Royalty from non-resident OEMs held not taxable in India absent a permanent establishment or Indian accrual.

Royalty received from non-resident OEMs located outside India was not taxable in India where the revenue failed to establish that those OEMs had a permanent establishment in India or that the royalty independently accrued in India for the year under consideration. The analysis followed earlier coordinate bench decisions in the assessee's own case, which had already held that royalty from OEMs manufacturing outside India was outside the Indian tax net. The additions made on this basis were directed to be deleted.

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Issues: Whether royalty received from non-resident OEMs without manufacturing presence in India was taxable as royalty under section 9(1)(vi)(c) of the Income-tax Act, 1961 and Article 12 of the India-US Double Taxation Avoidance Agreement.

Analysis: The issue was examined in the light of earlier coordinate bench decisions in the assessee's own case for prior assessment years. The material on record showed that the assessee had offered royalty to tax in respect of OEMs having a presence in India, while the disputed receipts related to OEMs located outside India. The assessing authority did not bring material to establish that those foreign OEMs had a permanent establishment in India or that the royalty had accrued in India on independent facts for the year under consideration. The additions were founded substantially on earlier assessment orders and technical reports relating to different years, whereas the earlier decisions had already held that royalty from OEMs located outside India was not taxable where the manufacturing activity took place outside India.

Conclusion: The royalty received from non-resident OEMs outside India was held not taxable in India, and the additions made on that basis were directed to be deleted.

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