Treaty royalty test: sponsorship and advertising rights were not royalty, and treaty benefits were not denied for lack of substance.

Sponsorship and advertising package payments for logo display, promotional privileges, official sponsor status and complimentary tickets did not amount to royalty under the India-Malaysia DTAA because the treaty definition in Article 12(3) is limited to consideration for use of, or right to use, specified intellectual property or similar assets. The broader domestic definition was irrelevant once the treaty test was not met. Treaty benefits were also not denied under Article 28, as the Malaysian entity had pre-existing business presence, infrastructure and commercial turnover, and the record did not establish a mere conduit or sham arrangement lacking substance.

---

---

Issues: (i) Whether the payment for advertising package rights, including logo rights, advertising privileges, promotional activities rights and complimentary tickets, constituted royalty under the India-Malaysia DTAA and the Income-tax Act, 1961; (ii) Whether Article 28 of the India-Malaysia DTAA could be invoked to deny treaty benefits on the footing that the Malaysian intermediary was a mere conduit or that the arrangement lacked economic substance.

Issue (i): Whether the payment for advertising package rights, including logo rights, advertising privileges, promotional activities rights and complimentary tickets, constituted royalty under the India-Malaysia DTAA and the Income-tax Act, 1961.

Analysis: The payment related only to publicity and sponsorship rights, namely display of sponsor logo, use of the status of official sponsor or partner, promotional participation, and access-linked benefits. The definition of royalty under Article 12(3) of the India-Malaysia DTAA is narrower and requires consideration for the use of, or right to use, copyright, patent, trade mark, design, model, process, equipment, or know-how. Applying the treaty definition, and following the principle that no payment can be treated as royalty unless it falls within the specified categories, the consideration for these sponsorship and advertising rights did not amount to royalty. Once the treaty itself did not treat the payment as royalty, there was no occasion to resort to the broader domestic law definition.

Conclusion: The payment was not royalty and was not taxable in India on that basis, in favour of the assessee.

Issue (ii): Whether Article 28 of the India-Malaysia DTAA could be invoked to deny treaty benefits on the footing that the Malaysian intermediary was a mere conduit or that the arrangement lacked economic substance.

Analysis: The record showed that the Malaysian entity existed before the transaction, had business infrastructure, and earned substantial turnover from multiple contracts. The fact that rights passed through the group structure and that one agreement preceded another was not enough, by itself, to establish a sham arrangement or a mere paper conduit. The absence of any meaningful functions in Cayman Islands, coupled with actual operations in Malaysia, supported the conclusion that the Malaysian entity was not a name-lender created only to secure treaty benefits. The material on record did not justify denial of the treaty on the ground of lack of substance.

Conclusion: Article 28 could not be invoked to deny the treaty benefit, in favour of the assessee.

Final Conclusion: The additions made on account of alleged royalty were deleted and the assessee's cross-appeal succeeded, while the Revenue's challenge to the relief granted by the first appellate authority failed.

Ratio Decidendi: Sponsorship and advertising rights that only permit publicity, branding, and promotional usage do not constitute royalty unless the payment is for the use of, or right to use, a specified intellectual property right or similar asset within the treaty definition.

---