Technology transfer payments as royalty where agreement grants only a restricted licence to use know-how, not ownership transfer.

A lump sum paid under a technology transfer agreement was treated as royalty because the agreement granted only a non-exclusive right to manufacture, use, maintain and sell the licensed products, while ownership and proprietary rights in the technology and know-how remained with the foreign licensor. Confidentiality obligations, restrictions on disclosure, licensor control over improvements and patents, inspection rights, and reversion on breach showed a licence to use, not an outright transfer of intellectual property. The payment therefore fell within the royalty category under the DTAA and was taxable in India. The court held that the lump sum nature of the payment did not alter its character as royalty.

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Issues: Whether the lump sum payments made under the technology transfer agreement constituted royalty under Article VIIIA of the DTAA and were taxable in India, or whether they represented consideration for an outright transfer of ownership in technology and know-how.

Analysis: The agreement granted only a non-exclusive right to manufacture, use, maintain and sell the licensed products, while ownership and proprietary rights in the technology and technical information remained with the foreign licensor. The agreement imposed strict confidentiality obligations, restricted disclosure, preserved the licensor's control over improvements and patents, allowed quality control and inspection, and provided for reversion of rights on breach. These features showed that the assessee received permission to use the technology and know-how, not an absolute transfer of the underlying intellectual property. Lump sum payment does not take the receipt out of the royalty category where the real nature of the arrangement is a licence to use.

Conclusion: The payments were royalty and taxable in India under the DTAA. The issue was decided against the assessee and in favour of the Revenue.

Ratio Decidendi: Where an agreement grants only a restricted right to use technology or know-how, subject to confidentiality, control, and reversionary conditions, the consideration is royalty and not consideration for sale or absolute transfer of ownership.

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