Technical know-how transfer lump sum taxed as fees for technical services, not royalty, under treaty and domestic law

A lump sum received under a collaboration agreement for transfer of technical know-how and supporting documentation delivered abroad was not characterised as royalty because the know-how was supplied for plant set-up and there was no immediate use of it in India during the relevant year. The receipt was instead taxable as fees for technical services under the governing treaty and domestic law, as the arrangement concerned technical assistance and documentation linked to establishing the manufacturing unit rather than a royalty-bearing exploitation of know-how. On those facts, the tax treatment was determined in favour of the assessee and against the Revenue.

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Issues: Whether the lump sum received under the collaboration agreement for supply of technical know-how and related documentation was taxable as royalty or as fees for technical services.

Analysis: The agreement contemplated supply of technical know-how for setting up a manufacturing unit and subsequent manufacture of disc pads and brake linings. The documentation and drawings were delivered in Japan, and on the facts found, the assessee had not carried out any further activity in India during the relevant year beyond such delivery. The Court distinguished between consideration for immediate use of know-how or technical services in an existing business and a preliminary lump sum received for transfer of know-how for plant set-up. On the facts, the amount did not fit the character of royalty. The assessee's prayer was confined to treatment of the receipt as fees for technical services, and the treaty provisions were also considered.

Conclusion: The receipt of Rs. 2,02,237 was held taxable in India as fees for technical services and not as royalty, and the issue was decided in favour of the assessee and against the Revenue.

Ratio Decidendi: Where a lump sum is received under a collaboration agreement for transfer of technical know-how and supporting documentation delivered abroad for setting up a plant, and the facts do not show immediate use of the know-how in India during the relevant year, the receipt is not to be characterised as royalty; its taxability must be determined as fees for technical services according to the governing treaty and domestic law.

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