Royalty under the India-US treaty requires a real transfer of IP rights, not mere marketing and support functions.

A composite payment under a distance-education arrangement was analysed under Article 12 of the India-US DTAA to determine whether it constituted royalty and attracted deduction of tax at source under section 195. Reading the agreement as a whole, the payer's role was limited to marketing, registration support and infrastructure, while the foreign affiliate retained ownership of course content and marks and separately provided online access and related services. On that construction, no right to use copyright, trademark or other intellectual property was transferred, so the remittance was not royalty. The authorities' insistence on tax deduction at source was therefore not sustainable.

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Issues: Whether the remittance made by the assessee to the foreign affiliate was royalty under Article 12 of the India-US DTAA and therefore liable to deduction of tax at source under section 195 of the Income-tax Act, 1961.

Analysis: The agreement had to be read as a whole to ascertain the real nature of the arrangement. The assessee was responsible for marketing, registration support and providing infrastructure to students, while the foreign entity retained ownership of the course content and marks and separately provided online course access and related services to students. On a proper construction of the agreement and its exhibits, the payment was not consideration for the use of, or right to use, copyright, trademark or other intellectual property in the sense contemplated by Article 12. The arrangement was in substance a collaborative revenue-sharing model for delivery of distance education, not a licence generating royalty income. As the remittance did not fall within royalty, the authorities' reliance on tax deduction at source was misplaced.

Conclusion: The payment was not royalty under Article 12 and was not liable to tax deduction at source under section 195.

Final Conclusion: The assessee succeeded and the order treating the remittance as royalty and requiring deduction of tax at source was set aside.

Ratio Decidendi: In determining whether payments under a composite commercial arrangement constitute royalty, the agreement must be construed as a whole and the substance of the arrangement prevails; where the payer only performs marketing and support functions and no right to use copyright or trademark is transferred, the payment is not royalty under the treaty.

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