Treaty protection for interconnect charges: telecom connectivity receipts were not taxable as royalty absent any right to use network assets.

Interconnect usage charges received by a non-resident telecom operator were held not taxable in India as royalty under the Income-tax Act and Article 12 of the India-Sri Lanka DTAA because the Indian payer only received carriage and connectivity services, with no transfer of any right to use the operator's network, equipment, intellectual property or secret process. The domestic deeming expansions in the royalty definition could not be read into the treaty absent a corresponding amendment, and section 90(2) entitled the assessee to the more beneficial treaty position. The treaty definition of royalty also did not cover the receipts, and the absence of a permanent establishment in India supported non-taxability as business income.

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Issues: Whether interconnect usage charges received by a non-resident telecom operator from an Indian telecom operator are taxable in India as royalty under the Income-tax Act, 1961 and Article 12 of the India-Sri Lanka DTAA, and whether the expanded domestic law definition of royalty can override the treaty.

Analysis: The receipt arose from carriage and connectivity services, with no transfer of any right to use the assessee's network, equipment, intellectual property, or secret process by the Indian payer. The domestic deeming expansions in the royalty definition, including the clarificatory Explanations relied on by the Revenue, could not be imported into the DTAA in the absence of a corresponding treaty amendment. Under section 90(2), the assessee was entitled to the more beneficial treaty position. The cited treaty definition of royalty also did not bring the impugned interconnect charges within its scope, and the absence of a permanent establishment in India reinforced the non-taxability of the receipt as business income.

Conclusion: The interconnect usage charges were not taxable as royalty in India under the treaty, and the addition was deleted in favour of the assessee.

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