It was held that Amount received by the taxpayer was on account of right to use the know-how for a specified period and there was no outright transfer of know-how. Therefore, amount received was royalty and taxable in India.
The High Court relied on the findings of the Tribunal and held that as per the agreement, the amounts were paid to the taxpayer on account of right to use the know-how for a specified period and there was no outright transfer of know-how by the taxpayer.
The taxpayer retained all the rights in the know-how to itself and only the limited right to use the know-how was parted with. Therefore, the amount received was royalty for giving the right to use the know-how for the limited period.
The High Court observed that as per the tax treaty any amount received by the taxpayer for allowing the right to use the know-how constitutes ‘royalty’ and would be taxable in India. Since the taxpayer received the amount on account of permitting the Indian company to use its know-how for the period specified in the agreement, it would get covered under the tax treaty and therefore taxable as royalty.