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Issues: Interpretation of agreement for technical services, Tax liability on payments made under the agreement, Applicability of section 42(3) of the Indian Income-tax Act, 1922.
Interpretation of agreement for technical services: The case involved an agreement between a foreign company and an Indian company for the provision of technical services related to the manufacture of rayon yarn in India. The agreement included provisions for technical skill, advice, machinery selection, training of personnel, and continuous information sharing on manufacturing processes. The foreign company was to receive payments based on the total cost of construction and a percentage of the yarn manufactured. The Tribunal found that the services provided were continuous and not limited to the initial setup of the factory. The Indian company was obligated to pay the foreign company for the services rendered under the agreement. Tax liability on payments made under the agreement: The Income-tax Officer treated the payments received by the foreign company as royalties for know-how accrued in India and taxed the entire amount. The Tribunal, however, disagreed with this approach, stating that the payments were based on the agreement terms and not specifically for services rendered in India during the relevant year. The Tribunal concluded that the profits liable to be taxed in India and abroad should be apportioned equally at 50% each. The Court upheld the Tribunal's decision, emphasizing that the payments were made under the stipulations of the agreement and were not solely linked to operations carried out in India. Applicability of section 42(3) of the Indian Income-tax Act, 1922: The primary legal question was whether the income from the agreement was liable to be apportioned under section 42(3) of the Indian Income-tax Act, 1922. The revenue contended that section 42(1) applied as all operations related to the payments were conducted in India. However, the Court rejected this argument, clarifying that section 42(3) pertained to the operations of the foreign company, not the Indian company. The Court affirmed the Tribunal's decision that the payments were made under the agreement terms and were not solely dependent on production in India. Therefore, the income was subject to apportionment under section 42(3) of the Act. In conclusion, the Court answered the legal question in the affirmative, stating that the income from the agreement was liable to be apportioned under section 42(3) of the Indian Income-tax Act, 1922. The Court upheld the Tribunal's decision to apportion the profits equally between India and abroad.
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