Royalty on technical documentation payments is taxable in India and attracts tax deduction at source under section 195.

Lump sum consideration paid to a foreign collaborator for drawings, designs, specifications and technical documentation for manufacture in India is treated as royalty under the Income-tax Act because the payment is made for use of designs and for technical knowledge connected with those rights and property. The treaty analysis in the text likewise treats such royalty as taxable in India where the relevant convention preserves source taxation of royalty income, even if the foreign enterprise has no permanent establishment. The stated tax consequence is that tax is required to be deducted at source under section 195 on such payments.

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Issues: Whether the lump sum payment made to the foreign collaborator for supply of drawings, designs, specifications and technical documentation was royalty chargeable to tax in India so as to attract deduction of tax at source under section 195.

Analysis: The agreement showed that the payment was made in consideration of the supply of drawings, designs, specifications, process details and other technical documents for manufacture in India. Under the domestic law, royalty includes consideration for the transfer or use of designs and for the imparting of technical knowledge or services connected with such rights or property. The Convention similarly treated royalty as taxable in India and did not exclude such payment merely because the foreign enterprise had no permanent establishment, since Article III(3) preserved taxation of royalty derived from sources in India. The Court found no real distinction between supply and use in this context, and held that the Convention did not negate the charge created by the Act.

Conclusion: The payment was royalty chargeable to tax in India and the assessee was bound to deduct tax at source under section 195. The Revenue's appeal succeeded.

Ratio Decidendi: Where a lump sum is paid for supply of drawings, designs and technical documentation for use in India, the amount is royalty under the Income-tax Act and the applicable tax treaty, and it remains taxable in India even without a permanent establishment if the treaty expressly so provides.

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