Royalty from foreign OEMs outside India not taxable under section 9(1)(vi)(c) where use and manufacturing occurred abroad

Royalty received from non-resident OEMs outside India, with no permanent establishment in India, was held not taxable under section 9(1)(vi)(c) where the manufacturing activity and use of the patents occurred outside India and the Revenue failed to establish taxable accrual or presence in India for the years under appeal. The ITAT Delhi followed coordinate bench rulings in the assessee's earlier and later years on identical facts, and found the impugned royalty addition unsustainable. Issues relating to reopening, approval, interest, and penalty were either not argued or were merely consequential and did not require separate adjudication.

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Issues: Whether royalty received from non-resident OEMs located outside India and having no permanent establishment in India was taxable in India under section 9(1)(vi)(c) of the Income-tax Act, 1961.

Analysis: The disputed addition related only to royalty from foreign OEMs, while royalty from Indian-resident licensees was not in issue. The Tribunal noted that in the assessee's earlier and later years, identical facts had already been examined by coordinate benches, which held that royalty from OEMs outside India was not taxable where the manufacturing activity and use of the patents occurred outside India and the Revenue had not brought material to establish taxable presence or accrual in India for the impugned years. The assessment for the years under appeal was also based largely on earlier orders that had subsequently been reversed or held unsustainable on the same issue. Grounds relating to reopening, approval, interest, and penalty were either not argued or consequential and did not require separate adjudication.

Conclusion: The royalty addition under section 9(1)(vi)(c) was not sustainable and was directed to be deleted; the issue was decided in favour of the assessee.

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