Treaty definition of royalty prevails: bandwidth payments without equipment use or secret process are not taxable royalty.

Under the India-UK DTAA, standard bandwidth payments were treated as not constituting royalty because the payer obtained no right to use equipment or any secret process of the UK resident, so no tax was deductible at source on that basis. The Tribunal also stated that Explanations 5 and 6 to section 9(1)(vi) could not be imported into the treaty through Article 3(2) to widen the agreed definition of royalty, because a unilateral domestic amendment cannot override or enlarge a bilateral DTAA. The result was that the treaty definition remained controlling and bandwidth services stayed outside royalty.

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Issues: (i) whether payments made for bandwidth services to the UK resident constituted royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 13(3) of the India-UK DTAA, so as to require deduction of tax at source; (ii) whether Explanations 5 and 6 to section 9(1)(vi) could be read into the DTAA through Article 3(2) so as to enlarge the treaty definition of royalty.

Issue (i): whether payments made for bandwidth services to the UK resident constituted royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 13(3) of the India-UK DTAA, so as to require deduction of tax at source.

Analysis: The payment was for standard bandwidth services and the assessee did not obtain any right to use equipment or any secret process of the non-resident. The definition of royalty in the India-UK DTAA was held to be in pari materia with the treaty considered in the assessee's earlier years, and the earlier Tribunal view had already held that similar bandwidth payments were not royalty. The Tribunal also noted that the later judicial authorities supported the view that such payments, absent use of equipment or a right to use a process, do not fall within royalty.

Conclusion: The payment for bandwidth services was not royalty and no tax was deductible at source on that basis.

Issue (ii): whether Explanations 5 and 6 to section 9(1)(vi) could be read into the DTAA through Article 3(2) so as to enlarge the treaty definition of royalty.

Analysis: The Tribunal held that a unilateral amendment to domestic tax law cannot alter the terms of a treaty unless the treaty itself is amended bilaterally. It relied on the principle that domestic law changes cannot override treaty provisions, and that Article 3(2) does not permit importing an expanded domestic-law meaning into a fully defined treaty term in a manner that would amount to a treaty override. The line of authority rejecting such importation of the amended domestic definition into the DTAA was followed.

Conclusion: Explanations 5 and 6 to section 9(1)(vi) could not be applied to enlarge the treaty definition of royalty.

Final Conclusion: The Revenue's challenge to the CIT(A)'s declaration failed, and the assessee's payment for bandwidth services remained outside the scope of royalty under the treaty.

Ratio Decidendi: Where the applicable DTAA defines royalty, domestic-law amendments expanding the scope of royalty cannot be read into the treaty through Article 3(2) so as to create a unilateral treaty override; standard bandwidth services, without use of or right to use equipment or a secret process, do not constitute royalty.

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