Technical know-how payment treated as royalty where ownership stayed with the transferor and only limited use rights were granted.

Lump-sum consideration for technical know-how was treated as royalty, not a capital receipt, where the transferor retained ownership and granted only a limited right to use the know-how for a specified period. The restrictive terms requiring secrecy and limiting disclosure showed that there was no outright transfer of the underlying asset. On that basis, the payment fell within the treaty concept of royalty for the right to use know-how and was also taxable in India under the Income-tax Act, 1961. The questions were answered in favour of the Revenue.

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Issues: Whether the lump-sum consideration received for supply of technical know-how was a capital receipt or royalty taxable in India under the relevant treaty and the Income-tax Act, 1961.

Analysis: The agreement showed that the assessee retained the ownership of the know-how and only granted a limited right to use it for a specified period. The arrangement required secrecy, restricted disclosure, and preserved the assessee's control over the know-how and associated rights. On that footing, the consideration was for permitting use of the know-how and not for an outright transfer of the underlying asset. Article VII of the Double Taxation Avoidance Agreement between India and Sweden treated royalty as consideration for the right to use know-how and similar rights, and section 9 of the Income-tax Act, 1961 also supported taxability in India.

Conclusion: The lump-sum consideration was royalty and not a capital receipt, and it was taxable in India; the questions were answered in favour of the Revenue.

Ratio Decidendi: Where technical know-how is retained by the transferor and only a limited right to use it is granted under a restrictive agreement, the consideration is royalty and not capital receipt.

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