Royalty

In order to treat any payment as in the nature of equipment royalty, the same must be made for the use of or right to use industrial, commercial or scientific equipments and the customer/subscriber must have control over the equipment — as held by MumTrib in Yahoo India P Ltd v DCIT — In favour of: The Assessee ; ITA No. 506/Mum/2008 : Assessment Year: 2004–2005

The payment made by assessee to Yahoo Holdings (Hong Kong) Ltd for the services rendered for uploading and display of the banner advertisement of the Department of Tourism of India on its portal are not in the nature of royalty and in the absence of any PE of Yahoo Holdings (Hong Kong) Ltd in India, it was not chargeable to tax in India.

The word “use” in relation to equipment occurring in cl (iva) of Explanation to s 9(1)(vi) is not to be understood in the broad sense of availing of the benefit of an equipment. The context and collocation of the two expressions “use” and “right to use” followed by the word “equipment” indicate that there must be some positive act of utilisation, application or employment of equipment for the desired purpose. If an advantage was taken from sophisticated equipment installed and provided by another, it could not be said that the recipient/customer “used” the equipment as such. The customer merely made use of the facility, though he did not himself use the equipment. What is contemplated by the word “use” in clause (iva) of Explanation 2 to s 9(1)(vi) is the customer came face to face with the equipment, operated it or controlled its functions in some manner. However, if it did nothing to or with the equipment and did not exercise any possessory rights in relation thereto, it only made use of the facility created by the service provider who was the owner of the entire network and related equipment and there was no scope to invoke clause (iva) in such a case because the element of service predominated. The predominant features and underlying object of the agreement unerringly emphasised the concept of service. That even where an earmarked circuit was provided for offering the facility, unless there was material to establish that the circuit/equipment could be accessed and put to use by the customer by means of positive acts, it did not fall within the category of “royalty” in clause (iva) of Explanation 2 to s 9(1)(vi).

Decided on: 24 June 2011