The Hon’ble High Court of Andhra Pradesh recently held that  ” One time lumpsum payment made for transfer of technical Know-how is not taxable as royalty  ” .  

The fact of the case  –  Assessee had entered into an agreement with UK based company for supply and installation of machinery, which involved transfer of technical know-how.  The assessee made One time lumpsum payment made for transfer of technical fees, which the High Court held as not  royalty as it was not made for any particular period. Earlier, the assessing officer treated the payment in connection with transfer of technical know-how as royalty. The assessee pleaded that the such payment couldn’t be treated as royalty, (i)  It was paid in lumpsum and not year after year for the use of patent or any facility; (ii) The transfer of technical know-how or patent was for the limited purpose of installation and fixing the machinery, The CIT(A) dismissed the appeal of assessee. Further, the Tribunal set aside the order of Assessing officer by holding that amount paid to UK Co. couldn’t be treated as royalty.Aggrieved by the order of tribunal, the revenue filed the instant appeal. The High Court held the above as not royalty on the following grounds :   (a ) Though the royalty is required to be paid periodically during the subsistence of the arrangement, it is quite possible for the parties to agree for payment of a lumpsum amount. However, a lumpsum payment would be deemed as royalty, only when it is for a fixed period for which the facility can be utilised. Also, a lumpsum payment without mentioning the period is prone to take away such amount from the definition of royalty.  (b) Royalty, by its very nature, is a sum payable to the owner of a design, invention or trademark by another for using it. It is clearly opposed to an outright transfer.  In the instant case, the amount paid in lumpsum was not for any particular period. It was paid for transfer of technical know-how for limited purpose of installation and fixing of machinery. Thus, such lumpsum payment could not be treated as royalty. To Conclude – This ruling can be a guiding principle for structuring international agreements.  The payment for a technical fees can be treated as not royalty, if the same is made in lumpsum, with outright transfer of technical knowhow without attaching any period to it.