Outright transfer of technical know-how excluded royalty treatment and left the lump sum outside Indian tax absent a permanent establishment.

A lump sum payment for technical know-how was treated as consideration for an outright transfer of the know-how, not as royalty or fees for technical services. The agreement, read as a whole, showed that the foreign party had to transfer technical information and documents, while the Indian party could assign the agreement, register the patent in its own name, and continue using the know-how after expiry or termination. The separate treatment of lump sum and running royalty payments supported a sale of know-how rather than a mere licence. In the absence of a permanent establishment in India, the receipt was characterised as business profit and held not taxable in India under the treaty.

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Issues: Whether the lump sum payment for technical know-how was taxable in India as royalty or fees for technical services, or whether it was a business receipt arising from an outright sale of technical know-how and therefore not taxable in the absence of a permanent establishment.

Analysis: The agreement was read as a whole. The foreign company was obliged to transfer technical information and documents, and the Indian company was granted rights to transfer or assign the agreement, to register the patent in its own name, and to continue using the know-how even after expiry or termination of the agreement. The lump sum payment was separately distinguished from running royalty payments on sales. These features showed transfer of the technical know-how itself, not merely a right to use it. On that construction, the lump sum was not royalty or fees for technical services. Since the foreign company had no permanent establishment in India, the receipt was a business profit and could not be taxed in India under the applicable treaty.

Conclusion: The lump sum payment was held to be consideration for outright transfer of technical know-how and not taxable in India.

Ratio Decidendi: Where the agreement, read as a whole, shows transfer of know-how with assignability, patent registration rights, and post-termination use rights, the lump sum consideration is a business receipt from sale of know-how and not royalty or fees for technical services; in the absence of a permanent establishment, it is not taxable in India.

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