1998 (11) TMI 95 - HC - Income Tax

Summary

Issues Involved:
1. Taxability of payments made under Article III(a) of the collaboration agreement.
2. Determination of whether the income accrued or arose in India under Section 5(2)(b) of the Income Tax Act, 1961.
3. Applicability of relevant case laws to the facts of the case.

Detailed Analysis:

1. Taxability of Payments Made Under Article III(a) of the Collaboration Agreement:
The primary issue was whether the payments made under Article III(a) of the collaboration agreement between Hindustan Steel Ltd. (later MECON) and WEAN United Incorporated were taxable in India. Article III(a) stipulated that Hindustan Steel Ltd. would pay WEAN United $100,000 upon execution of the agreement and annually on each anniversary date for nine years. The Tribunal, CIT(A), and IAC held that these payments were taxable, considering them as income accruing or arising in India. However, the High Court found that the payments under Article III(a) were for the transfer of technical know-how, which mostly took place outside India, and thus, the payments did not constitute income accruing or arising in India.

2. Determination of Whether the Income Accrued or Arose in India Under Section 5(2)(b) of the Income Tax Act, 1961:
The Tribunal and lower authorities held that the payments under Article III(a) were income accruing or arising in India within the meaning of Section 5(2)(b) of the Income Tax Act, 1961. They considered the payments under Articles III(a) and III(b) as part and parcel of the same payment. However, the High Court disagreed, noting that the payments under Article III(a) were for the transfer of know-how, which occurred outside India, while payments under Article III(b) were for the use of the know-how in India. The High Court emphasized that the transfer of know-how was a distinct transaction from its use, and the payment for the transfer did not accrue or arise in India.

3. Applicability of Relevant Case Laws to the Facts of the Case:
The Tribunal relied on the Supreme Court decision in Performing Right Society Ltd. vs. CIT, which dealt with royalties for broadcasting musical works in India. However, the High Court found this case inapplicable, as the facts were not similar. Instead, the High Court found the decision in Carborandum Co. vs. CIT more relevant. In Carborandum Co., the Supreme Court held that technical service fees paid to a foreign company for services rendered outside India did not accrue or arise in India. The High Court also referred to other relevant cases, such as New Consolidated Gold Fields Ltd., Usha Martin Black (Wire Ropes) Ltd., and VDO Tachometer Werke, which supported the view that payments for services rendered outside India did not constitute income accruing or arising in India.

Conclusion:
The High Court concluded that the income mentioned in Article III(a) of the collaboration agreement did not accrue or arise in India to WEAN United within the meaning of Section 5(2)(b) of the Income Tax Act, 1961. The reference was answered in favor of the assessee, and against the Revenue, with no order as to costs.