Treaty royalty cap turns on the actual contract signing date, not the retrospective effective date of the agreement.

Under the DTAA royalty provision, the decisive factor is the actual signing date of the contract, not any retrospective effective date assigned to it. Where royalty is otherwise taxable in India under section 9(1)(vi) and section 195 governs deduction at source, the concessional 30 per cent ceiling under Article 13(2) applies if the royalty is paid under a contract signed after the Convention entered into force. On the facts noted, the 10-12-1981 agreement was treated as a fresh contract executed after the DTAA began to operate, supported by correspondence, approvals and materially revised terms, so the royalty tax cap applied.

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Issues: Whether the agreement dated 10-12-1981 was a new agreement signed after the DTAA came into force, so as to limit tax on royalty to 30 per cent under Article 13(2), or merely an extension of the earlier agreement.

Analysis: The royalty was otherwise taxable in India under section 9(1)(vi) of the Income-tax Act, 1961 and section 195 governed deduction at source. Under Article 13(2) of the DTAA, the concessional ceiling of 30 per cent applied where the royalty was paid in respect of a right or property first granted after the Convention entered into force, or under a contract signed after that date. The agreement executed on 10-12-1981 was actually signed after the DTAA came into force on 23-11-1981. The correspondence and approvals showed that the earlier arrangement had expired and the later instrument was executed after modifications, with materially different terms from the earlier agreements. The effective date of 1-1-1980 did not alter the fact that the contract was signed later.

Conclusion: The agreement dated 10-12-1981 was a fresh agreement signed after the DTAA entered into force, and the tax on royalty was therefore capped at 30 per cent. The finding was in favour of the assessee.

Ratio Decidendi: For the purpose of a treaty provision limiting tax on royalty where the contract is signed after the Convention's entry into force, the decisive date is the actual signing date of the agreement, not the retrospective effective date assigned to it.

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