Royalty under treaty includes limited rights to use confidential know-how; technical assistance through an engineer is not taxable royalty.

Under the India-Norway treaty, consideration for the limited right to use confidential designs, plans, information and similar protected materials was treated as royalty and therefore taxable in India, because the agreements granted only restricted use rights with confidentiality obligations rather than an outright transfer. By contrast, a remittance made for placing the assessee's engineer at the disposal of an Indian company for technical assistance was treated as part of industrial or commercial profits, not as personal services or royalty, and was not taxable in the assessee's hands. The analysis turns on the treaty definition of royalty and the distinction between a licence to use protected know-how and payment for technical assistance through an engineer.

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Issues: (i) Whether the sums received under the technical collaboration agreement with the Indian industrial corporation and the later agreement with the Indian steel company constituted royalty and were taxable in India under the treaty. (ii) Whether the amount remitted towards the services of the assessee's engineer was taxable in the assessee's hands as personal services or technical fees. (iii) Whether the receipts under the later agreement amounted to royalty or industrial/commercial profits not taxable in India.

Issue (i): Whether the sums received under the technical collaboration agreement with the Indian industrial corporation and the later agreement with the Indian steel company constituted royalty and were taxable in India under the treaty.

Analysis: The treaty provisions governing industrial or commercial profits and royalties prevailed over the general charging provision of the Income-tax Act. The payment under the 1973 collaboration agreement was not confined to a sale of know-how; it included imparting knowledge, furnishing confidential design and information, and granting the right to use those protected materials. The treaty definition of royalty was wide enough to cover consideration for the right to use designs, plans, secret processes, and like rights. The contractual restrictions on use and confidentiality showed that the Indian party received only a limited right to use, not an outright transfer.

Conclusion: The receipt of Rs. 12,35,284 was royalty and was taxable in India; this issue was decided against the assessee.

Issue (ii): Whether the amount remitted towards the services of the assessee's engineer was taxable in the assessee's hands as personal services or technical fees.

Analysis: The remittance was made under the agreement for placing the assessee's engineer at the disposal of the Indian company to render technical assistance. The record did not establish that the engineer was an employee of the Indian company or that the amount was taxed again in his hands. The payment was not for personal services of the engineer to the Indian company, but remuneration to the assessee for technical assistance through its engineer. Such a receipt did not fall within the treaty exclusion for royalties or personal services and formed part of the assessee's industrial or commercial profits.

Conclusion: The receipt of Rs. 14,200 was not taxable in the assessee's hands; this issue was decided in favour of the assessee.

Issue (iii): Whether the receipts under the later agreement amounted to royalty or industrial/commercial profits not taxable in India.

Analysis: The later agreement granted the Indian party only the right to use the confidential design and information supplied by the assessee, with express confidentiality restrictions and an obligation to return the materials after termination of the contractual obligations. The agreement was not an outright sale of drawings or information. The consideration was therefore for the right to use protected design and information, bringing it within the treaty definition of royalty and excluding it from industrial or commercial profits.

Conclusion: The receipt of Rs. 2,77,557 was royalty and was taxable in India; this issue was decided against the assessee.

Final Conclusion: The appeal relating to the earlier assessment year succeeded only in part, with relief confined to the engineer-remittance issue, while the royalty additions were sustained; the later assessment year appeal failed.

Ratio Decidendi: Under the India-Norway treaty, consideration for the limited right to use confidential design, information, plans or analogous rights is royalty, whereas a reimbursement for technical assistance rendered through the assessee's engineer, not being a payment for personal services or royalty, remains part of industrial or commercial profits and is not taxable in India in the absence of a permanent establishment.

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