Substance over contract labels: liaison and support payments were tested for royalty character, with part excluded from tax deduction.

Payments must be characterised by their real substance, not the contractual label. On the liaison, advisory and negotiation-related services, the record showed pure service elements rather than any imparting of technical, industrial, commercial or scientific knowledge, so the amounts were not royalty and no tax was required to be deducted at source. For the remaining support services, the material was insufficient to determine whether the consideration involved secret know-how or only routine commercial assistance, so that issue was restored for fresh factual examination.

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Issues: (i) Whether the payments described as liaison, advisory and support services for vendor finance, sales channels, marketing, customer care and operational controls were royalty or fees for technical services so as to require deduction of tax at source. (ii) Whether the matter relating to the remaining support services required fresh examination for want of adequate particulars.

Issue (i): Whether the payments described as liaison, advisory and support services for vendor finance, sales channels, marketing, customer care and operational controls were royalty or fees for technical services so as to require deduction of tax at source.

Analysis: The agreement had to be read according to the real character of the payments and not merely by the label used in the contract. On the material relating to liaison with legal and financial advisers and negotiations with vendors and financial institutions, the payment was found to be for pure services and not for the imparting of technical, industrial, commercial or scientific knowledge, experience or skill. Such payment was therefore not royalty, and the treaty position prevailed so that no tax was deductible at source on that item.

Conclusion: The payment for liaison with legal and financial advisers and negotiations with vendors and financial institutions was not taxable as royalty and no deduction at source was required.

Issue (ii): Whether the matter relating to the remaining support services required fresh examination for want of adequate particulars.

Analysis: For the remaining items, the available record did not sufficiently show whether the consideration represented secret know-how or only routine commercial support. The nature of the information supplied, its confidentiality, and whether it was of enduring or perpetual utility were matters that needed clearer factual examination before deciding whether the payments fell within royalty or some other taxable category.

Conclusion: The issue relating to the remaining support services was restored to the Assessing Officer for fresh consideration.

Final Conclusion: The assessee succeeded in part, with one category of payment held outside the scope of tax deduction at source and the balance remitted for reconsideration.

Ratio Decidendi: A payment is to be characterised by its true substance, and only consideration for imparting know-how or similar protected information can be treated as royalty; routine service payments do not become royalty merely because they are described in contractual terms as advice or assistance.

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