Treaty definition of royalty controls, and receipts remain business profits absent a permanent establishment in India.

The treaty definition of royalty prevailed over the wider domestic-law definition, so a lump-sum payment for transfer of technical know-how, drawings and documents under a collaboration agreement was not taxable as royalty where the treaty definition did not cover that transfer in the same breadth. The foreign enterprise's receipts were also not taxable in India as business profits because the treaty permitted such taxation only where the enterprise carried on business through a permanent establishment in India, and the limited technical visits and commissioning activities did not amount to a permanent establishment on the facts. The treaty therefore controlled the tax treatment and the assessee succeeded on both issues.

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Issues: (i) Whether the lump-sum consideration paid for transfer of technical know-how, drawings and documents under the collaboration agreement constituted "royalty" under the applicable double taxation avoidance agreement; (ii) whether, in the absence of a permanent establishment in India, the foreign enterprise's receipts were taxable as business profits.

Issue (i): Whether the lump-sum consideration paid for transfer of technical know-how, drawings and documents under the collaboration agreement constituted "royalty" under the applicable double taxation avoidance agreement.

Analysis: The applicable treaty definition of royalty prevailed over the wider domestic-law definition because the agreement specifically governed the taxability of the payment. The treaty definition was narrower and did not include the transfer of rights in secret formulae, processes, or the imparting of information concerning the working of such processes in the same manner as the domestic provision. The payment was made once and for all for disclosure and transfer of know-how, and the consideration fell within the excluded category rather than within treaty "royalties".

Conclusion: The payment did not constitute royalty under the treaty and the finding was in favour of the assessee.

Issue (ii): Whether, in the absence of a permanent establishment in India, the foreign enterprise's receipts were taxable as business profits.

Analysis: The treaty provided that business profits of an enterprise of one contracting state were taxable in the other state only if the enterprise carried on business through a permanent establishment situated there. On the facts, the foreign enterprise had no permanent establishment in India, and the limited technical visits and commissioning-related activities did not amount to a permanent establishment under the treaty. The receipts therefore retained the character of business profits taxable only in the state of residence.

Conclusion: The receipts were not taxable in India as business profits in the absence of a permanent establishment, and the finding was in favour of the assessee.

Final Conclusion: The treaty provisions controlled the tax treatment, the impugned remittances were outside the scope of royalty, and the foreign enterprise's income was not chargeable in India in the absence of a permanent establishment, so the assessee succeeded.

Ratio Decidendi: Where a tax treaty contains a narrower definition of royalty than the domestic statute, the treaty definition prevails, and consideration for transfer of know-how or technical documentation falling outside that treaty definition cannot be taxed as royalty; in the absence of a permanent establishment, such receipts are taxable only as business profits in the state of residence.

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