Royalty for patents used in overseas manufacturing was held not taxable in India absent business use or source of income in India.

Royalty received by a non-resident from OEMs outside India for licensing patents used in manufacturing subscriber units and infrastructure equipment outside India was held not taxable in India. The tribunal noted that the OEMs were not shown to carry on business in India, to use the patented rights in business carried on in India, or to exploit the patents for income from a source in India. Applying coordinate bench and jurisdictional precedents, it held that the royalty deeming provision did not apply on these facts, and the addition was deleted.

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Issues: Whether royalty received by a non-resident from OEMs located outside India for licensing patents used in the manufacture of subscriber units and infrastructure equipment outside India was taxable in India.

Analysis: The royalty arose from licensing of patents for manufacture outside India, and the OEMs were not shown to have carried on business in India or to have used the patented rights for business carried on in India. The record also did not establish that the OEMs used the patents for making or earning income from a source in India. Following the coordinate bench decisions in the assessee's own case and the jurisdictional precedents on business carried on outside India, source of income, and the distinction between a copyrighted article and copyright, the receipts from OEMs located outside India could not be brought to tax under the deeming rule for royalty income.

Conclusion: The royalty income from OEMs located outside India was not taxable in India and the addition was deleted.

Ratio Decidendi: Royalty for patents used in manufacturing carried on outside India is not taxable in India under the royalty deeming provision unless the Revenue proves that the payer carried on business in India or used the rights for earning income from a source in India.

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