Affiliation fee not royalty when no technology or copyright rights are transferred, so tax withholding and disallowance fail.

An annual affiliation fee paid to a foreign entity was treated as a non-royalty payment because it involved no transfer of technology, technical knowledge, copyright use, or use of industrial, commercial or scientific equipment. The separate consulting-and-reports fee referenced in the agreement was not the payment in dispute. As the amount was not chargeable as royalty under section 9(1)(vi) or Article 12(3) of the India-USA DTAA and the recipient had no permanent establishment in India, tax withholding was not required and disallowance under section 40(a)(ia) did not apply.

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Issues: Whether the payment described as an affiliation fee was royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 12(3) of the India-USA DTAA, so as to require deduction of tax at source and attract disallowance under section 40(a)(ia) of the Income-tax Act, 1961.

Analysis: The payment was found to be only an annual affiliation fee for association with the foreign entity. It did not involve transfer of technology, imparting of technical knowledge, use of copyright, or use of any industrial, commercial or scientific equipment. The agreement also contemplated a separate consulting-and-reports fee, but that was not the payment in dispute. As the foreign recipient had no permanent establishment in India and the amount was not chargeable as royalty under either the domestic law or the treaty, the obligation to deduct tax at source did not arise.

Conclusion: The affiliation fee was not royalty and no disallowance under section 40(a)(ia) was warranted. The issue was decided in favour of the assessee.

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