Royalty treatment of online ad space payments rejected where no right to use website or server was transferred.

Payments for mere resale of digital advertisement space on a foreign website were not royalty under section 9(1)(vi) or Article 13 of the India-UK DTAA because no right to use the website, server, equipment, or any process was transferred, and the arrangement was only a reseller arrangement. The retrospective expansion of the domestic royalty definition could not override the more beneficial treaty definition under Article 13(3), so the amounts were not taxable in India. As a result, there was no obligation to deduct tax at source and no basis to treat the payer as an assessee in default under sections 201(1) and 201(1A).

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Issues: Whether payments made for purchase of advertisement space on a foreign website constituted royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 13 of the India-UK DTAA, so as to render the assessee liable to deduct tax at source and liable as an assessee in default under sections 201(1) and 201(1A).

Analysis: The payment was held to be only for resale of advertisement space under a reseller arrangement. No right to use the website or server was conferred on the assessee, nor was any equipment placed under its control. The arrangement did not involve transfer of any right, property, information, technical knowledge, or process, and the website/server was found not to be equipment used by the assessee in the royalty sense. The retrospective domestic-law expansions to the definition of royalty could not override the more beneficial treaty definition under Article 13(3) of the India-UK DTAA. The reliance on cases involving different factual settings, including bandwidth and server access arrangements, was held inapposite.

Conclusion: The payments did not constitute royalty and were not chargeable to tax in India; consequently, there was no obligation to deduct tax at source and the assessee could not be treated as an assessee in default.

Final Conclusion: The assessee succeeded on the core taxability issue, and the demand and consequential interest were not sustainable.

Ratio Decidendi: Payment for mere purchase or resale of digital advertisement space, without conferral of control over equipment, website, or server and without transfer of a right to use any process, does not amount to royalty where the applicable treaty definition is more beneficial than the expanded domestic definition.

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