Treaty override and know-how transfer: lump sum payment treated as outright transfer, not royalty, so no TDS required.

Lump sum consideration for transfer of technical know-how was analysed under the Income-tax Act and the applicable treaty. The text explains that treaty provisions prevail over conflicting domestic provisions under section 90, and that the foreign recipient's business profits are taxable in India only if it has a permanent establishment, while royalty is taxable only if the payment fits the treaty definition. Because the agreement provided for transfer of know-how for use, exploitation and ownership on a non-contingent lump sum basis, without refund for non-use, the payment was treated as consideration for outright transfer rather than royalty. On that basis, the remittance was not subject to Indian tax deduction at source.

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Issues: Whether the lump sum payment made for transfer of technical know-how to the foreign collaborator was royalty taxable in India under the Income-tax Act and the Double Taxation Avoidance Agreement, and whether the assessee was obliged to deduct tax at source.

Analysis: The relevant charging and source provisions of the Income-tax Act operate subject to the Act and, where a double taxation agreement applies, section 90 gives the treaty overriding effect in case of conflict. Under the treaty, business profits of the foreign enterprise were taxable in India only if it carried on business through a permanent establishment, while royalties could be taxed in India only if the payment fell within the treaty definition of royalty. On the terms of the agreement between the parties, the technical know-how was transferred for use, application, exploitation and ownership in consideration of a lump sum, with payment not contingent on actual use and without any refund clause for non-use. The secrecy and sharing clauses did not alter the substance of the transaction. On that basis, the payment was treated as consideration for outright transfer of technical know-how and not as mere royalty for use of technology.

Conclusion: The payment did not constitute royalty under the treaty and, as the foreign collaborator had no permanent establishment in India, the receipt was taxable only in Germany. The assessee was not liable to deduct tax at source on the remittance.

Final Conclusion: The tax deducted from the remittance was held refundable, and the assessee succeeded in the appeal.

Ratio Decidendi: Where technical know-how is transferred for a lump sum as an outright transfer and the payment is not contingent on use, the amount is not royalty under the treaty and treaty provisions prevail over the Income-tax Act in determining taxability of the foreign recipient.

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