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

International Tax Review is part of Legal Benchmarking Limited, 1-2 Paris Garden, London, SE1 8ND

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

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

nayak.jpg

jain.jpg

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 (rajendra.nayak@in.ey.com) and Aastha Jain (aastha.jain@in.ey.com)
Ernst & Young

Tel: +91 80 4027 5275

Website : www.ey.com/india

more across site & shared bottom lb ros

More from across our site

It should be easy for advisers to be transparent about costs, Brown Rudnick partner Matthew Sharp said in response to exclusive ITR in-house data
The sprawling legislation phases out Joe Biden-era green tax incentives for businesses; in other news, the UK will reportedly maintain its DST despite US pressure
New French legislation should create a more consistent legal environment for taxing gains from management packages, say Bruno Knadjian and Sylvain Piémont of Herbert Smith Freehills Kramer
The South Africa vs SC ruling may embolden the tax authority to take a more aggressive approach to TP assessments, an adviser tells ITR
Indirect tax professionals now rate compliance as a bigger obstacle than technology and automation; in other news, Italy approved a VAT cut on art sales
AI-powered tax agents are likely to be the next big development in tax technology, says Russell Gammon of Tax Systems
FTI Consulting’s EMEA head of employment tax and reward tells ITR about celebrating diversity in the profession, his love of musicals, and what makes tax cool
Canadian Prime Minister Mark Carney and US President Donald Trump have agreed that the countries will look to conclude a deal by July 21, 2025
The firm’s lack of transparency regarding its tax leaks scandal should see the ban extended beyond June 30, senators Deborah O’Neill and Barbara Pocock tell ITR
Despite posing significant administrative hurdles, digital services taxes remain ‘the best way forward’ for emerging economies, says Neil Kelley, COO of Ascoria
Gift this article