Technical know-how payments treated as royalty where the recipient received only a restricted right to use technology in India

Payment for supplying technical know-how and permitting its use in India was treated as royalty because the arrangement gave only a limited right to use and exploit the technology, imposed use restrictions, and required continuing technical updates and improvements. The consideration was linked to the Indian company's exploitation of the technology, bringing it within the treaty concept of royalty for use, or the right to use, designs, secret processes, formulae and scientific information. The source of income was the exploitation of the technology in India, so the amount was taxable in India. The absence of a deeming clause found in other treaties did not change that result on these facts.

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Issues: Whether the payment received for supplying technical know-how and allowing its use in India was taxable as royalty in India under the treaty and the Income-tax Act.

Analysis: The agreement did not amount to a simpliciter transfer of technology. It granted only a right to use and exploit the technology in India, imposed restrictions on use, required continuous supply of improvements and technical updates, and tied the payment to exploitation of the technology by the Indian company. On that basis, the payment fell within the treaty definition of royalty as consideration for use, or the right to use, designs, secret processes, formulae and scientific information. The source of income was the exploitation of the technology in India, not merely the place where the agreement was signed or the technology was initially supplied. The absence of a deeming clause similar to those in other treaties did not alter the conclusion on the facts.

Conclusion: The payment was held to be royalty, the source was in India, and the amount was taxable in India.

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