1. The assessee-company, which will be hereinafter referred to as A. C. N. A., is a corporation registered under the laws of Italy. The reference arises out of the assessments made on the assessee for the years 1959-60, 1960-61 and 1961-62, the respective accounting years being the years ending on 31st March, 1959, 31st March, 1960, and 31st March, 1961, respectively. The assessee was treated as a company for the purposes of such assessments. During the previous years it was also assessed as a non-resident.
2. We are concerned in this reference with certain payments received by the assessee-company under an agreement dated 30th June, 1958, entered into between the assessee and an Indian company called Amar Dye Chem Ltd. Under the said agreement the assessee was, inter alia, entitled to receive a fee called 'technical service fee'; this was under clause (3) of the agreement. The fee provided under the agreement, to which we shall make a detailed reference subsequently, was Rs. 25,000 annually. In the assessment year 1959-60, the assessee received the proportionate amount of Rs. 18,750. However, in the two succeeding years of assessment the full amount of Rs. 25,000 was received. A question arose about the taxability of these amounts as income accruing or arising in India. The assessee's contention was that since the technical services were rendered in Italy, and wholly outside the taxable territories, no income had arisen within the taxable territories so as to be liable to tax in India. It was further contended that under the agreement certain other services were to be rendered which were distinct and for which a separate payment was provided. The Income-tax Officer took the view that a part of the above amounts must be deemed to be income accrued in India and hence liable to tax in India. The assessee then filed appeals to the Appellate Assistant Commissioner, who by an order upheld the view of the Income-tax Officer. The assessee thereafter went in second appeals tot he Income-tax Appellate Tribunal. The contention before the Tribunal was that the technical services as required to be rendered in terms of clause (3) of the agreement between the assessee-company and Amar Dye Chem Ltd. were wholly rendered in Italy and outside the taxable territories, and, hence, according to the assessee, no income with reference to the technical fees received under the said clause could be said to have arisen within the taxable territories. The Tribunal considered the rival arguments of the parties and upon such consideration came to the conclusion that the view of the department was right and that a part of the technical fees received by the assessee could, in the circumstances, be deemed to be income accrued or received within the taxable territories. It may be mentioned here that before the Tribunal there was no dispute about the receipt being of an income nature or about the apportionment made by the departmental authorities in regard to the amounts held to be assessable in the taxable territories . This was 40% of the amounts paid to the assessee under clause (3), i.e., Rs. 7,500, Rs. 10,000 and Rs, 10,000 for the three assessment years respectively. Thereafter, at the instance of the assessee a reference has been made to this court under section 66(1) of Indian Income-tax Act, 1922.
3. The question which has been referred to us for our opinion is as follows :
'Whether the sum of Rs. 7,500, Rs. 10,000 and Rs. 10,000 being a portion of the technical service fees received by the assessee in terms of clause (3) of the agreement dated June 30, 1958, was income liable to tax in India ?'
4. It is clear that the answer to the question referred to us will principally depend upon the terms and conditions of the agreement as also the findings of fact as to its actual implementation by the parties. The agreement between A.C.N.A. and Amar Dye Chem Ltd. has been annexed an annexure 'A' to the statement of the case. It is a short agreement and the main provisions thereof as are relevant for our purposes may be set out :
'THIS AGREEMENT made on the 30th day of June One thousand nine hundred and fifty-eight.
betweenAmar Dye-Chem Limited........andAziende Colori Nazionali Affini........ ............. ........... ............ NOW IT IS AGREED BETWEEN THE PARTIES hereto as follows :
(1) A.C.N.A. shall render technical service by disclosing and supplying to Amar, secret processes, technical know-how (i.e., skillful knowledge and experienced information) and specification for efficient and economic production of Naphthols marketed by Amar (as Amarthols) Fast (Developing) Bases and BON Acid, as per Schedule I, and help Amar to achieve the desired target of production.
(2) A.C.N.A. shall also disclose and supply all new processes and formulae and technical know-how that A.C.N.A. may develop within the agreement period in connection with the dyes and chemicals stated in paragraph (1) above. All such information supplied by A.C.N.A. to Amar will be used by Amar without any restriction or objection by A.C.N.A. even after the agreement period, but shall not be disclosed to any third party.
(3) In consideration of A.C.N.A.'s disclosure and supply of the secret processes as referred to in paragraphs (1) and (2) above, Amar shall pay to A.C.N.A. an annual technical service fee of Rs. 25,000 net free from income-tax in Italian lire at Italian lire 130 per Re. 1, subject to any exchange restrictions as may be for the time being in force. This fee shall not include payments for A.C.N.A. 's technicians sent to India, as laid down in paragraph (6) below..........
(5) The annual amount of technical service fee laid down in paragraph (3) above shall be paid in advance in two six monthly instalments; the first two of such instalments shall be paid on the execution and commencement of effective operation of this agreement.
(6) If a request is made in writing by Amar, A.C.N.A. shall procure and depute specialised technicians to India to assist and advise Amar, to correct, adjust and alter the operations of the plant and it lay-out and to amend techniques and processes or manufacture and make such other additions and alterations as would enable Amar to turn out more efficient and more economic products referred to in paragraphs (1) and (2) above than those of Amar's present production. Amar shall bear all expenses of such technicians on the basis of the following schedule :.......
(9) During the subsistence of this agreement, A.C.N.A. shall not directly or indirectly supply to any person or company in the Union of India, formula, technical information and know-how to carry on the manufacturing or processing of the items of this agreement...........'
5. The learned counsel for the assessee submitted that this agreement had been signed by the parties in Italy, that the assessee-company was maintaining a research development organisation in Italy, that the know-how pertaining to the processes developed by A.C.N.A. had been handed over to the Indian company, i.e., Amar Dye Chem Ltd., in Italy and that, according to the assessee, the technical service fees at the rate of Rs. 25,000 per annum was entirely for services rendered in Italy, i.e., outside India. Under these circumstances, it was submitted, the question of taxing any part of the income on the basis of accrual or on the basis of receipt in the hands of the assessee did not arise. It was further submitted that the obligation contained in clause (3) of the said agreement, for which payment had to be made, had to be considered separately and it would not be proper to consider the agreement as a general obligation of the respective parties therein contained as another link.
6. We are unable to subscribe to this view. It is impossible in our opinion to read the obligations undertaken by the parties under the agreement as divorced from one another. It is true that clause (3) seems to suggest that the payment of Rs. 25,000 net free of income-tax in terms of Indian rupees as made by the Indian company to the assessee in consideration of A.C.N.A.'s disclosure and supplies of the secret processes as are referred to in clause (1) of the draft agreement. The question is : Could the obligation undertaken by the assessee-company be considered to have come to an end on mere handing over of these processes, which handing over, it may be assumed, was fully in Italy If the recitals of the agreement which have been reproduced above are considered as also the provision contained in clause (6) thereof, it is patent and obvious that the obligation undertaken by the assessee did not end merely with the handing over of the secret processes i.e., know-how, but also extended to helping the Indian company, i.e., Amar Dye Chem Ltd., in exploiting these processes properly, efficiently and economically as indicated in clause (6). The handing over of the know-how or secret processes was intimately connected and concerned with the obligation to show how the same were to be worked in actual practice and it is this obligation which is undertaken by A. C. N. A. in clause (6). Once that point of view is accepted it is impossible to find fault with the approach of the department or the conclusions of the Tribunal that some part of these payments must be properly regarded as income having accrued in India. As a matter of fact, it has been found that the assessee-company had deputed certain technicians to help the Indian company in 1959, 1961, 1962 and 1963.
7. We are, therefore, in agreement with the conclusion of the Tribunal upholding the claim of the revenue that part of the payments represented income which was rightly deemed to accrue or arise to the assessee-company in the taxable territories. At stated earlier, the apportionment thereof at the rate of 40% made by the departmental authorities was not challenged before the Tribunal and, therefore, we are not concerned with the same.
8. In the result, the question is answered in the affirmative and in favour of the revenue. The assessee will pay to the revenue the costs of this reference.