Tailor-made engineering know-how payments are not royalty when paid to create a plant asset and no Indian tax nexus exists.

Consideration for a tailor-made basic engineering design package and limited know-how licence was treated as payment for creating a plant asset, not as royalty for use of copyright, patent, design, secret process or similar protected rights. The contractual structure and the absence of linkage to actual use showed that the payment did not fall within royalty characterisation. Because the related services were not rendered in India and no permanent establishment in India was shown for the recipient, the amount was not taxable in India. On that basis, the payer had no obligation to deduct tax at source under section 195.

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Issues: Whether consideration paid for the basic engineering design package and related know-how under the agreement constituted royalty taxable in India and whether tax was deductible at source under section 195.

Analysis: The payment was for supply of a tailor-made basic engineering design package enabling construction of a plant, together with a limited licence to use the know-how for IOC's own purposes. The consideration was not for the use of any copyright, patent, design, secret process or similar property in the sense required for royalty, nor was it linked to the extent of use. Under the treaty, undefined technical services had to be understood with reference to the domestic law definition, but the package was treated as consideration for creating an asset in the form of a plant and not as payment for use of rights. The authorities relied on the royalty character of the payment, but the contractual structure and the nature of the supply showed otherwise. Since the services giving rise to the disputed amount were not rendered in India and no permanent establishment of the recipient in India was shown, the amount was not taxable in India.

Conclusion: The payment was not royalty and was not chargeable to tax in India, so IOC had no obligation to deduct tax at source.

Ratio Decidendi: Consideration for supplying tailor-made technical know-how and basic engineering documentation to create a plant asset is not royalty unless it is paid for the use of protected rights or property, and in the absence of services performed in India or a permanent establishment in India, no tax is deductible at source.

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