Transponder service payments were not royalty under the India-UK DTAA, so no tax withholding was required.

Transponder service payments to a non-resident were treated as not constituting royalty under section 9(1)(vi) and Article 13 of the India-UK DTAA because the treaty's own royalty definition controlled, and later domestic amendments could not enlarge it. The arrangement did not confer a right to use a process or equipment in the treaty sense, so the payments were not taxable as royalty. As a result, the payer had no obligation to deduct tax at source under section 195, and the Revenue's challenge failed.

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Issues: Whether the assessee was liable to deduct tax at source under section 195 on transponder service payments made to the non-resident payee, and whether such payments constituted royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 13 of the India-UK DTAA.

Analysis: The payment for transponder services was examined in the light of earlier co-ordinate bench decisions in the assessee's own case and the Delhi High Court's treaty interpretation on royalty. It was held that where the DTAA contains its own definition of royalty, later domestic amendments enlarging the meaning of royalty do not control the treaty text. The service arrangement did not confer a right to use a process or equipment in the manner required to attract royalty, and the amount was therefore not taxable as royalty under the treaty. On that basis, the payer was not obliged to withhold tax under section 195.

Conclusion: The assessee was not liable to deduct tax at source on the transponder service payments, and the Revenue's challenge failed.

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