Royalty treatment of non-resident circuit and internet facility payments cannot be expanded retrospectively under tax law.

Payments to a non-resident for leased circuit or internet-related facilities were analysed under Section 9(1)(vi) and the Finance Act, 2012 explanations, with the Court holding that those later explanations could not be applied retrospectively to expand the meaning of royalty for earlier assessment years. On that basis, facility-use payments to a non-resident did not become royalty merely because the recipient was outside India, absent the relevant taxable nexus. No tax deduction obligation arose under Section 195 on that characterisation, and the issue was decided in favour of the assessee.

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Issues: Whether payments made to a non-resident for leased circuit or internet-related facilities constituted royalty so as to attract deduction of tax at source under Section 195 of the Income-tax Act, 1961, and consequent disallowance under the Act.

Analysis: The payment was examined in the light of Section 9(1)(vi) of the Income-tax Act, 1961, together with the Explanations inserted by the Finance Act, 2012. The governing principle applied was that the later explanations could not be given retrospective operation so as to enlarge the scope of royalty for earlier assessment years. The Court followed the binding view that such payments for facility use by a non-resident, in the absence of the relevant taxable nexus, do not by themselves become royalty merely because the recipient is outside India.

Conclusion: The payment did not constitute royalty for the relevant assessment year and no tax deduction obligation arose on that basis; the issue was decided in favour of the assessee.

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