Transponder service fees are not royalty under the India-UK tax treaty when no rights in a secret process are granted.

Payments for satellite transponder service charges to a UK resident were analysed under the Income-tax Act and the India-UK DTAA. The Tribunal relied on binding High Court authority that, for treaty purposes, "process" in the royalty article means a secret process, and that a unilateral domestic amendment enlarging the definition of royalty cannot override the treaty absent bilateral amendment. The transponder arrangement was characterised as a service arrangement for uplinking and downlinking television signals, not a grant of rights in a secret process. On that basis, the fees were not royalty under the DTAA and no tax deduction was required under section 195.

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Issues: Whether payments for transponder service charges made to a UK resident constituted royalty under the Income-tax Act, 1961 and the India-UK DTAA so as to require deduction of tax at source under section 195.

Analysis: The payment was for satellite transponder services used for uplinking and downlinking television signals. The controversy turned on whether the domestic law amendment inserting Explanation 6 to section 9(1)(vi), which expands the meaning of "process", could be imported into the treaty definition of royalty through Article 3(3). The Tribunal followed binding High Court authority holding that, for the treaty, "process" in Article 13(3) means a secret process, and that a unilateral amendment to domestic law does not alter the treaty definition unless the treaty is amended bilaterally. The transponder arrangement was treated as a provision of services and not a grant of rights in a secret process.

Conclusion: The transponder service fees did not constitute royalty under the India-UK DTAA, and the assessee was not liable to deduct tax at source under section 195.

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