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TMI Blog1998 (11) TMI 95X X X X Extracts X X X X X X X X Extracts X X X X ..... technical know-how for the design and manufacturing of rolling mills and auxiliary equipment. The 'collaboration agreement' being the subject-matter of this reference was executed in India on 11th Feb., 1969 on behalf of Hindustan Steel Ltd. It came into effect on 1st April, 1969 and continued in operation for a period of ten years from that date. While the agreement was subsisting, Hindustan Steel Ltd. was succeeded by Metallurgical Engg. Consultants Ltd. ('MECON'), the assessee presently before this Court. The other party to the agreement, namely, United Engg. Foundry Co., was similarly taken over and succeeded by WEAN United Incorporated. Payments were continued to be made by the assessee (MECON) to WEAN United under different provisions of the agreement. The parties to the reference are in dispute over the taxability of the annual payments made to the US company under art. III(a) of the agreement. Presently, it would be required to examine the agreement in greater detail but suffice it to note here that the agreement provided in detail (vide art. II) the manner in which technical know-how was to be furnished by the U. S. company to the Indian company. It similarly provided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . However, the ITO, Special Circle, Ranchi, issued a certificate on 23rd April, 1971 to the effect that payment in respect of reimbursement of cost to the US company for services rendered in USA [that is, payment under art, III(c) alone and not under arts. III(a) and (b)] was exempt from the Indian IT Act. At that stage, MECON incorporated and took over the division of Hindustan Steel Ltd. which had the agreement with the US company and it was about the same time that United Engineering was taken over by WEAN United Incorporated, another US company. Notwithstanding the refusal of the ITO to issue a certificate concerning non-taxability of the payments made to the US company under arts. III(a) and (b), the assessee continued to make payments to the US company on due dates under art. III(a) without making any deductions as provided under s. 195(1) of the Act. Though no objections were raised by the IT authorities at that stage, the IAC later initiated a proceeding against the assessee under s. 201 of the Act, r/w s. 221, and by orders, dt. 25th March, 1981 and 27th May, 1981 found and held that the payments made by the assessee under art. III(a) of the agreement were income cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether payments made under art. III(a) of the agreement were income to WEAN United accruing or arising in India within the meaning of s. 5(2)(b) of the Act, it would be necessary to have a detailed look at the collaboration agreement. From the opening paragraphs of the agreement it is evident that Hindustan Steel Ltd. entered into the agreement with the object to acquire technical 'know-how' from United Engineering and to have the right in India to use the acquired 'know-how' in the design of contract articles'. Both the expressions 'contract articles' and 'know-how' were defined in the agreement and for the purpose of the agreement, the two expressions meant as under : "(a) 'Contract articles' shall mean those machines and parts thereof for the hot and cold rolling and processing of metals, and those machines and parts thereof accessory thereto which are or may be designed by HSL for manufacture by others and/ or sold by HSL and which are identified on the list thereof designated as Exhibit 'A' which is attached hereto and made a part of this agreement. (b) 'know-how' shall mean technical and manufacturing information, data, detail design and related calculations for the mill ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. Article III of the agreement dealt with the 'compensation for know-how'. The payments under para (a) of art. III are the subject-matter of dispute in this case. It will be useful here to reproduce art. III along with its paras (a) and (b) which are as follows : "Article. III : Compensation for know-how.--For the granting of the licence, the furnishing of know-how, material, and services in accordance with the provisions of art. II, the parties shall make payment to one another of the following amounts and in compliance with the following conditions : (a) On the execution of this agreement, HSL shall pay UNITED one hundred thousand Dollars ($ 1,00,000) and each year thereafter, on the anniversary date of the execution of this agreement, through the ninth anniversary, a similar amount of one hundred thousand Dollars ($ 1,00,000), provided, however, that if this agreement is terminated by UNITED under the terms and conditions as set forth in art. III hereof, then, in that event, any instalments remaining unpaid under this para (a) shall become due and payable at such date of termination. (b) In addition to the payments set forth in para (a) of this art. III, HSL shall pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a) and (b) of art. III were part and parcel of the consolidated payment under the agreement. In this regard, it is stated in the order of the Tribunal as follows : "If the arts. III(a) and III(b) of the agreement were to be read together, it would immediately appear that the payment as required to be made under art. III(b) was nothing but an additional payment which had to be made over to the American company, besides the payment stipulated in art. III(a), We would, therefore, agree with the representation that has been made on the side of the Department that the two payments as mentioned in arts. III(a) and III(B) were, in fact, part and parcel of the same payment which had been stipulated to be made over by MECON to WEAN. We do not see any difference in the hue and colour of the payments described in arts. III(a) and III(b) of the agreement. We do not know the reason why the CBDT thought that the sums to be paid under art. III(a) would not be liable to tax because according to us, the payments under arts. III(a), III(b) and III(c) are part and parcel of the same income which had been agreed to be made over by the Indian company to the American company. The Tribunal then p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... III(c) was admittedly in the nature of reimbursement of cost. It, thus, appears to me to be incorrect to club together the payments under arts. III(a) and (b) as part and parcel of the same payment with no difference in their hue and colour. To me it appears that the two payments corresponded to two separate rights accruing to HSL/ MECON under the agreement. This, however, is only a minor point and not much depends upon it. 7. The main question is whether the payment under art. III(a) was in the nature of income to the US company accruing or arising in India, In this connection, the Tribunal has solely relied upon a Supreme Court decision in the case of Performing Right Society Ltd. The facts of that case were that the society was an association of composers, authors and publishers of copyright musical works established to grant permission for the performing right in such works. The society collected royalties for the issue of licences granting such permission and distributed the royalties to the members of the society who were composers, authors, music publishers and other persons having an interest in the copy right, in proportion to the extent to which a member's work was pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee in its books, it did not actually receive the amount. The argument proceeded that the assessee could be said to have 'received' the royalty amount only when it received the same in U.K. in Pound Sterling and made an entry to that effect in its own books of account. Since it was maintaining its accounts, with respect to the royalty in question on cash basis, it was contended that receipt meant receipt in U.K. The Supreme Court noted the fact that the assessee had been very careful not to say that the Indian company did not place the said amount at the disposal of the assessee. In fact in answer to a question by the Court, it was stated that even if the amount were put by the Indian company in a bank to the credit of the assessee, it could not be said that the assessee had received the amount. The Supreme Court rejected the contention holding that the method of accounting adopted by the assessee was really irrelevant and the very 'concept of receipt' as espoused by the assessee was untenable and unacceptable. The decision in Standard Triumph Motor Co. Ltd.'s case has, thus, got nothing in common with the facts of this case. 10. Mr. A. Moitra, the learned counsel for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llows : "The High Court was wrong in its view that activities of the foreign personnel lent or deputed by the American company amounted to a business activity carried on by that company in the taxable territory. The finding of the Tribunal in that regard was specific and clear and was unassailable in the reference in question. The American company had made the services of the foreign personnel available to the Indian company outside the taxable territory. The latter took them as their employees, paid their salary and they worked under the direct control of the Indian company. The service rendered by the American company in that connection was wholly and solely rendered in the foreign territory, Even assuming, however, that there was any business connection between the earning of the income in the shape of the technical fee by the American company and the affairs of the Indian company, yet no part of the activity or operation could be said to have been carried on by the American company in India. And in the absence of such a sustainable finding by the High Court, the provisions of s. 42, either of sub-s. (1) or of sub-s. (3) were not attracted at all." The Supreme Court, thus, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he income to such a non-resident, in the facts and circumstances of the present case, cannot be co-related with the activity of any such non-resident within the territory of India so as to make it an income within the meaning of s. 9(1) of the Act." 12. Mr. Moitra also relied upon a Bench decision of the Calcutta High Court in CIT vs. Usha Martin Black (Wire Ropes) Ltd. (1983) 36 CTR (Cal) 22 : (1984) 148 ITR 236 (Cal) : TC 39R. 1168 and a decision of the Karnataka High Court in VDO Tachometer Werke vs. CIT (1979) 10 CTR (Kar) 16 : (1979) 117 ITR 804 (Kar) : TC 39R. 1312. The reliance on these two decisions appears to be quite well placed. In the case of Usha Martin Black (Wire Ropes) Ltd., the Calcutta High Court relying upon the Supreme Court decision in Carborandum Co.'s case held on similar facts as in the present case that the amount of royalty paid to the non-resident company was not assessable to tax in India. The decision of the Karnataka High Court in VDO Tachometer Werke's case also applies to the facts of this case and lends considerable support to Mr. Moitra's submissions. In that decision Venkataramaiah, J., as His Lordship, then, was examined in detail the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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