Withholding tax on connectivity charges fails where payment is only for a standard facility, not royalty or technical services.

Payments for leased line interconnectivity and usage charges were treated as consideration for a standard connectivity facility, not as royalty or fees for technical services, because no technical knowledge, technical service, or equipment-hiring arrangement was shown. As the amount was not chargeable to tax in India, no obligation to withhold tax arose under section 195, and the related disallowance under section 40(a)(i) could not be sustained. The deletion of the addition followed from the same reasoning.

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Issues: Whether leased line interconnectivity and usage charges paid to a non-resident were taxable in India as royalty or fees for technical services, and consequently whether tax was required to be deducted at source under section 195, so as to justify disallowance under section 40(a)(i).

Analysis: The payment was made for use of a standard facility under the service arrangement and there was no material to show that any technical knowledge, technical service, or equipment-hiring arrangement was provided to the assessee in the sense required by the charging provisions. The nature of the payment was treated as reimbursement for connectivity services, not as consideration for royalty or technical services. On that basis, the amount was held not chargeable to tax in India, and the obligation to withhold tax did not arise.

Conclusion: The payment was not taxable as royalty or fees for technical services, no tax was deductible under section 195, and the disallowance under section 40(a)(i) could not be sustained.

Final Conclusion: The assessee succeeded and the addition/disallowance made for non-deduction of tax at source was deleted.

Ratio Decidendi: Payments for access to a standard connectivity facility, without evidence of technical services or a taxable royalty element, do not attract withholding tax under section 195 and cannot be disallowed under section 40(a)(i) merely because the recipient is a non-resident.

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