Specialised data processing payments were not royalty or business profits, and no withholding tax was required.

Specialised data processing charges paid to a foreign company were held not to constitute royalty because the payer had no right to use the mainframe, software, or any copyright, patent, secret process, or similar right, and the treaty's residual royalty wording was read narrowly under ejusdem generis. The receipts also could not be taxed as business profits because the recipient had no permanent establishment in India. As there was no underlying tax liability in India, no withholding obligation arose on the payer.

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Issues: Whether the remittance made to the foreign company for data processing and related charges was taxable in India as royalty or business profits, and whether the payer was required to withhold tax on the payment.

Analysis: The payment was held to be for specialised data processing, with fixed annual charges and variable per-transaction charges forming complementary components of one composite service. The payer had no independent right to use the mainframe computer or software, no physical access or control over the equipment, and no grant of any copyright, patent, secret process, or similar right. The amount did not fall within the royalty limb for use of equipment, supply of information, consultancy services, or the wider residual expressions in the treaty. The principle of ejusdem generis was applied to reject an expansive reading of the residual words in the royalty definition. Since the foreign recipient had no permanent establishment in India, the income could not be taxed as business profits under the treaty. The withholding obligation was treated as dependent on an underlying tax liability in India.

Conclusion: The remittance was not taxable in India as royalty or business profits, and the assessee had no obligation to deduct tax at source.

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