Royalty classification under the Indo-US DTAA was denied, with prior treaty interpretation controlling despite retrospective domestic amendment.

Payments for use of equipment and related facilities were analysed under Article 12(3) of the Indo-US DTAA and Section 9(1)(vi), with the court treating both as covering the same composite subject matter. Relying on Asia Satellite Telecommunications and New Skies Satellite, it held that the prior interpretation of those provisions continued to govern unless the treaty terms were amended by the contracting states, and that a retrospective domestic amendment did not by itself displace that interpretation. On the assessee's own prior order, no substantial question of law survived, and the payments were not treated as royalty.

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Issues: Whether payments received for use of equipment and related facilities constituted royalty under Section 9(1)(vi) of the Income-tax Act, 1961 and Article 12(3) of the Indo-US Double Taxation Avoidance Agreement, and whether any substantial question of law arose.

Analysis: The provisions of Article 12(3) of the Indo-US DTAA and Section 9(1)(vi), Explanation (2)(iii) and (iva), were treated as dealing with the same composite subject matter. The earlier decisions in Asia Satellite Telecommunications and New Skies Satellite had already considered the relevant statutory clauses, including the clauses relied upon by the Revenue. On that basis, the legal principle applied was that where the treaty and the domestic provision cover identical subject matter, the interpretation already placed upon them continues to govern unless the contracting states alter the treaty terms. It was also held that a retrospective change in domestic law does not, by itself, neutralise the effect of the earlier judicial interpretation. In view of the prior order in the assessee's own case, no further question of law survived.

Conclusion: The payments were not held to be royalty for the purpose of the appeal, and no substantial question of law arose against the assessee.

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