Connectivity service payments are not royalty when no equipment right is transferred, and treaty limits prevail over domestic amendments.

Network connectivity charges paid to a non-resident were treated as payment for international connectivity services, not as consideration for the use of equipment, so they were held outside the treaty definition of royalty and not taxable as fee for technical services; the related disallowance under section 40(a)(ia) was deleted. Deduction under section 80IA at 30% of eligible profits was upheld because the existing co-ordinate bench view was followed and no stay order existed. Variable licence fee disallowance was also deleted on the principle of consistency, as the expenditure had been accepted in earlier years and pending SLPs in other matters did not justify a fresh disallowance.

---

---

Issues: (i) Whether network connectivity charges paid to the non-resident were taxable as royalty or fee for technical services and consequently disallowable under section 40(a)(ia); (ii) Whether deduction under section 80IA at 30% of eligible profits was rightly allowed; (iii) Whether the disallowance of variable licence fee could be sustained merely because the Revenue had filed SLPs in other cases on the same issue.

Issue (i): Whether network connectivity charges paid to the non-resident were taxable as royalty or fee for technical services and consequently disallowable under section 40(a)(ia).

Analysis: The payment was held to be for international connectivity services, not for the use of or right to use any equipment. The assessee used its own network in India, while the non-resident provided only the foreign leg of connectivity. The treaty definition of royalty under Article 13 of the India-UK DTAA was applied, and domestic-law amendments could not be read into the treaty. The distinction between service contracts and equipment-use contracts was emphasized, and the reasoning in the jurisdictional precedent on satellite services was followed.

Conclusion: The payment was not royalty or fee for technical services, and the disallowance under section 40(a)(ia) was deleted in favour of the assessee.

Issue (ii): Whether deduction under section 80IA at 30% of eligible profits was rightly allowed.

Analysis: The Revenue's objection was based only on the fact that the matter was pending before the High Court in another year. In the absence of any stay of the co-ordinate bench decision, the Tribunal followed the existing view and applied it to the year in question.

Conclusion: The allowance of deduction under section 80IA was upheld in favour of the assessee.

Issue (iii): Whether the disallowance of variable licence fee could be sustained merely because the Revenue had filed SLPs in other cases on the same issue.

Analysis: The Tribunal applied the principle of consistency, noting that the payment had been accepted in earlier years and there was no change in facts or law. The filing of SLPs in other matters was held insufficient to justify a fresh disallowance.

Conclusion: The disallowance was deleted and the issue was decided in favour of the assessee.

Final Conclusion: The assessee succeeded on the main transfer-pricing/disallowance issue and on the additional issues raised by the Revenue, resulting in deletion of the impugned addition and dismissal of the Revenue's appeal.

Ratio Decidendi: Payments for telecommunication connectivity services are not taxable as royalty where the payer does not obtain any right to use the service provider's equipment, and domestic-law amendments cannot be imported into an unamended treaty definition of royalty.

---