Treaty royalty test: transfer of technology and know-how was not royalty, so no Indian withholding tax applied.

A technical collaboration agreement that transfers comprehensive know-how, drawings, designs, processes and related information for consideration does not amount to royalty where the treaty definition is confined to payment for the use of, or right to use, specified intellectual property or information. Limited rights to use the technology in existing factories and a conditional sublicensing right did not change the character of the payment into mere use of know-how. The remittances were therefore treated as business profits, and in the absence of a permanent establishment in India, they were not taxable in India and no tax was deductible at source.

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Issues: Whether the amounts remitted to the foreign collaborator under the technical collaboration agreement constituted royalty within Article XIII(3) of the Double Taxation Avoidance Agreement, and whether tax was deductible at source in India on those remittances.

Analysis: The agreement, read as a whole, showed a transfer of comprehensive technical know-how, drawings, designs, processes and related information for a lump sum consideration, along with limited rights to use the technology in the assessee's existing factories in India and a conditional right to sub-license with approval. The definition of royalty in the applicable treaty was narrower than the domestic definition in Section 9(1)(vi) of the Income-tax Act, 1961 and was confined to consideration for the use of, or right to use, specified intellectual property or information. A complete transfer of technology and know-how, even if non-exclusive and subject to conditions, did not amount to mere use of know-how. Since the foreign collaborator had no permanent establishment in India, the receipts were business profits and could not be taxed in India through the assessee.

Conclusion: The remittances were not royalty under Article XIII(3) of the treaty and no tax was deductible at source in India; the issue was decided in favour of the assessee.

Final Conclusion: The references failed and the question of law was answered for the assessee because the agreement effected a transfer of technology and know-how outside the treaty definition of royalty, leaving the receipts taxable in India only as business profits, which was not possible in the absence of a permanent establishment.

Ratio Decidendi: Where an agreement effects a transfer of technology and know-how for consideration, the payment is not royalty under a treaty definition confined to use or right to use intellectual property, and in the absence of a permanent establishment the receipts are taxable, if at all, only as business profits.

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