foreign research corporation under a collaborative joint research agreement were treated as cost reimbursement for shared research work, with both parties retaining rights in the research results. The revenue failed to show that the assessee obtained a right to use intellectual property in return for royalty, or that the remittance fell within the statutory meaning of royalty under section 9(1)(vi) of the Income-tax Act, 1961. The payments were therefore not royalty, no tax was deductible under section 195 on that basis, and the interest charged under section 201(1A) was unsustainable.

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Issues: Whether the payments made to the foreign research corporation for a collaborative joint research project constituted royalty, attracting withholding tax under section 195 of the Income-tax Act, 1961, and consequential interest under section 201(1A).

Analysis: The payment was made under agreements for a collaborative research project relating to tight gas sandstone reservoirs. The agreement showed that the expenditure was in the nature of cost reimbursement for a joint research exercise, with both parties having rights in the research results. The Court found that the revenue authorities did not establish that the assessee acquired a right to use intellectual property in consideration of royalty, or that the payment fell within the statutory meaning of royalty under section 9(1)(vi) of the Income-tax Act, 1961. On the material produced, the character of the remittance was not disproved as a reimbursement of research expenses.

Conclusion: The payments were not royalty and no tax was deductible under section 195 on that basis; the interest charged under section 201(1A) was also unsustainable. The assessee succeeded on the issue.

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