India-Singapore DTAA relief upheld: Article 24 and Article 12(7) could not deny treaty benefits on disputed royalty payments.

Article 24 of the India-Singapore DTAA was found inapplicable because the disputed royalty income was not taxable in India on the facts and the treaty language did not justify denial of relief. The Tribunal followed an earlier coordinate bench view and held that treaty benefits could not be denied under Article 24. On Article 12(7), royalty was held not to arise in India merely because the payer had a permanent establishment in India; the payer was not resident in India, and there was no economic nexus showing that the liability was incurred in connection with, and borne by, that permanent establishment. The assessee therefore retained DTAA benefits on the disputed payments.

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Issues: (i) Whether Article 24 of the India-Singapore DTAA was applicable to deny treaty benefits to the assessee. (ii) Whether the royalty payments were deemed to arise in India under Article 12(7) of the India-Singapore DTAA.

Issue (i): Whether Article 24 of the India-Singapore DTAA was applicable to deny treaty benefits to the assessee.

Analysis: The question turned on whether the income in dispute was exempt from tax in India within the meaning of Article 24 and whether the treaty provision could be invoked to deny relief. The earlier coordinate bench view, followed in the present appeal, held that the payment, even if treated as royalty, was not taxable in India and that the treaty language did not support application of Article 24 on these facts.

Conclusion: Article 24 was held to be inapplicable, and the issue was decided in favour of the assessee.

Issue (ii): Whether the royalty payments were deemed to arise in India under Article 12(7) of the India-Singapore DTAA.

Analysis: The determining factors were the residence of the payer, the existence of any permanent establishment in India, and whether the liability to pay the royalty was incurred in connection with and borne by that permanent establishment. The Tribunal applied the earlier decision in the assessee's own case and held that the payer was not a resident of India, that mere existence of a permanent establishment was insufficient, and that there was no economic link between the payment and the alleged Indian permanent establishment. Accordingly, the royalty could not be deemed to arise in India under Article 12(7).

Conclusion: The royalty was held not to arise in India under Article 12(7), and the issue was decided in favour of the assessee.

Final Conclusion: The Revenue's challenge failed on the substantive treaty issues, the appeal was dismissed, and the assessee retained the benefit of the India-Singapore DTAA on the disputed payments.

Ratio Decidendi: Royalty payable by a non-resident does not arise in India under Article 12(7) merely because the payer has a permanent establishment in India; an economic nexus is required, and the liability must be incurred in connection with and borne by that permanent establishment.

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