Royalty vs business profits: ongoing support services without transfer of know-how were not taxable as royalty.

Receipts under a Regional Service Agreement were held not to be royalty because the foreign enterprise merely performed ongoing managerial, administrative, financial, HR, technology, supplier, and operational services through its own personnel and infrastructure. The recipient obtained only the benefit of those services, without any transfer of a right to use intellectual property, secret formula, process, or proprietary know-how for independent use. The cost-plus remuneration model also supported service character rather than royalty. The receipts were taxable, if at all, only as business profits, and in the absence of a permanent establishment in India, they were not taxable in India.

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Issues: Whether the receipts received under the Regional Service Agreement were taxable as royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 12(4) of the India-Singapore DTAA, or were in the nature of consideration for services taxable as business profits.

Analysis: The arrangement was found to be a continuing regional support structure under which managerial, administrative, financial, HR, technology, supplier, and operational services were performed by the foreign enterprise through its own personnel and infrastructure. The recipient obtained only the benefit of the services and not any reproducible or confidential corpus of knowledge. The agreement did not transfer any right to use intellectual property or any secret formula, process, or know-how, and the cost-plus basis of remuneration was inconsistent with a royalty model. The distinction between applying experience in performing services and imparting experience for independent use was applied in line with the treaty text, OECD Commentary, and coordinate bench precedent.

Conclusion: The receipts were not royalty and were taxable, if at all, only as business profits. In the absence of a permanent establishment in India, they were not taxable in India. The issue was decided in favour of the assessee.

Final Conclusion: The Revenue's appeals failed, and the assessee's cross-objections did not survive after the merits were decided against the Revenue.

Ratio Decidendi: A payment is royalty only when there is a transfer of a right to use an intangible or an imparting of proprietary know-how or experience for independent use by the recipient; mere use of expertise by the service provider in performing ongoing services does not constitute royalty.

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