Technical know-how payments and ancillary service fees: limited licence rights made royalty taxable, while service income escaped tax absent a permanent establishment.

A lump sum payment for supply of technical know-how was treated as royalty because the agreement left ownership and continuing control with the transferor, imposed confidentiality and disclosure restrictions, and granted only a limited licence to use the know-how; the capital receipt argument failed and the amount was taxable in India. A separate payment for contractual advisory and support services was not consideration for use of know-how, so it fell outside the royalty definition and was taxable only as business profits if attributable to a permanent establishment; in the absence of such a presence, it was not taxable in India.

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Issues: (i) Whether the lump sum consideration received for supply of technical know-how was capital receipt or royalty taxable in India. (ii) Whether the amount of US $ 9,480 received for other contractual services was taxable in India.

Issue (i): Whether the lump sum consideration received for supply of technical know-how was capital receipt or royalty taxable in India.

Analysis: The agreement showed that the assessee retained ownership and continuing control over the know-how, with restrictions on disclosure, confidentiality obligations, limited licence rights, and no exclusive transfer of proprietary rights. The recipient acquired only a licence to use the know-how, not an outright transfer of the know-how itself. On those facts, the consideration fell within royalty as understood in the treaty and the Income-tax Act, and the capital receipt contention failed.

Conclusion: The lump sum consideration was royalty and was taxable in India, against the assessee.

Issue (ii): Whether the amount of US $ 9,480 received for other contractual services was taxable in India.

Analysis: The payment under clause 6(b) related to obligations such as advice on plans, designs, layouts, machinery, personnel and marketing, and did not represent consideration for right to use technical know-how. It was therefore outside the royalty definition and constituted industrial or commercial profits, taxable only if the assessee had a permanent establishment in India. As no permanent establishment existed, the amount was not exigible to tax in India.

Conclusion: The amount of US $ 9,480 was not taxable in India, in favour of the assessee.

Final Conclusion: The appeal succeeded only in respect of the service-fee component, while the lump sum know-how payment remained taxable as royalty.

Ratio Decidendi: A payment for technical know-how is royalty where the transferee acquires only a limited right to use the know-how and the transferor retains ownership, control, confidentiality rights, and freedom to license the know-how to others; ancillary service payments are separate and are taxable as business profits only if attributable to a permanent establishment.

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