Transfer of technical know-how under section 115A(1)(ii) upheld, not fees for technical services, in collaboration agreement tax dispute.

A collaboration agreement for transfer outside India of drawings, designs, documentation and technical know-how was treated as consideration for transfer of technical know-how, not fees for technical services. Applying the Explanation to section 9(1)(vii), the court distinguished payment for services rendered from transfer of know-how, and found the contractual clauses substantially mirrored section 115A(1)(ii). The payment therefore fell under section 115A(1)(ii) rather than section 115A(1)(iii), and the Tribunal's view was upheld in favour of the assessee and against the Revenue.

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Issues: Whether the collaboration agreement fell under section 115A(1)(ii) of the Income-tax Act, 1961 and not under section 115A(1)(iii) of the Income-tax Act, 1961, and whether the technical know-how fee received was taxable only to the extent contemplated by section 115A(1)(ii).

Analysis: The agreement was found to provide for transfer outside India of drawings, designs, documentation and technical know-how relating to the products manufactured under the collaboration. The Explanation to section 9(1)(vii) of the Income-tax Act, 1961 was applied to distinguish fees for technical services, which contemplate payment for services rendered, from consideration for transfer of technical know-how. The relevant contractual clauses were held to substantially reproduce the language of section 115A(1)(ii), supporting the view that the payment was covered by that provision and not by section 115A(1)(iii).

Conclusion: The questions were answered in favour of the assessee and against the Revenue. The Tribunal's view that the amount fell under section 115A(1)(ii) was upheld.

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