Bandwidth connectivity payments were treated as service reimbursements, not royalty or fees for technical services, so no withholding tax arose.

Bandwidth connectivity charges paid to a UK group entity were analysed as a service reimbursement for network access, not as royalty or fees for technical services under the Income-tax Act and the India-UK DTAA. Because the payer did not obtain any intellectual property right, exclusive use or control over equipment, or access to a secret process, the domestic royalty definition did not expand the treaty position. The payment also failed the "make available" requirement for technical services. As the remittance was not chargeable to tax in India, no withholding obligation arose under section 195 and the consequential default and interest consequences under sections 201(1) and 201(1A) did not apply.

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Issues: (i) Whether bandwidth charges paid to a UK group entity were taxable in India as royalty or fees for technical services under the Income-tax Act, 1961 and the India-UK DTAA; (ii) Whether, in consequence, the assessee was liable to deduct tax at source under section 195 of the Income-tax Act, 1961 and could be treated as an assessee in default under sections 201(1) and 201(1A) of the Income-tax Act, 1961.

Issue (i): Whether bandwidth charges paid to a UK group entity were taxable in India as royalty or fees for technical services under the Income-tax Act, 1961 and the India-UK DTAA.

Analysis: The payment was found to be a cost allocation / reimbursement for bandwidth connectivity services rendered through the overseas network arrangement, without transfer of any intellectual property, exclusive right, possession or control over equipment, or use of a secret process by the payer. The domestic law provisions in section 9(1)(vi) of the Income-tax Act, 1961, even with Explanations 5 and 6, were held not to expand the treaty definition. On the treaty side, the payment did not satisfy the requirements of royalty under Article 13(3)(b), nor did it constitute fees for technical services under Article 13(4) because no technical knowledge, skill, know-how or process was made available. The transaction was treated as standard connectivity service, not royalty or FTS.

Conclusion: The payment was not taxable in India as royalty or fees for technical services.

Issue (ii): Whether, in consequence, the assessee was liable to deduct tax at source under section 195 of the Income-tax Act, 1961 and could be treated as an assessee in default under sections 201(1) and 201(1A) of the Income-tax Act, 1961.

Analysis: Since the underlying remittance was held not chargeable to tax in India, no obligation to deduct tax at source arose under section 195 of the Income-tax Act, 1961. The foundation for treating the assessee as a defaulter under section 201(1) and for charging interest under section 201(1A) therefore disappeared.

Conclusion: The assessee was not liable to deduct tax at source and could not be treated as an assessee in default.

Final Conclusion: The additions and withholding consequences arising from the bandwidth payments were deleted, and the assessee's appeals were allowed.

Ratio Decidendi: Bandwidth connectivity payments used only as a service, without transfer or control of equipment or making available of technical knowledge or secret process, do not constitute royalty or fees for technical services under the treaty and therefore do not attract withholding tax under section 195 of the Income-tax Act, 1961.

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