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India: Ruling on royalty secondary source rule under Indian tax laws



Rajendra Nayak

Aastha Jain

Under the Indian Tax Law (ITL), royalty income payable by a non-resident (NR) is considered as sourced in India, and therefore taxable, if it is utilised for the purpose of a business carried out in India or for earning income from any source in India. This source rule for taxing royalties paid by a non-resident to another non-resident is commonly referred to as the secondary source rule. The Delhi Income Tax Appellate Tribunal recently ruled on taxation of royalty under the secondary source rule in the case of Qualcomm Incorporated (150 TTJ 661). The taxpayer, a US resident corporation, had licensed certain intellectual property (IP) relating to the Code Division Multiple Access (CDMA) technology to non-resident original equipment manufacturers (OEMs). The OEMs in turn, used the licensed IP to manufacture CDMA handsets and wireless equipment outside India and sold it to customers worldwide, including India. The issue was with regard to taxability of royalty income in the hands of the taxpayer received from OEMs to the extent it related to equipments sold to customers in India. The Tribunal observed that under the secondary source rule of the ITL, the onus lies on the tax authority to prove that the royalty payable by the non-resident is for the purpose of business carried on by such non-resident in India or used for making or earning any income from any source in India. For business to be carried out in India there should be some activity in India. In the present case, the licensed IP was used by the OEMs in manufacturing products outside India and sale to India was without any operations being carried out in India which would amount to business with India and not business in India. Hence, the tribunal found that the OEMs did not carry out business in India. Furthermore, the licensed IP was not used by the OEMs for earning income from a source in India. Source is the activity that gives rise to income. The source of income for the OEMs was manufacture of products undertaken outside India and not sale made to the Indian customers. Accordingly, the royalty income of the taxpayer was not taxable in India under the ITL. In view of the above, the tribunal did not consider taxability under the India-US treaty as it would have been an academic exercise.

Rajendra Nayak ( and Aastha Jain (
Ernst & Young

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