Composite services contract treated as royalty where no reliable apportionment of consideration was provided.

A composite management and administrative services agreement was examined under the royalty definition in section 9(1)(vi) of the Income-tax Act and Article 13 of the Indo-UK DTAA. The note explains that where the contract includes both ordinary services and elements that may amount to imparting industrial, commercial or scientific experience, the tax character depends on the substance of the arrangement and the available apportionment material. Because no reliable breakup of consideration or supporting details was furnished, the principal nature of the agreement was applied to the whole receipt, and the amount was treated as royalty rather than business income.

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Issues: Whether the consideration received under the management and administrative services agreement was royalty within the meaning of section 9(1)(vi) of the Income-tax Act, 1961 and Article 13 of the Indo-UK DTAA.

Analysis: The agreement covered a wide range of managerial, administrative, commercial and support services. On the material placed before it, the assessee did not furnish a breakup of the consideration for the different services or the supporting details necessary to segregate services that were purely advisory or commercial from those that could amount to imparting information concerning industrial, commercial or scientific experience. The definition of royalty under the Act and the treaty was examined, along with OECD commentary distinguishing supply of know-how from mere performance of services. It was noted that where a contract is composite and the assessee fails to provide the basis for apportionment, the tax treatment applicable to the principal nature of the contract may be applied to the entire consideration.

Conclusion: The receipt was treated as royalty and not as mere business income exempt from tax in India in the absence of a reliable segregation of the services and consideration.

Final Conclusion: The assessee's appeal failed, and the royalty characterization made by the lower authorities was upheld.

Ratio Decidendi: Where a composite services contract includes elements that may fall within royalty and the assessee does not furnish material for reasonable apportionment, the entire consideration may be taxed as royalty if the principal nature of the arrangement supports that characterization.

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