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Issues: (i) whether royalty received by the assessee from non-resident OEMs outside India for use of patented CDMA technology in subscriber units and infrastructure equipment was taxable in India under section 9(1)(vi)(c) of the Income-tax Act, 1961 and Article 12(7)(b) of the India-USA DTAA; (ii) whether royalty received under the BREW operator agreement was taxable as royalty in India.
Issue (i): whether royalty received by the assessee from non-resident OEMs outside India for use of patented CDMA technology in subscriber units and infrastructure equipment was taxable in India under section 9(1)(vi)(c) of the Income-tax Act, 1961 and Article 12(7)(b) of the India-USA DTAA.
Analysis: The additions were founded mainly on the view that the OEMs carried on business in India and that the patented technology was used in India because the products were ultimately sold or used in India. The Tribunal noted that the assessee had already offered royalty attributable to OEMs carrying on business in India through PEs, while the impugned additions concerned OEMs located outside India. It further found that the Revenue had not brought fresh material to show that those foreign OEMs had carried on business in India or had used the assessee's patents for such business, and that the assessment order substantially relied on earlier material that was not determinative for the relevant years. Following the earlier coordinate Bench decisions in the assessee's own case, the Tribunal held that manufacture outside India did not by itself create taxability in India and that the Revenue had not discharged the burden required to invoke section 9(1)(vi)(c).
Conclusion: The royalty from non-resident OEMs located outside India was not taxable in India and the addition was not sustainable.
Issue (ii): whether royalty received under the BREW operator agreement was taxable as royalty in India.
Analysis: This issue had already been decided in the assessee's favour in the earlier coordinate Bench ruling dealing with the BREW operator arrangement. The Tribunal followed that decision and the jurisdictional High Court's reasoning distinguishing a copyrighted article from transfer of copyright, and treated the payment as not giving rise to taxable royalty in India.
Conclusion: The BREW operator agreement receipts were not chargeable to tax as royalty in India.
Final Conclusion: The additions made in both appeals were deleted, and the assessee obtained complete relief on the royalty taxation issue.
Ratio Decidendi: For royalty payable by a non-resident under section 9(1)(vi)(c), the Revenue must prove that the non-resident payer carried on business in India or earned income from a source in India through use of the relevant patent rights in India; absent such proof, and where the manufacturing activity is outside India, the royalty is not taxable in India.
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