Outsourced data processing payments are not royalty without control, possession, or a real right to use the underlying system.

Payments for outsourced overseas data processing were not royalty because the payer acquired no right to use any copyright, process, software, or other intellectual property, but only received processed output after transmitting raw data. The arrangement was also not royalty for use of industrial, commercial or scientific equipment because the payer had no possession, control, or operational access to the foreign hardware or system. The receipts were treated as business income of the non-resident and, absent a permanent establishment in India, were not taxable in India; no withholding obligation arose.

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Issues: (i) Whether payments for overseas data processing services constituted royalty under Article 12(3)(a) of the India-Singapore tax treaty and Section 9(1)(vi) of the Income-tax Act, 1961; (ii) Whether the payments constituted royalty for the use or right to use industrial, commercial or scientific equipment under Article 12(3)(b) of the treaty and Section 9(1)(vi) of the Income-tax Act, 1961, so as to require withholding under Section 195 of the Income-tax Act, 1961.

Issue (i): Whether payments for overseas data processing services constituted royalty under Article 12(3)(a) of the India-Singapore tax treaty and Section 9(1)(vi) of the Income-tax Act, 1961.

Analysis: The arrangement was found to be one for data processing, not for the use of, or the right to use, any copyright, secret formula, process, or similar intellectual property. The payer did not access or operate the foreign company's mainframe, did not obtain any independent right over the software or the processing system, and merely transmitted raw data and received processed output. The consideration was therefore for a service, not for a process made available to the payer.

Conclusion: The payment was not royalty under Article 12(3)(a) or Section 9(1)(vi) and was not taxable on that basis.

Issue (ii): Whether the payments constituted royalty for the use or right to use industrial, commercial or scientific equipment under Article 12(3)(b) of the treaty and Section 9(1)(vi) of the Income-tax Act, 1961, so as to require withholding under Section 195 of the Income-tax Act, 1961.

Analysis: Mere access to an infrastructure facility or receipt of a data processing service does not amount to use of equipment unless the customer has possession, control, or the ability to operate the equipment. On the facts, the payer had no physical or constructive possession of the computer hardware, no control over its functions, and no possessory rights in the system. The payment was for availing a facility and specialized processing services, not for hiring or using equipment.

Conclusion: The payment was not royalty under Article 12(3)(b) or Section 9(1)(vi), and no withholding obligation arose under Section 195.

Final Conclusion: The receipts were held to be business income of the non-resident and, in the absence of a permanent establishment in India, not taxable in India under Article 7 of the treaty; all connected appeals were allowed.

Ratio Decidendi: A payment for outsourced data processing is not royalty unless the payer acquires a real right to use the underlying process or equipment, with possession, control, or independent operational access to the facility or system.

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