Treaty definition of royalty prevails: lump sum know-how and documentation payments treated as business profits, not royalty.

Under the India-Italy tax treaty, the specific treaty definition of royalty prevailed over the wider domestic definition because the DTAA was more beneficial. Lump sum payments for technical know-how and basic process engineering documentation were treated as consideration for supply of know-how and documentation for setting up the plant, not as payment for mere use of the process. The recurring payment was separately linked to process use. As the non-resident recipient had no permanent establishment in India, the lump sum receipts were treated as business profits under the treaty and not taxable in India as royalty.

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Issues: Whether the lump sum amounts payable for technical know-how and basic process engineering documentation under the India-Italy tax treaty were royalty taxable in India, or business profits not taxable in India in the absence of a permanent establishment.

Analysis: The treaty definition of royalty was held to prevail over the wider domestic definition because section 90 gives effect to the double taxation avoidance agreement where it is more beneficial. On the contract, the separate lump sum payments were for supply of technical know-how and engineering documentation for setting up the plant, while the recurring payment was separately stipulated for use of the process. The substantive character of the lump sum payments was found to be consideration for transfer or supply of know-how and documentation, not consideration for mere use of the process. Since the recipient had no permanent establishment in India, the amounts were treated as business profits under the treaty and not as royalty.

Conclusion: The lump sum payments were not royalty under the treaty and were not taxable in India in the hands of the non-resident recipient.

Ratio Decidendi: Where a double taxation avoidance agreement contains a specific definition of royalty, that definition prevails over the domestic provision, and a lump sum paid for supply of technical know-how and documentation for setting up a plant is business profit rather than royalty when it is distinct from consideration for mere use of the process and the recipient has no permanent establishment in India.

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