Payment made to foreign company for outright purchase of plant and know-how cannot be considered as ‘Royalty’

Recently, the Himachal Pradesh High Court in the case of CIT v. Maggronic Devices Pvt. Ltd. [2009-TIOL-568-HC-HP-IT] held that payment made by the taxpayer to a Singapore company for outright purchase of plant and product knowhow cannot be considered as ‘Royalty’ within the provisions of the Income-tax Act, 1961. Accordingly, no tax was required to be deducted while making payment to the Singapore company for acquiring such know-how outside India.

Facts of the Case

• The taxpayer was engaged in the manufacture of audio magnetic sound heads, which are used in various audio appliances like tap recorders, stereos, sound systems, telephone answering systems etc.
• The taxpayer entered into an agreement with a Singapore Company called Sankyo Seiki (Singapore) Pvt. Ltd. (Sankyo) for the purchase of

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