Treaty rate on royalty payments turns on whether the Government of India was the effective payer under the agency arrangement.

Royalty payments made through Hindustan Aeronautics Ltd. were treated as payments by the Government of India for treaty purposes because the agreement appointed the company only as the Government's agent for implementation and performance. On that basis, the payer was not a separate non-government person acting on its own account, so the higher treaty rate did not apply. The India-UK Double Tax Avoidance Agreement therefore applied the lower royalty rate where the Government of India was the payer, resulting in taxation at 15 per cent rather than 20 per cent.

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Issues: Whether royalty payments made through Hindustan Aeronautics Ltd. were payments by the Government of India for the purpose of the treaty rate applicable to royalties under the Double Tax Avoidance Agreement between India and the United Kingdom.

Analysis: The agreement showed that Hindustan Aeronautics Ltd. was appointed only as agent of the Government of India for implementation and performance of the agreement. The royalty was therefore paid by the agent on behalf of the principal and not on its own account. On that basis, the payment could not be treated as having been made by a person other than the Government of India so as to attract the higher treaty rate. The treaty provision applied the lower rate where the payer was the Government of India.

Conclusion: The royalty was paid by the Government of India for treaty purposes, and the applicable tax rate was 15 per cent, not 20 per cent, in favour of the assessee.

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