ITAT Holds IT, Infrastructure Allocations Not Taxable as Royalty under India-Belgium DTAA

The assessee received allocations from its Belgian associated enterprise towards IT-infrastructure facilities, including SAP licences, application support, antivirus and backup services, VPN, and related IT maintenance. These costs, incurred by the overseas group and allocated to subsidiaries, were held by the AO to be taxable as royalties and fees for technical services, attracting withholding obligations. Disallowance under Section 40(a)(i) was therefore made. The DRP endorsed this view after classifying the payments as taxable royalties. In appeal, the Tribunal initially treated the entire payment as equipment royalty both under Section 9(1)(vi) of the Act and Article 12(3)(a) of the India–Belgium DTAA.

The assessee filed a Miscellaneous Application, submitting that the notified treaty omits the phrase “use of industrial, commercial or scientific equipment,” and that the confusion between the words “Plan” and “Plant” had led to an erroneous interpretation. A difference of opinion between the Judicial and Accountant Members was referred to a Third Member.

Issue Raised: Whether payments made for use of IT-infrastructure facilities to a Belgian associated enterprise constituted “royalty” under Section 9(1)(vi) of the Income-tax Act and Article 12 of the India–Belgium DTAA, thereby requiring tax deduction at source and disallowance under Section 40(a)(i).

ITAT’s Decision: The Third Member concurred with the Judicial Member and held that payments made for use of IT infrastructure do not constitute royalty under the India-Belgium DTAA. Referring to the official Gazette Notification, the Tribunal noted that the expression “use of industrial, commercial or scientific equipment” was deleted from Article 12 and that the word “Plant” found in earlier references was a typographical error, the correct term being “Plan”. Thereon, it held that such payments fall outside the Article 12 definition of royalty and therefore are not taxable under the treaty.

Therefore, the Tribunal held that tax need not be deducted at source under Section 195, and disallowance under Section 40(a)(i) could not be upheld. The coordinate Bench’s earlier order characterising the payments as equipment royalty was therefore set aside. In accordance with the majority opinion, the assessee’s appeal was allowed and the disallowance deleted.

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