1999 (10) TMI 39 - HC - Income Tax

Income, Non-resident, Income Deemed To Accrue Or Arise In India, Collaboration Agreement, Transfer Of Technical Know-how, Business Connection

Summary

Issues:
1. Taxability of technical know-how and royalty payment under collaboration agreement dated April 9, 1974.
2. Accrual of technical know-how and royalty in India within the meaning of section 9 for income-tax purposes.

Analysis:
The judgment by the High Court of MADRAS addresses the issues of taxability concerning technical know-how and royalty payments under a collaboration agreement dated April 9, 1974. The court deliberates on whether the technical know-how and royalty accrued or deemed to have been accrued in India within the purview of section 9 for income-tax liability. The case involves assessment years 1976-77, 1977-78, 1979-80 for technical know-how, and 1979-80, 1980-81 for royalty payment.

Regarding technical know-how, the court examines the collaboration agreement between a Swiss company and an Indian entity for manufacturing weaving machines. The agreement involved royalty payments on products manufactured and marketed in India and abroad. The consideration for technical documents was paid in Switzerland, and the court held that this amount was not subject to Indian income-tax as it did not arise or accrue in India. The Commissioner (Appeals) agreed that only 60% of the royalty amount was taxable, which the Tribunal affirmed.

Concerning royalty payments, the Tribunal found that the Swiss company had a business connection in India through its equity investment and directorship in the Indian company. The Tribunal concluded that the royalty payments were taxable in India as they were related to products manufactured under license from the Swiss company. The court upheld the Tribunal's decision, stating that the royalty income had arisen or accrued in India due to the business connection between the parties.

In conclusion, the court ruled in favor of the assessee regarding fees for documentation, holding them non-taxable in India. However, the court sided with the Revenue on the taxability of royalty payments. The judgment emphasizes the importance of business connections and the situs of income accrual in determining tax liabilities. The parties were directed to bear their respective costs in the case.