Data processing payments were not royalty where there was no right to use equipment or process, so no withholding tax applied.

Data processing charges paid for services performed on the payer's raw data did not constitute royalty where the Singapore provider used its own mainframe, software, staff and infrastructure, and the payer had no physical possession, control or right to use the equipment or process. The receipts were therefore outside article 12(3)(a) and 12(3)(b) of the treaty and not taxable in India as royalty or business profits in the absence of a permanent establishment. As the sums were not chargeable to tax in India, no tax was deductible at source under section 195.

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Issues: Whether the payments made for data processing and use of computer infrastructure in Singapore were royalty within the meaning of the treaty and the Income-tax Act, and consequently whether tax was deductible at source under section 195.

Analysis: The payment was for data processing services carried out by the Singapore entity using its own mainframe, software, staff, and infrastructure. The assessee had no physical possession, control, or possessory rights over the equipment, and merely transmitted raw data and received processed output. The arrangement therefore did not amount to use or right to use any process or industrial, commercial, or scientific equipment. The receipts were not royalty under article 12(3)(a) or article 12(3)(b) of the treaty, and in the absence of a permanent establishment, the income was not taxable in India as business profits.

Conclusion: The payments were not taxable in India as royalty or otherwise, and the assessee had no obligation to withhold tax under section 195.

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