Royalty earned by Non Resident from another Non Resident is not taxable in India even if payer embeds the know-how into products sold in India

Under section 9(1)(vi)(c) royalty payable by a person who is a non-resident is deemed to arise in India where the royalty is payable in respect of any right etc utilised for the purposes of a business carried on by such person in India or for the purposes of earning any income from any source in India. Section 9(1)(vi)(c) is a deeming provision and the burden is on the Revenue to prove that the payer has a business/source of income in India. What is important for Section 9(1)(vi)(c) is not whether the right to property is used “in” or “for the purpose of” a business, but to determine whether such business is “carried on by such person in India”; 

ITAT held that it was clear that the software didn't have an independent use and was an integral part of the hardware without which the hardware couldn't function. The software supplied was a copyrighted article and not a copyright right. The software was only used with the hardware and was not independent of the equipment or the chip-set  Since no separate consideration was paid by Indian parties for licensing of the software and the consideration was paid only for the equipment which had numerous patented technologies, the sale couldn't be bifurcated or broken down into different components. Thus, the royalty earned by the appellant couldn't be brought to tax in India under Section 9 of the Act.

Qualcomm Incorporated v/s ADIT, Circle 2(1) International Taxation (ITAT DELHI BENCH ‘E’)