Royalty characterization of interconnectivity charges rejected; bandwidth and interconnect services treated as business profits absent a permanent establishment.

Interconnectivity utility charges for bandwidth capacity and interconnect services were analysed under section 9(1)(vi) and the India-Singapore DTAA, but they were held not to constitute royalty because no intellectual property right, equipment possession or effective right to use any process was transferred. The domestic term "process" was read as referring to an intellectual property process, while the treaty definition required a secret process or right to use, which was absent on the facts. The receipts were instead treated as business profits taxable only in the State of residence in the absence of a permanent establishment in India, so the amount was not taxable in India as royalty.

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Issues: Whether interconnectivity utility charges received by the non-resident assessee for bandwidth capacity and interconnect services were taxable as royalty under section 9(1)(vi) of the Income-tax Act, 1961 and under the India-Singapore DTAA.

Analysis: The payment was examined in the context of the domestic definition of royalty and the narrower treaty definition. It was found that the assessee did not transfer any intellectual property right, nor did the service recipients obtain possession, custody, control, or effective right to use any equipment or process. The expression "process" in the domestic provision was treated as referring to an intellectual property process, and the treaty was held to require a secret process or right to use, which was absent on the facts. The receipt was also treated as business profits, taxable only in the State of residence in the absence of a permanent establishment in India.

Conclusion: The interconnectivity charges were not taxable as royalty in India, and the issue was decided in favour of the assessee.

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