Aircraft leasing receipts not taxable as royalty where treaty excludes aircraft and more beneficial treaty terms prevail.

Aircraft leasing receipts were held not taxable as royalty under Article 12 of the applicable treaty because that provision expressly excludes aircraft from the equipment-use limb of royalty. The domestic royalty charging provision could not be relied on to tax the same receipts where the treaty was more beneficial to the assessee. In consequence, section 9(1)(vi) could not override the treaty position, and the reassessment notice based on the royalty characterisation failed. The stated ratio is that, where a treaty specifically excludes a receipt from royalty and the treaty is more beneficial, the domestic royalty provision cannot be used to bring the amount to tax.

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Issues: (i) Whether receipts from aircraft leasing could be treated as royalty under the treaty and the Income-tax Act, and (ii) whether the domestic charging provision could be invoked despite the more beneficial treaty provision.

Issue (i): Whether receipts from aircraft leasing could be treated as royalty under the treaty and the Income-tax Act

Analysis: The reassessment was founded on the premise that the amount received for aircraft leasing fell within royalty. Article 12 of the treaty expressly excludes aircraft from the definition of equipment whose use may generate royalty. On that plain reading, the receipt could not be brought within the royalty limb of the treaty.

Conclusion: The receipt from aircraft leasing was not taxable as royalty under Article 12 of the treaty, and the contrary view was unsustainable.

Issue (ii): Whether the domestic charging provision could be invoked despite the more beneficial treaty provision

Analysis: The domestic provision dealing with royalty could not override the treaty where the treaty was more beneficial to the assessee. The treaty prevailed by virtue of the statutory scheme recognising that, in case of inconsistency, the assessee may rely on the more beneficial treaty position. The reassessment notice, being built on the opposite assumption, could not be sustained.

Conclusion: Section 9(1)(vi) could not be invoked to tax the receipts in the face of the more beneficial treaty provision, and the reassessment action failed.

Final Conclusion: The reassessment notice was quashed and the writ petition was allowed, while leaving it open to the revenue to take such action as may otherwise be permissible in law.

Ratio Decidendi: Where a tax treaty specifically excludes a receipt from the definition of royalty, the domestic royalty provision cannot be used to tax it if the treaty is more beneficial to the assessee.

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