Delhi Tribunal rules taxability under s. 9(1) is determined by situs of income, not source of receipts

As per Section (S.) 9(1)(vi) of Income Tax Act, 1961 (ITA 1961), royalty paid by a resident to a non-resident is deemed to accrue or arise in India in all cases unless the royalty is paid in respect of intellectual property (IP) or know-how which is utilized for the purposes of business of the resident payer outside India or where it is utilized for earning or making a source of income for the resident payer outside India.

In the present case, the Taxpayer^[1] , a foreign company had licensed some IP to its Indian associate, I Co, for use in manufacturing and sale of certain products in India as well as outside India. The Taxpayer contended that while the royalty received in respect of goods manufactured and sold in India is taxable in India as royalty u/s 9(1)(vi) of the ITA 1961, the royalty pertaining to goods sold outside India amounts to utilization of the IP for earning a source of income outside India and hence cannot be deemed as accruing or arising in India having regard to the provisions of S. 9(1)(vi)(b) of ITA 1961.

To support its contention, the Taxpayer relied on the Madras High Court (HC) decision in the case of Aktiengesellschaft Kunhle Kopp & Kausch (262 ITR 513) which held that royalty paid in relation to export sales qualifies as income from a source outside India and hence not taxable in India.

On the other hand, the tax authority relied on Delhi HC decision in the case of Havells India Ltd (352 ITR 376)(Del) which held that the conclusion of the Madras HC in the case of Aktiengesellschaft Kunhle Kopp & Kausch cannot be accepted since the decision was rendered without having regard to the decision of the Division Bench of the Madras HC itself in the case of Anglo French Textiles Limited in (199 ITR 785) which held that in case of export sales, the activities of manufacturing and export in India constituted a source of income in India and hence royalty received for manufacture and sale of such exported goods is to be deemed as income accruing or arising in India u/s 9(1)(vi). Having regard to the Madras HC decision in the case of Anglo French (supra), Delhi HC in the case of Havells (supra) concluded that the importer or customer of exported goods qualifies as a source of receipts and not source of income, instead the manufacturing activities as well as the export contract concluded in India qualifies as a source of income in India.  

Having noted the tax authority’s contention and judicial precedents relied on by the parties, the Delhi Income Tax Appellate Tribunal (Tribunal) concluded that the ratio laid down by Madras HC decision in the case of Aktiengesellschaft Kunhle Kopp & Kausch (supra) without referring back to the Division Bench Ratio does not represent correct position in law. 

The Delhi Tribunal however noted that in absence of clarity on the place of conclusion of exports contracts i.e., whether such contracts were concluded in India or outside India it would not be possible for it to conclude on whether the export proceeds can be deemed to accrue or arise in India, especially since Delhi HC considered the place of conclusion of export contracts as an important factor to conclude on the location of source of income.

Hence the Tribunal remitted the matter back to tax authority to undertake factual finding on the location where the export contracts were concluded. The Tribunal, however, clarified that the situs of conclusion of contract though relevant cannot be the conclusive basis for determining the source of income in India.

^[1] TS-03-ITAT-2026(DEL)