1. The assessee-company (hereinafter referred to an 'OBSF'), which is incorporated in West Germany, had developed a process known as Winkler process used for gasifying certain fuels. It entered into an agreement with another non-resident company, namely M/s. Pintsch Bamag AG, West Germany (hereinafter referred to as 'Bamag'). Under this agreement Bamag was entitled to license the use of the Winkler process by third parties and Bamag was to pay a royalty as per art. 7 of the agreement.
2. Bamag entered into a contract with a company in India, namely M/s. Neyveli Lignite Corporation Ltd. for construction of a chemical plant in which the Winkler process was used. The OBSF receive Rs. 1,47,333 on account of royalty under the agreement with Bamag. This amount was received in India and not in Germany and was deposited by OBSF in the State Bank of India by opening an account in the bank. After making an allowance of 20% for estimated expenses attributable to the work done by OBSF in West Germany for earning this amount the balance was treated as taxable income of the assessee, non-resident company, as it was received in India. This assessment was confirmed by the AAC.
3. The OBSF went up in appeal before the Tribunal, before which it was contended that the amount was receivable by the OBSF in West Germany but that due to exchange regulations the same could not be paid there and that is why it was required to be credited in the account opened with the state bank of India in the name of the OBSF. On behalf of the OBSF the stand taken before the Tribunal was that the payment in India was made ins satisfaction of a debt realisable from Bamag and the amount is question, therefore, did not have the character of income. The Tribunal accepted the contention of the OBSF and held that the amount in question could not be taxed on receipt basis under s. 5(2)(a) of the I.T. Act, 1961. Arising out of this order of the Tribunal, the following two questions have been referred to this court under s. 256(1) of the I.T. Act, 1961 :
'(1) Whether, on the facts and in the circumstances of the case, and having regard to section 5(2) of the Income-tax Act, 1961, the sum of Rs. 1,47,333 received by the non-resident assessee-company in India for the assessment year 1964-65 was chargeable to income-tax ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the said amount received by the non-resident assessee-company in India was towards satisfaction of a debt due to it by M/s. Pintsch Bamag AG, West Germany, and as such was not income taxable in India ?'
4. Mr. Joshi, learned counsel appearing on behalf of the Revenue, has placed reliance on the provisions of s. 5(2)(a) of the I.T. Act, 1961, the material part of which reads as follows :
'Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from what ever source derived which -
(a) is received or is deemed to be received in India in such year by or on behalf of such person.'
5. Mr. Joshi contends that admittedly the amount is paid on account of royalty and the fact that it has been received in India is sufficient to bring the receipt within s. 5(2)(a) of the I.T. Act and must, therefore, be treated as income.
6. Mr. Dastur on behalf of the assessee has, however, contended that the receipt contemplated by s. 5(2)(a) of the I.T. Act, 1961, must be a voluntary receipt and since in the instant case the amount was received in India because of exchange regulations it could not be said that the receipt had the character of income. Reference was made by Mr. Dastur to the concluding paragraph in art. 7 of the agreement between the parties. The agreement itself is not a part of the statement of the case, but with the consent of both the counsel we have referred to it. The only relevant part of it, for the purpose of the contention of the learned counsel for the Revenue, is the last part of art. 7, which reads as follows :
'Bamag shall remit the royalties for the values of the plants to I.G. at the same rate at which it receives its customer's payments; if Bamag receives foreign exchange from its licensees as compensation for erecting the plants, Bamag shall pay the royalties to I.G. in foreign exchange, if this is possible under the German foreign Exchange regulations.'
7. Relying on this clause, it is contended by Mr. Dastur that since foreign exchange regulations did not permit receipt of royalty in terms of German currency the amount had perforce to be received in Indian currency and that this receipt was, therefore, not a voluntary nature.
8. Plainly read, all that is material for the purpose of s. 5(2)(a) of the I.T. Act, 1961, is to ascertain whether a non-resident has received or is deemed to have received in the relevant previous year any income in India. It can hardly be disputed that the OBSF was entitled to royalty from Bamag on account of the licences granted by Bamag to the Indian company. The amount has admittedly been received in India. It is difficult to see how this receipt can be said to be involuntary in character in so far as receipt in terms of rupees is concerned. As a matter of fact, the clause relied upon by Mr. Dastur itself seems to contemplate that Bamag shall pay royalty in foreign exchange only 'if this is possible under the German foreign exchange regulations'. This must necessarily imply that if it was not possible to pay royalties in foreign exchange under the German foreign exchange regulations'. This must necessarily imply that if it was not possible to pay royalties on foreign exchange under the German foreign exchange regulations the OBSF was at liberty to receive royalty from Bamag in any other currency. It is obvious, therefore, that the OBSF has chosen to receive royalty from Bamag in Indian currency. There is nothing to show that it was forced to receive this amount of royalty in Indian currency. Even otherwise, this did not detract from the fact that the amount was in fact received in India and that it was on account of royalty. The amount was, therefore, clearly income for the purposes of s. 5(2)(a).
9. it is difficult to accept the argument that the amount was received in lieu of debt and, therefore, it could not be income. It is no doubt true that the liability of Bamag to pay royalty may have matured into a debt later and could have been so treated by the parties. But there is nothing to show that any of the parties treated the amount in question as a debt. The amount is paid as royalty and not in discharge of any liability for payment of a debt, and, therefore, the receipt must necessarily take the character of income. In the view which we have taken, question No. 1 has to be answered in the affirmative and in favour of the Revenue, and question No. 2 has to be answered in the negative and in favour of the Revenue.
10. The question are accordingly answered as follows :
Question No. 1 : In the affirmative and in favour of the Revenue.
Question No. 2 : In the negative and in favour of the Revenue.
11. It will be open to the assessee to canvass the question of exemption under the Agreement for the Avoidance of Double Taxation between India and West Germany when the matter goes back to the Tribunal. The assessee to pay the costs of this reference.