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Issues Involved:
1. Validity of the assessment of royalties received by the assessee for the years 1953-54 to 1957-58. 2. Interpretation of clauses A and D of the agreement between the assessee and REMCO. 3. Calculation of taxable income including the grossing up of royalties. Detailed Analysis: 1. Validity of the Assessment of Royalties: The primary issue was whether the assessment of royalties received by the assessee during the assessment years 1953-54 to 1957-58 was valid. The royalties in question were assessed at Rs. 21,271, Rs. 87,379, Rs. 1,63,180, Rs. 2,54,827, and Rs. 2,98,901 for the respective years. The Income-tax Officer grossed up the royalties, arguing that since the non-resident company had to receive the royalty free of all taxes, the total income included the royalty received plus an amount that, when taxed, would leave the net royalty as the actual income received by the assessee. 2. Interpretation of Clauses A and D of the Agreement: The agreement between the assessee and REMCO (Radio Electricals Manufacturing Co. Ltd.) included two critical clauses: - Clause A: Stated that REMCO agreed to pay TOSHIBA (the principal company) a royalty of 3% of net sales billed in rupees, with an annual minimum royalty of 9,000 U.S. dollars. - Clause D: Specified that all payments should be made in Tokyo, Japan, without deductions for taxes or other charges assessed in India, which would be assumed by REMCO. The Tribunal and the High Court had to interpret these clauses to determine the correct taxable income. The Appellate Assistant Commissioner initially held that the taxes paid by the resident agent (REMCO) on behalf of the non-resident (the assessee) should be added to the royalty to determine the taxable income. However, the Tribunal disagreed, stating that the agreement required the grossing up of the royalty to ensure the principal company received the amount tax-free, meaning the taxable income should be the grossed-up amount. 3. Calculation of Taxable Income Including Grossing Up: The Tribunal's decision was based on the interpretation that the royalty received by the assessee should be grossed up to account for the taxes paid by REMCO. This meant that the taxable income was the amount that, after taxes, would leave the net royalty specified in the agreement. - For instance, if the royalty for the assessment year 1953-54 was Rs. 10,702, the taxable income should be grossed up to Rs. 21,271 to ensure the net amount received was tax-free. - Similarly, for the assessment year 1957-58, the royalty of Rs. 1,15,077 should be grossed up to Rs. 2,98,901. The High Court upheld the Tribunal's decision, agreeing that the correct method was to gross up the royalties to ensure the principal company received the stipulated amount tax-free. This interpretation was supported by precedents such as the decision in Jaworski v. Institution of Polish Engineers in Great Britain Ltd., which held that remuneration paid free of tax should be grossed up to determine the true taxable income. Conclusion: The High Court concluded that the assessment of royalties by grossing up the amounts to account for taxes paid by REMCO was valid. The taxable income should include the royalty plus the taxes paid on behalf of the non-resident. The decision was in favor of the revenue, and the assessee was ordered to pay the costs. The question referred was answered in the affirmative.
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