Outright sale of designs and drawings was not royalty; no Indian tax withholding applied on the remittance.

An outright supply of designs and drawings prepared abroad was treated as a sale of a design package, not a licence of intellectual property. Applying noscitur a sociis, the terms in section 9(1)(vi) and article 12(3) were read in context, so "design" and "model" did not extend to a transfer where the supplier retained no proprietary rights. The receipt was therefore not royalty and was not taxable in India under section 9(1)(vi); the treaty could not operate as an independent charging provision. The income was treated as business profit, with article 7 governing and article 22 not applying. On that basis, no tax was required to be withheld on the remittance.

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Issues: Whether the consideration paid to the non-resident for supply of designs and drawings constituted royalty taxable in India, or business profits from an outright sale outside India.

Analysis: The agreement, though styled as a service agreement, was held to be in substance an arrangement for outright supply of a package of designs and drawings prepared abroad. The surrounding terms showed that the non-resident acted as a supplier of the design package, with only incidental site visits for explanation or clarification. The expression "royalty" in section 9(1)(vi) of the Income-tax Act, 1961 and in article 12(3) of the treaty had to be read in context with the associated words referring to intellectual property such as patent, invention, secret formula, process, trademark, design and model. Applying noscitur a sociis, the words "design" and "model" could not be extended to an outright sale of drawings and designs in which the seller retained no proprietary right. Since the receipt was not royalty, it was not taxable under section 9(1)(vi); the treaty could not be used as an independent charging provision. The amount was, therefore, business profit, and article 22 did not apply because article 7 governed such income.

Conclusion: The payment was not royalty and was not chargeable to tax in India; the assessee was not required to deduct tax at source on the remittance.

Ratio Decidendi: An outright sale of designs and drawings, without retention of proprietary rights by the transferor, does not constitute royalty where the governing statutory and treaty language refers to intellectual property rights and allied licences or use rights.

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