Royalty on embedded software-based gateway access upheld for treaty purposes, making the receipts taxable in India.

Consideration for access to internet, email and networking facilities through an embedded software-based gateway was treated as royalty because the payment was for use of a facility built around secret software, not a mere passive connectivity service. Applying the India-USA DTAA definition, the Tribunal held that the arrangement involved consideration for the use of, or the right to use, a secret formula, process or similar intellectual property. The transponder ruling was distinguished on facts, while the advance ruling on centralized computer systems and secret software was followed. The receipt was taxable in India as royalty under section 9(1)(vi) and Article 12(3).

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Issues: Whether the consideration received for providing access to internet, email and networking facilities through an embedded software-based gateway constituted royalty and was taxable in India under the Act and the India-USA DTAA.

Analysis: The payment was held to be for the use of a facility built around embedded secret software and not for a mere passive connectivity service. Applying the treaty definition of royalty, the Tribunal found that the arrangement fell within consideration for the use of, or the right to use, a secret formula, process or similar intellectual property. The reliance on the transponder decision was rejected as factually distinguishable, while the advance ruling involving use of centralized computer systems and secret software was treated as squarely applicable.

Conclusion: The receipt constituted royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 12(3) of the India-USA DTAA, and was taxable in India.

Final Conclusion: The assessee's appeal failed and the Revenue's appeals succeeded, resulting in taxability of the impugned receipts as royalty.

Ratio Decidendi: Where consideration is paid for access to a facility enabled by embedded secret software or a similar protected process, the receipt is royalty if the treaty definition covers use of a secret process or comparable intellectual property.

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