Shared services payments not royalty where no intellectual property rights or exploitation rights were transferred.

Payments under a shared services arrangement for global brand support, communications, and technology/knowledge management were not royalty under Article 13(3) of the India-UK DTAA because they involved internal-use services rather than any transfer of copyright, trademark, patent, equipment, or proprietary intellectual property. The arrangement also did not amount to imparting industrial, commercial, or scientific experience. Applying the later judicial position that royalty requires a transfer of copyright or a right to exploit it, the amounts fell outside the royalty definition and no tax deduction at source was required under Section 195.

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Issues: Whether the payments made for global brand, global communications and global technology/knowledge management under the shared services arrangement constituted royalty under Article 13(3) of the India-UK DTAA so as to attract deduction of tax at source under Section 195 of the Income-tax Act, 1961.

Analysis: The payments were examined in the context of the shared services arrangement and the specific nature of the impugned services. The activities relating to brand support, internal communications, and technology/knowledge management were found to be for internal use within the network and not for transfer of any copyright, trademark, patent, scientific equipment, or proprietary intellectual property. It was further held that the arrangement did not involve imparting information concerning industrial, commercial or scientific experience, but only provision of services and support. Reliance placed on the earlier view treating similar payments as royalty was displaced by the later judicial position that royalty requires a transfer of copyright or a right to exploit it, which was absent here.

Conclusion: The payments did not fall within the scope of royalty under Article 13(3) of the India-UK DTAA and, therefore, no tax was required to be deducted at source under Section 195.

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