Royalty taxability on foreign OEM licences and software payments turns on business in India and transfer of copyright rights.

Royalty paid to non-resident OEMs for manufacture of subscriber units and infrastructure equipment outside India was not taxable in India under section 9(1)(vi)(c) and Article 12(7)(b) because the OEMs manufactured outside India, title passed outside India, and the arrangements reflected business with India rather than business in India. BREW receipts were also not taxable as royalty because the licence covered only a copyrighted article, with no transfer of copyright or rights in copyright. The article reiterates that the deeming provision for royalty must be strictly construed and that software payments are not royalty where copyright rights are not conveyed.

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Issues: (i) Whether royalty received from non-resident OEMs for manufacture of subscriber units and infrastructure equipment outside India was chargeable to tax in India under section 9(1)(vi)(c) of the Income-tax Act, 1961 and Article 12(7)(b) of the India-USA Double Taxation Avoidance Agreement; (ii) Whether royalty received under the BREW operator agreement and BREW carrier agreement was taxable as royalty in India.

Issue (i): Whether royalty received from non-resident OEMs for manufacture of subscriber units and infrastructure equipment outside India was chargeable to tax in India under section 9(1)(vi)(c) of the Income-tax Act, 1961 and Article 12(7)(b) of the India-USA Double Taxation Avoidance Agreement.

Analysis: The royalty arose from licences permitting OEMs to manufacture products outside India and sell them abroad, including sales into India. The settled test applied was whether the OEMs carried on business in India or used the licensed patents for earning income from a source in India. The Tribunal reiterated that section 9(1)(vi)(c) is a deeming provision to be strictly construed and that the burden lay on the Revenue to establish Indian business activity or an Indian source. On the facts, the OEMs manufactured outside India, the title in the goods passed outside India, and the arrangements reflected business with India rather than business in India. The Tribunal followed its earlier coordinate-bench decisions and the jurisdictional High Court principles distinguishing sale of goods from taxable business activity in India.

Conclusion: The royalty was held not taxable in India. The issue was decided in favour of the assessee.

Issue (ii): Whether royalty received under the BREW operator agreement and BREW carrier agreement was taxable as royalty in India.

Analysis: The BREW receipts were examined as consideration for software made available under licence. The Tribunal held that what was transferred was a copyrighted article and not any copyright or right in the copyright. The software was only incidental to the use of the product, with no transfer of copyright rights and no separate royalty character. The Tribunal applied the settled distinction between a copyrighted article and copyright rights and followed binding jurisdictional precedent on software payments.

Conclusion: The BREW receipts were held not taxable as royalty in India. The issue was decided in favour of the assessee.

Final Conclusion: The additions on royalty were deleted and the connected grounds relating to interest and penalty did not survive independently in view of the relief granted on the core taxability issues.

Ratio Decidendi: Royalty paid for use of intellectual property by foreign OEMs is not taxable under section 9(1)(vi)(c) unless the Revenue proves that the payer carried on business in India or used the right for earning income from a source in India, and a payment for a copyrighted article without transfer of copyright rights is not royalty.

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