Royalty characterization of technical documentation payments rejected where no technical rights or information were transferred

Payments for preparation of technical documentation, working drawings, testing models and related technical work in Russia were not treated as royalty under Section 9 of the Income-tax Act, 1961 because the foreign entity did not impart technical information, rights, or control over the material to the assessee. The work product was to remain and be used in Russia, and the assessee did not receive the kind of knowledge, experience, or rights that constitute royalty. The final product was characterised as a capital asset rather than royalty, so tax deduction at 20% was not attracted.

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Issues: Whether the payments made for preparation of technical documentation, working drawings, testing models and related technical work in Russia constituted royalty under Section 9 of the Income-tax Act, 1961 and were liable to tax deduction at source at 20%.

Analysis: Royalty under Section 9 contemplates consideration for imparting information or conferring rights in relation to technical, industrial, commercial or scientific knowledge, experience or skill. On the facts found, the material prepared by the foreign entity was not to be handed over to the assessee and the technical work was to remain with and be used in Russia. The Court accepted that the assessee did not receive any technical information, rights, or control over the material in a manner that would bring the payment within the statutory concept of royalty. The final product received by the assessee was treated as a capital asset, not royalty.

Conclusion: The payment did not fall within the ambit of royalty and the assessee was not liable to deduct tax at 20% on that amount.

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