Royalty treatment for exclusive know-how: confidential manufacturing process payments were not technical service fees.

Payments under a collaboration agreement for supply of confidential data, assistance and information on working methods and manufacturing processes were treated as royalty where the know-how was exclusive, secret and for the Indian company's limited use. The court stated that royalty is not confined to consideration under a formal patent licence; it can extend to payment for the use of exclusive rights or secret business know-how having the character of a capital asset. Contractual labels and the method of computation were not decisive. On these facts, the amount attributable to manufacturing know-how was royalty, not technical service fees, in favour of the Revenue.

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Issues: Whether the payment received under the collaboration agreement, so far as referable to supply of data, assistance and information about working methods and manufacturing processes, was royalty and not technical service fees.

Analysis: The agreement treated the information as confidential, for the Indian company's exclusive use, and not as its property until it became public. The payments were linked to use of exclusive and specialised information about working methods and manufacturing processes, which enabled production under the arrangement. The Court held that royalty is not confined to payments under a formal patent licence; it extends to consideration for user of exclusive rights or secret know-how having the character of a capital asset, while mere nomenclature or the method of computation is not decisive. On the facts, the information regarding manufacturing processes was exclusive know-how and the payment attributable to it bore the character of royalty.

Conclusion: The payment attributable to the supply of exclusive technical information and manufacturing know-how was royalty and not technical service fees; the answer was in favour of the Revenue.

Ratio Decidendi: Consideration paid for the limited user of exclusive, confidential know-how or a secret process used in business may constitute royalty even without a registered patent, and the contractual label given by the parties is not conclusive.

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