Treaty royalty characterization of IT infrastructure payments excluded equipment royalty under the India-Belgium tax treaty.

Consideration for use of an IT infrastructure facility was examined under the India-Belgium tax treaty to determine whether it constituted royalty taxable in India and triggered withholding tax. The treaty, as modified by the relevant notification, was read as not retaining the clause covering use of, or right to use, industrial, commercial or scientific equipment. The text was construed to contain "Plan" rather than "Plant", with "Plant" treated as a typographical error. On that construction, the payment did not fall within treaty royalty under Article 12(3)(a), so no withholding tax was exigible and disallowance under section 40(a)(i) was not sustainable.

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Issues: Whether the consideration paid for use of IT infrastructure facility under the India-Belgium tax treaty constituted royalty taxable in India and attracted withholding tax liability, thereby justifying disallowance under section 40(a)(i) of the Income-tax Act, 1961.

Analysis: The payment was found to be for use of an IT infrastructure facility and the treaty text was examined against the domestic royalty definition and the applicable treaty provision. The decisive factor was that the India-Belgium treaty, as modified by the relevant notification, did not retain the clause covering consideration for the use of, or the right to use, industrial, commercial or scientific equipment. The word appearing in the treaty text was read as "Plan" and not "Plant", and the latter was treated as a typographical error. On that construction, the payment could not be brought within industrial or equipment royalty under Article 12(3)(a) of the treaty.

Conclusion: The payment was not taxable as royalty under the India-Belgium treaty, no withholding tax was exigible, and the disallowance under section 40(a)(i) was not sustainable.

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