1. Messrs. Skenando Rayon Corporation of U.S.A. is a foreign company carrying on business in the manufacture of Viscose yarn. On the April 31, 1954, it entered into an agreement with one R. J. Chinai as the promoter of a proposed company for the manufacture of rayon yarn dated February 3, 1947, by the National Rayon Corporation Ltd., when that company was registered in India. By clause 4 of the said agreement it was, inter alia, provided : (a) that in consideration of the payments which were to be made to the foreign company pursuant to the terms of the said agreement, the foreign company would furnish to the Indian company technical skill, advice and knowledge regarding the selection of a plant site and the acquisition of the same, as well as the design, plan, layout and specifications for the machinery, equipments, etc. : (b) that it would employ an American concern to assist and advise the Indian company in the preparation of the plans and specifications; (c) that it would act in connection with the selection and purchase of machinery, equipment, apparatus, etc., to be purchased in the United States of America; (d) that it would furnish to the new company the services of a superintendent familiar with the specifications and requirements for the construction of the proposed rayon manufacturing plant; (e) that it would train at its manufacturing plant in the United States of America up to but not exceeding 12 men, so that they would be prepared to assume the responsibility of supervising the operation of the Indian company; and (f) that it would send to India for a total period of not more than one year one or more of its skilled employees. By clause 6 of the said agreement, it was stipulated that during the time that it continued and for a further period of 10 years the foreign company would keep the new company fully informed in regard to any new technical improvements or changes in the methods or processes of manufacturing viscose rayon or in any machinery, apparatus and facilities therefor as employed at its new plant in the United States of America, or as discovered in the foreign company's research, production and engineering, and would grant to the new company royalty-free licences under letters patent in relation to the manufacture of viscose rayon. By clause 7 of the agreement, it was provided that in consideration of the services to be furnished by the foreign company, the Indian company would pay six per cent. of the total actual cost of construction subject to a minimum of 2,50,000 dollars and would also pay at the rate of one-half percent. per pound on each and every pound of the viscose filament rayon yarn manufactured by the new Indian company during a certain period subject to a minimum of not less than 25,000 dollars per annum. In this reference the court is concerned only with the latter of the two payments which are to be computed at the rate of one-half per cent. as aforesaid.
2. Pursuant to that agreement, the foreign company received at that rate the four amounts set our in paragraph 6 of the statement of the case for the four assessment years with which we are concerned in the present case. The Income-tax Officer treated them as royalties for the know-how which had accrued in India and taxed the entire amount, and the Appellate Assistant Commissioner confirmed the same, though on slightly different grounds. When the matter was taken up to the Tribunal, the Tribunal by its order dated 26 December, 1960, thought it necessary to remand it to the Appellate Assistant Commissioner in order to call for his findings on the contention advanced before the Tribunal that there were no operations carried out in India, and that no income accrued or could be deemed to have accrued in India. After the Appellate Assistant Commissioner had returned his findings pursuant to that order of remand, the Tribunal passed a final order on the February 3, 1962, which, it stated, was in continuation of its earlier order dated December 26, 1960. In that order, the Tribunal took the view that as a result of the report submitted by the Appellate Assistant Commissioner on remand, it was clear that the payment of one-half per cent per pound was made as per the agreement between the parties, and that it did not relate to any specific services rendered in India during the relevant year. It further took the view that the nature of the activity or assistance derived from the foreign corporation was a continuous one which did not stop with the mere erection of the factory, and that the foreign company has been communicating the development in the manufacturing process though, it so happened that the Indian company did not feel it necessary to adopt these new processes, as it found the original processes to be good enough for its purposes. These were findings of fact arrived at by the Tribunal which are binding on us, and it is on the basis of these findings that this reference must be decided. The Tribunal's own conclusion from these findings was that where continuous knowledge based on experience was being gathered and furnished by one party to another, and where the manufacture in India was being carried on the basis of the experience gathered in the course of its manufacture abroad, it was necessary to attribute some portion of consideration to the activities abroad, and on that footing, taking all the factors into account, the Tribunal held that the profits liable to be taxed in India and abroad should be at the rate of 50% each. It is from that order of the Tribunal that this reference has arisen.
3. The question of law that has been referred to us is as follows :
'Whether, on the facts and in the circumstances of the case the income is liable to be apportioned under the provisions of sub-section (3) of section 42 of the Indian Income-tax Act, 1922 ?'
4. Mr. Joshi, on behalf of the revenue, has stated that his submission is that section 42(3) of the Indian Income-tax Act, 1922, does not apply to the present case, because all the operations relating to the payments made under clause 7(2) of the agreement were carried out in India. He has therefore, submitted that it is section 42(1) which applies, and the whole of those payments were liable to tax in India in the hands of the Indian company as the agents of the foreign company under sub-section (1) of section 42. Mr. Joshi contended that the payments that were made under clause 7(2) of the agreement were based on production and the entire production was in India. Mr. Joshi submitted that the entire income accrued in India because it is in India that the goods were manufactured and the place of accrual has, therefore, to be determined with reference to the place of production. In my opinion there is a clear fallacy implicit in these arguments of Mr. Joshi, in so far as the operations to which sub-section (3) of section 42 refers are the operations of the foreign company, and not the operations of the Indian company. The further argument of Mr. Joshi is also fallacious in so far as the reference to production in the said clause 7(2) of the agreement is only for the purpose of computation, and even if the production in a particular year were, for any reason such as a strike or a lock-out, to be nil, the Indian company would still be bound to pay to the foreign company the minimum amount of 25,000 dollars for that year. The payments in connection were, therefore, as the Tribunal has rightly held, payments made under the stipulation contained in the agreement and nothing else.
5. In my opinion, on the findings of the Tribunal referred to above not only is there no evidence to show that all the operations of the foreign company relating to the agreement were carried out in India, but it is impossible to take that view. Though this reference was argued by Mr. Joshi, for some time, I cannot help feeling that there is no substance in the revenue's contention's which are the basis of this reference. There is certainly some, if not considerable, material to show that the operations which the foreign company carried out under the agreement had also to be carried out abroad as, for instance, when it had to communicate the latest developments in manufacturing processes in the United States of America to the Indian company which, on the material before the court, it certainly did. That being the position, I am not prepared to hold that the conclusion arrived at by the Tribunal is perverse, or that there was no material before it on which it could come to the conclusion that the provisions of sub-section (3) of section 42 were attracted to the present case. The question referred to us must, therefore, be answered in the affirmative.
S.K. Desai, J.
(BY THE COURT)
6. Question answered in the affirmative. The Commissioner to pay the costs of the reference to the respondents.