Monday, December 1, 2014

Lumpsum amount paid for transfer of know-how wasn’t royalty if payment wasn’t made for any particular period


Assessee had entered into an agreement with UK based company for supply and installation of machinery, which involved transfer of technical know-how. It had paid lumpsum amount in connection with transfer of technical know-how. Such payment could not be treated as royalty as it was not made for any particular period.

Facts:


a) Assessee entered into an agreement with UK based Co. to supply and install certain machinery, which involved transfer of technical know-how.

b) The AO treated the payment inconnection with transfer of technical know-how as royalty. The assessee pleaded that the such payment couldn’t be treated as royalty on following grounds:

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.

c) On appeal, the CIT(A) dismissed the appeal of assessee. Further, the Tribunal set aside the order of AO 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 in favour of assessee as under:

1) 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.

2) A lumpsum payment without mentioning the period is prone to take away such amount from the definition of royalty.

3) 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.

4) 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- CIT v. The Andhra Petrochemicals Ltd. [2014] 51 taxmann.com 451(AP)

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