Royalty under India-UK DTAA excluded for internal shared services; no withholding tax under section 195.

Payments under a shared services arrangement for global brand, communications, and technology/knowledge management were not royalty under Article 13(3) of the India-UK DTAA because the services were internal support functions, advisory in nature, and confined to member firms' use. No copyright, intellectual property, or right to use industrial, commercial, or scientific equipment was transferred, and the payments did not constitute consideration for information concerning industrial, commercial, or scientific experience. As the amounts fell outside the treaty definition of royalty, no tax was deductible at source under section 195. The mutuality and reimbursement arguments were not examined further once non-taxability as royalty was found.

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

Analysis: The payments were made to a group entity that provided internal support services for the Deloitte network. The services relating to brand, communications, and technology were held to be advisory, supportive, and for internal use of member firms, without any transfer of copyright, intellectual property, or right to use any industrial, commercial, or scientific equipment. The arrangement did not amount to consideration for information concerning industrial, commercial, or scientific experience. The earlier view relied upon by the Revenue, including the AAR ruling on software-related deliverables, had been displaced by later authority, and the payments were held to fall outside the treaty definition of royalty. The plea based on mutuality was not examined in section 195 proceedings, and the reimbursement argument became academic once the amounts were found not taxable as royalty.

Conclusion: The payments were not royalty under Article 13(3) of the India-UK DTAA, and no tax was deductible at source under section 195.

Ratio Decidendi: For section 195 purposes, amounts paid for internal support services do not attract withholding if they do not involve transfer of copyright, proprietary rights, or other treaty-specified incidents of royalty.

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