Royalty tax limits for bandwidth and software payments where no equipment, process, or copyright rights are transferred

Amounts received for WAN connectivity and bandwidth services were treated as non-taxable royalty because the customer obtained only a transmission and no possessory, operational, or treaty-covered right in the network, equipment, or process; the narrower India-UK DTAA definition prevailed over the wider domestic expansion. Amounts received for shrink-wrapped software were also held not to be royalty because the transaction involved a copyrighted article for end use, with no transfer of copyright rights or interest. On that reasoning, the disputed receipts could not be brought to tax in India as royalty.

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Issues: (i) Whether amounts received for providing WAN connectivity and bandwidth services were chargeable to tax in India as royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 13 of the India-UK DTAA; (ii) Whether the amount received towards cost of shrink-wrapped software was chargeable to tax in India as royalty.

Issue (i): Whether amounts received for providing WAN connectivity and bandwidth services were chargeable to tax in India as royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 13 of the India-UK DTAA.

Analysis: The payments arose from standard connectivity arrangements under which the service provider retained control, possession, and operation of the network and equipment. The customer obtained a facility for transmission of voice and data, but did not acquire any possessory or operational right in the equipment, nor did it use a process in the treaty sense. The definition of royalty in the India-UK DTAA was narrower than the expanded domestic definition, and the later domestic explanations could not enlarge the treaty language. In case of competing judicial views, the interpretation favourable to the taxpayer was preferred.

Conclusion: The bandwidth receipts were not taxable as equipment royalty or process royalty and this issue was decided in favour of the Assessee.

Issue (ii): Whether the amount received towards cost of shrink-wrapped software was chargeable to tax in India as royalty.

Analysis: The software transaction involved acquisition of a copyrighted article for end use, without transfer of any copyright right or interest. The governing treaty provisions were applied in the light of the Supreme Court's ruling on software payments, which held that such resale or use of software through distribution arrangements does not amount to royalty when no copyright right is transferred.

Conclusion: The software-related receipt was not taxable as royalty and this issue was decided in favour of the Assessee.

Final Conclusion: The additions treating the disputed receipts as royalty could not be sustained, and the assessee succeeded on all substantive issues decided in the appeals.

Ratio Decidendi: A payment is taxable as royalty only where the payer acquires a treaty-covered right to use equipment, process, or copyright itself, and mere receipt of a service or a copyrighted article without transfer of such rights does not constitute royalty.

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