Separable know-how and technical service receipts must be taxed under the specific DTAA articles, not residual income rules.

Under a technical assistance and know-how agreement, the receipt was held to be separable into distinct treaty components rather than a single composite royalty payment. Only the portion attributable to transfer of know-how fell within royalty under Article 12, while consideration for training and technical services remained separate. The technical service component could not be taxed as business profits under Article 7 because the enterprise had no permanent establishment in India for the relevant years. Article 22 was unavailable because the receipts were specifically covered by Articles 12 and 7, leaving no scope for treatment as miscellaneous income.

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Issues: (i) Whether the consideration received under the technical assistance and know-how agreement was wholly taxable as royalty or was liable to be bifurcated between royalty and fees for technical services under the DTAA; (ii) whether the amount relatable to technical services could be taxed as business profits in the absence of a permanent establishment in India; (iii) whether Article 22 of the DTAA could be invoked for the receipts in question.

Issue (i): Whether the consideration received under the technical assistance and know-how agreement was wholly taxable as royalty or was liable to be bifurcated between royalty and fees for technical services under the DTAA.

Analysis: The agreement covered transfer of know-how, technical advice, supervision, training, and assistance in implementation and running of the plant. The payment was therefore not a single composite royalty receipt. On the terms of the agreement, only the portion referable to transfer of know-how fell within royalty, while the amounts paid for training and technical services were distinct components.

Conclusion: The receipt was rightly bifurcated, and only the identified royalty component was taxable as royalty under Article 12.

Issue (ii): Whether the amount relatable to technical services could be taxed as business profits in the absence of a permanent establishment in India.

Analysis: Under Article 5, business profits are taxable in the other State only where the enterprise carries on business through a permanent establishment there. The finding on remand was that the assessee had no permanent establishment in India for the relevant years. In the absence of a permanent establishment, the technical service component could not be brought to tax as business profits under Article 7.

Conclusion: The technical service receipts were not taxable as business profits in India for want of a permanent establishment.

Issue (iii): Whether Article 22 of the DTAA could be invoked for the receipts in question.

Analysis: Article 22 operates only for income not specifically covered by the express distributive rules in the DTAA. Since the receipts were found to fall within Articles 12 and 7, there was no scope to treat them as miscellaneous income.

Conclusion: Article 22 was inapplicable.

Final Conclusion: The royalty and technical service components were to be dealt with under the specific treaty provisions, the technical service component could not be taxed as business profits without a permanent establishment, and the residual article was unavailable.

Ratio Decidendi: Where a payment under a know-how and technical assistance agreement contains separable components, each component must be taxed under the specific DTAA article that governs it, and in the absence of a permanent establishment, technical service receipts cannot be charged as business profits or shifted to the residual article.

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