Interconnect usage charges are not royalty where treaty definition is narrower and no equipment use or secret process exists.

Interconnect usage charges received by a non-resident telecom service provider from Indian operators were analysed under section 9(1)(vi) and the India-Japan DTAA. The article states that the domestic royalty definition was read broadly, but the treaty definition remained narrower and prevailed where there was no transfer of intellectual property rights, no possession or control of equipment, and no exclusive right to use equipment. It also notes that a standard commercial telecom connectivity process was not a secret process. In the absence of a permanent establishment in India, the receipts were treated as business profits taxable only in the residence State, and therefore not taxable in India as royalty.

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Issues: Whether interconnect usage charges received by the non-resident assessee from Indian telecom operators were taxable in India as royalty under section 9(1)(vi) of the Income-tax Act, 1961 and under the India-Japan DTAA.

Analysis: The receipt was examined in the context of the domestic definition of royalty and the treaty definition. The domestic provision was considered to cover royalty for use of a process or equipment, but the reasoning held that the term "process" in the royalty clause refers to an intellectual property-like process and that the facts did not show transfer of any intellectual property rights, possession, control, or exclusive right to use equipment. The retrospective domestic explanations widening the meaning of royalty were held not to alter the narrower treaty definition. It was also found that the process used for providing telecom connectivity was a standard commercial process and not a secret process. In the absence of any permanent establishment in India, the payment was treated as business profits taxable only in the residence State under the treaty.

Conclusion: The interconnect usage charges were not taxable as royalty in India and the merits were decided in favour of the assessee.

Ratio Decidendi: Where a treaty defines royalty more narrowly than the domestic law, the treaty prevails, and telecom interconnect charges are not royalty unless there is use or right to use equipment or a secret process coupled with the requisite control or possessory rights.

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