Time charter receipts are not royalty where the owner retains control and merely provides vessel services.

Time charter receipts for a vessel with crew were treated as consideration for services, not royalty, because the owner retained exclusive control and the charterer obtained no independent possession or right to use the equipment. On that basis, mobilisation fees linked to the same charter arrangement were also held outside royalty. Reimbursement receipts could not be conclusively classified on the existing record and were remitted for factual verification. TDS credit was also restored for examination, with interest to be recomputed consequentially. The challenge to initiation of penalty proceedings was rejected as premature.

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Issues: (i) Whether consideration received for time charter of the vessel with crew was taxable as royalty under the Income-tax Act and the India-Singapore tax treaty; (ii) Whether mobilisation fees formed part of royalty; (iii) Whether receipts described as reimbursement of expenses were liable to be treated as royalty; (iv) Whether the TDS credit and consequential interest issues required interference; and (v) Whether initiation of penalty proceedings was sustainable.

Issue (i): Whether consideration received for time charter of the vessel with crew was taxable as royalty under the Income-tax Act and the India-Singapore tax treaty.

Analysis: The vessel remained under the owner's exclusive control and command throughout the charter period. The charterer was entitled only to the services rendered by the vessel and crew, not to independent possession, dominion, or control over the equipment. The distinction between use of an asset by the owner for rendering services and use of the asset by the charterer was treated as material. On those facts, the consideration did not answer the treaty definition of royalty for use of industrial, commercial or scientific equipment.

Conclusion: In favour of the assessee. The time charter receipts were not royalty.

Issue (ii): Whether mobilisation fees formed part of royalty.

Analysis: The mobilisation charge was found to be integrally connected with the same time charter arrangement. Once the principal charter receipts were held not to be royalty, the ancillary mobilisation amount could not be independently characterised as royalty on the basis adopted by the revenue authorities.

Conclusion: In favour of the assessee. The mobilisation fees were not taxable as royalty.

Issue (iii): Whether receipts described as reimbursement of expenses were liable to be treated as royalty.

Analysis: The reimbursement issue could not be conclusively decided on the existing record because the actual expenses claimed, the basis of allocation, and the supporting details were not properly verified. The matter required factual examination by the assessing authority.

Conclusion: In favour of neither side at this stage. The issue was restored to the assessing authority for verification.

Issue (iv): Whether the TDS credit and consequential interest issues required interference.

Analysis: The TDS credit dispute depended on verification of the record, and the interest levies were consequential to the outcome of the assessment and set-aside proceedings.

Conclusion: The TDS credit issue was restored for verification and the interest grounds were kept open for consequential recomputation.

Issue (v): Whether initiation of penalty proceedings was sustainable.

Analysis: The challenge to initiation of penalty proceedings was premature at the assessment stage.

Conclusion: Against the assessee. The penalty ground was rejected as premature.

Final Conclusion: The appeal succeeded on the principal royalty controversy, ancillary charter-related receipts were also held outside royalty, one reimbursement issue and the TDS credit question were remitted for verification, and the penalty challenge failed.

Ratio Decidendi: A payment is not royalty for use of industrial, commercial or scientific equipment unless the payer is given independent use or right to use the equipment; where the owner retains exclusive control and renders services through the equipment, the receipt is consideration for services rather than royalty.

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