Logistics payments to a non-resident were not royalty, and no withholding applied where the income was not chargeable in India.

Ocean freight and incidental logistics payments to a non-resident shipping/logistics company were held not to be royalty under section 9(1)(vi) or Article 9 of the India-Korea DTAA because the payments were for logistics services, not for any right to use a ship or equipment, and there was no control over or authority to operate the vessel. The non-resident also had no place of business or permanent establishment in India, so the service income was taxable only in Korea under Article 7. As the sums were not chargeable to tax in India, section 195 withholding did not apply and the consequential disallowance under section 40(a)(i) was not justified.

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Issues: (i) Whether ocean freight and incidental logistics payments made to the non-resident shipping/logistics company constituted royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 9 of the India-Korea DTAA. (ii) Whether the said payments were chargeable to tax in India so as to attract deduction of tax under section 195 of the Income-tax Act, 1961 and disallowance under section 40(a)(i) of the Income-tax Act, 1961.

Issue (i): Whether ocean freight and incidental logistics payments made to the non-resident shipping/logistics company constituted royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 9 of the India-Korea DTAA.

Analysis: The payment was found to be for logistics services, including movement of goods across ports outside India and ancillary coordination services, and not for any right to use ship or equipment. The arrangement did not confer control over the vessel or authorisation to operate it. On that basis, the payment did not answer the description of royalty under section 9(1)(vi) or the treaty provision dealing with shipping income.

Conclusion: The payment was not royalty and the disallowance could not be sustained on that footing.

Issue (ii): Whether the said payments were chargeable to tax in India so as to attract deduction of tax under section 195 of the Income-tax Act, 1961 and disallowance under section 40(a)(i) of the Income-tax Act, 1961.

Analysis: The non-resident did not have a place of business or permanent establishment in India, and the profits from the logistics services were held taxable only in Korea under Article 7 of the India-Korea DTAA. Since section 195 applies only to sums chargeable under the Act, no withholding obligation arose where the remittance was not chargeable in India. Consequently, the consequential disallowance under section 40(a)(i) also failed.

Conclusion: The payments were not chargeable in India, no tax was deductible at source, and the disallowance under section 40(a)(i) was not justified.

Final Conclusion: The deletion of the disallowance was upheld and the revenue's appeal was rejected.

Ratio Decidendi: Freight payments for logistics services rendered by a non-resident without a permanent establishment in India are not royalty, and in the absence of any sum chargeable to tax in India, section 195 is not attracted and no disallowance under section 40(a)(i) can be made.

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