Treaty definition of royalty governs transponder payments; domestic law amendment cannot expand withholding-tax liability.

Payments for transponder services to a non-resident were analysed under the service agreement and the applicable DTAA, and were treated as outside the treaty definition of royalty. The Tribunal applied its earlier orders and the payee-side reasoning, and held that a unilateral amendment in domestic tax law cannot enlarge or alter an express treaty definition of royalty. As the receipts were not taxable in India as royalty, no withholding obligation arose under section 195. The separate claim for interest on refund under section 244A was not decided on merits and was remitted to the Assessing Officer for fresh consideration in light of the earlier order and the applicable circular.

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Issues: (i) Whether payments made for transponder services to the non-resident payee constituted royalty so as to attract deduction of tax at source under section 195(2) of the Income-tax Act, 1961. (ii) Whether the claim for interest under section 244A of the Income-tax Act, 1961 on refund arising from excess deposit of TDS required fresh consideration.

Issue (i): Whether payments made for transponder services to the non-resident payee constituted royalty so as to attract deduction of tax at source under section 195(2) of the Income-tax Act, 1961.

Analysis: The payments were examined in the light of the service agreement and the applicable treaty framework. The Tribunal followed its earlier orders in the assessee's own case and the reasoning adopted in the payee's case, holding that transponder service payments did not fall within the treaty definition of royalty. It further held that an amendment in domestic law could not enlarge or alter the treaty definition where the DTAA itself contained an express definition of royalty. On that basis, the amount was held not taxable in India as royalty and, consequently, no withholding obligation arose.

Conclusion: The issue was decided in favour of the assessee. The payments for transponder services were held not to be royalty and tax was not required to be deducted at source.

Issue (ii): Whether the claim for interest under section 244A of the Income-tax Act, 1961 on refund arising from excess deposit of TDS required fresh consideration.

Analysis: The claim was not finally adjudicated on merits in the present round. The matter was directed to be examined afresh by the Assessing Officer in the light of the earlier order and the applicable circular.

Conclusion: The issue was remitted for fresh decision and was not concluded on merits in these appeals.

Final Conclusion: The appeals were substantially allowed in favour of the assessee on the core withholding-tax issue, while the interest claim was sent back for reconsideration.

Ratio Decidendi: Where a DTAA contains an express definition of royalty, a subsequent unilateral amendment to domestic tax law does not expand that treaty definition, and payments falling outside the treaty definition are not taxable as royalty for withholding-tax purposes.

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