Non-resident royalty and revisionary jurisdiction: technical know-how receipts taxed on accrual basis under continuing agreement

A non-resident's consideration for technical know-how and assistance was treated as taxable in India as royalty on accrual basis because the agreement, read as a whole, contemplated continuing know-how, advice and assistance, and the lump sum was for the use of know-how rather than an outright transfer. The note also records that revision under section 263 was valid because the assessment adopted an erroneous receipt basis; prejudice includes an incorrect method of assessment affecting tax administration, even if the income was taxed in a later year. The revisional order was therefore sustained on both jurisdiction and merits.

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Issues: (i) Whether the Commissioner was justified in invoking revisionary jurisdiction under section 263 of the Income-tax Act on the ground that the assessment order was erroneous and prejudicial to the interests of the Revenue; (ii) whether the consideration received by the non-resident assessee for supply of technical know-how and assistance was taxable in India as royalty on accrual basis.

Issue (i): Whether the Commissioner was justified in invoking revisionary jurisdiction under section 263 of the Income-tax Act on the ground that the assessment order was erroneous and prejudicial to the interests of the Revenue.

Analysis: The assessment had been made by accepting receipt basis for taxing the amounts, although the prevailing view was that royalty income of a non-resident was taxable on accrual basis. Prejudice under section 263 is not confined to immediate loss of revenue in monetary terms but extends to an erroneous method of assessment affecting tax administration. The assessee's plea that the amounts had already been taxed in a later year did not remove the prejudicial effect of the erroneous treatment in the relevant year.

Conclusion: The invocation of section 263 was valid and was upheld, against the assessee.

Issue (ii): Whether the consideration received by the non-resident assessee for supply of technical know-how and assistance was taxable in India as royalty on accrual basis.

Analysis: The source of the income was held to be in India on the basis of the applicable source rule. The agreement, read as a whole, contemplated a continuing flow of technical know-how, advice, and assistance, and the lump sum payment for initial disclosure and supply of know-how was treated as consideration for the use of such know-how rather than as an outright transfer outside the royalty field. The distinction between transfer and user was held to be ineffective on these facts, and the DTA definition of royalty was applied to bring the receipt within taxable income in India on accrual basis.

Conclusion: The receipt was held taxable in India as royalty on accrual basis, against the assessee.

Final Conclusion: The revisional order was sustained and the assessee's challenge failed on both jurisdiction and merits.

Ratio Decidendi: Royalty income of a non-resident is taxable on accrual basis where the assessment order adopts an erroneous receipt basis, and consideration for technical know-how supplied under a continuing agreement may constitute royalty taxable in India.

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