Treaty definition of royalty controls transponder payments, so no withholding tax and no section 40(a)(i) disallowance.

Transponder charges and satellite uplinking payments to non-residents were analysed under the Indo-US DTAA and section 9(1)(vi) of the Income-tax Act. The Tribunal followed the jurisdictional High Court view that the Finance Act, 2012 expansion of the domestic royalty definition does not alter treaty meaning unless the treaty is amended. It also held that transponder capacity or satellite transmission facilities do not amount to use of industrial, commercial or scientific equipment under the treaty. As the payments were not royalty in the treaty context, no withholding obligation arose and the section 40(a)(i) disallowance was deleted.

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Issues: Whether transponder charges and related satellite uplinking payments made to non-residents constituted royalty so as to attract tax deduction at source and consequent disallowance under section 40(a)(i).

Analysis: The payments were examined in the light of the Indo-US DTAA and the domestic definition of royalty under section 9(1)(vi) of the Income-tax Act, 1961. The Tribunal followed the binding jurisdictional High Court view that amendments expanding the domestic definition of royalty by the Finance Act, 2012 do not automatically alter the meaning of royalty under the DTAA. It was held that treaty terms must be interpreted on their own language, and that transponder capacity or satellite transmission facilities do not amount to use of industrial, commercial or scientific equipment in the sense required for royalty under the treaty. As the sums were not taxable as royalty in the relevant treaty context, no withholding obligation arose and the disallowance under section 40(a)(i) could not stand.

Conclusion: The issue was decided in favour of the assessee; the transponder charges were not treated as royalty under the applicable treaty framework, and the disallowance was deleted.

Ratio Decidendi: A domestic amendment enlarging the definition of royalty cannot be read into a concluded tax treaty unless the treaty itself is correspondingly amended, and transponder capacity payments do not constitute royalty under the treaty definition.

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