Transfer of know-how under Taxability of different kinds of income :
Royalty payments may be in exchange for something in addition to the mere use of the invention. Usually the licence contracts include “know -how” provisions. In other words, the licensor not only grants the right to use the inven tion but also undertakes to supply the licensee with technical `know-how‟. The Madras High Court in Fenner Woodroffe & Co., vs. CIT (1976) 102 ITR 665 (Mad.) has explained that know-how may be taken as comprehending within it, the fund of knowledge or experience gained by a manufacturer during the long number of years in which they had been manufacturing on the formulae, the engineering drawings and specifications, mechanical details or processes and general knowledge that is associated with the production and development which is in the exclusive knowledge of the trade.
Know-how is also referred to as a manufacturing technique. It is an intangible asset. The House of Lords in Moriarty vs. Evans Medical Supply Ltd. (1959) 35 ITR 707 laid down the criteria to be applied to determine whether the transaction involving dealings in know-how would constitute a receipt of payment of a capital or revenue nature. If the assessee sells its know-how and realizes the price for the same, the money realized for providing the know-how would be a receipt of a capital nature. On the other hand, in a case where the assessee who owns the know-how continues to own it and allows the other person only the right of use of such know-how, the payments received towards the use of the know-how by another person would be a revenue receipt liable to tax. The question whether the transaction involved is one of purchase or sale of know-how or is that of allowing the other person the right to use it will have to be determined with reference to the facts and circumstances of the case. Where the receipt is of a capital nature, it would be wholly outside the purview of tax under section 9(1 (vi) as royalty. Further, receipts of a capital nature which would otherwise have been liable to tax under the head “capital gains” (e.g. on transfer of patents, designs, drawings, secret formula, etc. forming part of the know-how) would not be liable to tax in the hands of the collaborator in India particularly when the transfer does not take place in India. Therefore, only if the transfer takes place in India, the non-resident collaborator would attract liability to capital gains tax in respect of the transfer of know-how, but not otherwise.