Promotional rights under a sports marketing agreement were not royalty, but India-linked event payments attracted mandatory withholding.

Advertisement and promotional rights under the Marketing and Advertising Agreement were examined by their substance, not their label, and were held not to constitute royalty or fees for technical services under the India-Mauritius DTAA; in the absence of a permanent establishment, the Mauritian recipient's income was treated as business profits not chargeable in India. For payments relating to games played in India, the amount was characterised as income of a non-resident sports association linked to the sporting event, so section 194E applied as a special withholding provision. The payer was therefore required to deduct tax at the statutory rate under section 194E, independent of section 195 and the treaty position.

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Issues: (i) Whether the payment made under the Marketing and Advertising Agreement was taxable in India in the hands of the Mauritian recipient under the India-Mauritius DTAA. (ii) Whether the payer was required to withhold tax on payments made under the Marketing and Advertising Agreement in respect of games played in India and, if so, at what rate.

Issue (i): Whether the payment made under the Marketing and Advertising Agreement was taxable in India in the hands of the Mauritian recipient under the India-Mauritius DTAA.

Analysis: The payment under the Marketing and Advertising Agreement was examined on the basis of the rights actually transferred, and not merely on the label used in the agreement. The rights under that agreement were found to be predominantly for advertisement, marketing and promotion of the assessee's products during ICC events. They did not amount to use of, or right to use, copyright, trademark, equipment, or technical experience so as to fall within the DTAA definition of royalty. The income was also not treated as fee for technical services. In the absence of a permanent establishment, the amount was treated as business profits not chargeable in India under the treaty.

Conclusion: The payment under the Marketing and Advertising Agreement was not taxable in India in the hands of the Mauritian recipient.

Issue (ii): Whether the payer was required to withhold tax on payments made under the Marketing and Advertising Agreement in respect of games played in India and, if so, at what rate.

Analysis: For games played in India, the payment was held to be income of a non-resident sports association or institution in relation to games played in India and, in substance, guaranteed fee linked to the sporting event. Once section 115BBA applied, section 194E created an absolute withholding obligation, independent of chargeability under section 195 and unaffected by the DTAA or the exemption notification. The treaty rate under section 115A was held inapplicable because the payment was not royalty. The applicable deduction was therefore under section 194E at the statutory rate in force for the relevant time.

Conclusion: The payer was required to withhold tax on payments relating to games played in India, and the deduction had to be made under section 194E at the rate prescribed by that provision.

Final Conclusion: The ruling accepted non-taxability under the treaty for the Marketing and Advertising Agreement as such, but upheld withholding obligations for the India-linked portion of the payment under the special sports-association provisions of the Act.

Ratio Decidendi: For treaty purposes, advertisement and promotional rights do not become royalty merely because incidental trademark or brand usage occurs, but payments in substance guaranteed to a non-resident sports association for games played in India attract the special withholding regime under section 194E, which operates independently of section 195 and the DTAA.

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