Restricted use of technical know-how under a collaboration agreement can be treated as royalty, not an outright sale.

A lump sum paid under a collaboration agreement for supply of technical documentation was treated as royalty because the recipient obtained only a non-exclusive, restricted right to use technical know-how for a specified purpose, with confidentiality and no-assignment obligations. The transferor retained property and interest in the designs and drawings, so the arrangement was not an outright sale. The article distinguishes Davy Ashmore India Ltd., which applies only to an out-and-out transfer with no retained property rights, and states that limited use under a collaboration arrangement falls within the royalty clause of the applicable treaty. The alternative claim based on section 10(6A) was not accepted.

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Issues: Whether the lump sum payment received for supply of technical documentation under the collaboration agreement was royalty liable to tax in India.

Analysis: The payment was made under an agreement granting only a non-exclusive right to use know-how for a specified purpose, with restrictions on assignment, confidentiality obligations, and liability for disclosure. On these terms, the transferor retained property and interest in the designs and drawings, so the transaction was not an outright sale. The principle in Davy Ashmore India Ltd. applied only where there is an out-and-out transfer with no retained property right; it did not apply to limited use under a collaboration arrangement. The receipts therefore fell within the royalty clause of the applicable treaty and could not be excluded as proceeds of outright sale. The assessee's alternative contention based on section 10(6A) was not accepted.

Conclusion: The payment was taxable as royalty and the assessee's contention failed.

Ratio Decidendi: Where the transferor retains property rights and permits only a limited non-exclusive use of technical know-how, designs, or drawings, the consideration is royalty and not consideration for an outright sale.

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