Treaty classification of technical know-how transfer: lump sum held to be commercial profit, not royalty, and not taxable in India.

A collaboration agreement that separately bifurcated consideration for outright transfer of technical know-how and recurring royalty for use of that know-how was construed under the India-France DTAA as excluding the lump sum from royalty. The lump sum was treated as commercial profit, because it was paid for transfer of know-how abroad rather than for its use, and therefore was not taxable in India under the treaty. The alternative argument that part of the payment constituted fee for technical services was rejected, since apportionment was impermissible where the agreement itself allocated the consideration separately. The tax deducted at source was refundable.

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Issues: Whether the lump sum consideration paid for transfer of technical know-how under the collaboration agreement was taxable in India as royalty or fee for technical services, or was exempt as commercial profit under the Double Taxation Avoidance Agreement between India and France.

Analysis: The payment was examined in the light of the collaboration agreement, the Income-tax Act, 1961, and the India-France treaty. The agreement separately provided for a lump sum consideration for transfer of know-how abroad and for recurring royalty for the right to use the know-how. The statutory definition of royalty under section 9(1)(vi) was considered, but the treaty distinction between royalties and commercial profits was applied. Since the agreement clearly bifurcated the consideration, and the lump sum was for outright transfer of know-how rather than for use of the know-how, it fell outside the treaty definition of royalty. The alternative contention that part of the amount was fee for technical services was rejected because apportionment was not permissible where the agreement itself separately allocated the consideration.

Conclusion: The lump sum second instalment was commercial profit under Article III of the Double Taxation Avoidance Agreement and was not taxable in India; the tax deducted at source was refundable.

Ratio Decidendi: Where a collaboration agreement separately bifurcates consideration for outright transfer of technical know-how and for the right to use that know-how, the amount paid for transfer is not royalty under the treaty and is taxable only in accordance with the treaty rules governing commercial profits.

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