Royalty versus fees for technical services: technology transfer payments were taxed as royalty, not technical services.

Payments under an agreement for transfer of technology, drawings, designs, engineering and limited site assistance were treated as royalty rather than fees for technical services. Reading the agreement as a whole and applying Explanation 2 to section 9, the consideration was held to relate to technology transfer and allied rights, not to independent managerial, technical or consultancy services. The limited site assistance described in the contract did not change the character of the payment. The amount was therefore taxable as royalty at 20% under section 115A, and the alternative classification as fees for technical services at 40% was rejected.

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Issues: Whether the amounts payable under the agreement with the foreign company were taxable as royalty at 20% under section 115A, or as fees for technical services at 40%.

Analysis: The agreement provided for transfer of technology, drawings, designs, engineering and limited site assistance, with the consideration split into heads relating to technology transfer, drawings and designs, and engineering consultancy. Reading the agreement as a whole and applying the definitions in Explanation 2 to section 9, the payment was held to be consideration for royalty and not for independent managerial, technical or consultancy services. The limited assistance described in the agreement did not convert the transaction into one for fees for technical services.

Conclusion: The amount payable under the agreement was held to be royalty, attracting income-tax only at 20%, and the contrary classification as fees for technical services was rejected.

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