Per Shri K. S. Viswanathan, Accountant Member - This is an appeal by the assessee a limited company, who has been treated as the agent of a non-resident company by name Uniroyal Inc., USA. There is no dispute that the assessee is the agent. The point at dispute is that the amount remitted by the Indian agent, Premier Tyres Ltd., to Uniroyal Inc. is not income accruing or arising in India. It is also not income which could be deemed to accrue or arise in India. Therefore, nothing is taxable.
2. Premier Tyres Ltd., the Indian company, had entered into an agreement with the American company for technical services. There was an agreement subsisting between these two companies, dated 23-2-1962, but that agreement was terminated 10 years later. A new agreement was made out on 1-4-1974 between them which governs the assessment year we are concerned with. Article II 2-1 provides for the technical assistance to be given by the American company and it reads as follows :
'UNIROYAL will furnish or cause to be furnished to PREMIER detailed information, as set forth in Appendix A hereto, on manufacturing equipment, methods, process and formulas, followed and used in regular production by UNIROYAL and any subsidiary of UNIROYAL in the manufacture of Agreement Products, and will continue, subject to Section 2-8, to furnish or cause to be furnished to PREMIER such information from time to time during the term of this agreement. Appendix A is hereby incorporated by reference and made a part of this Agreement. Nothing in this agreement shall be construed as requiring UNIROYAL to furnish or cause to be furnished any information, the disclosure of which would be in violation of an obligation of secrecy owed to another by UNIROYAL or and subsidiary of UNIROYAL having to make any payment to a third party (not a subsidiary of UNIROYAL).'
Apart from the above provision, the American company is also required, if it considers necessary, to send to the Indian company one or more persons for 30-man working days to advise and assist the Indian company is establishing the use of the information furnished and for rearranging and making such factory layouts as may be necessary. If so requested by the Indian company, the American company will undertake special product or developmental services.
3. The payments for these services are governed by Article IV. According to this Article, the American company will be entitled, for information and services rendered, to a royalty calculated at half per cent of the net sales in India of the products which are manufactured by using the technical aid given by the American company. Similarly, in respect of sales outside India, 5 per cent royalty is payable. During the accounting year concerned, the net sales in India were Rs. 23.7 crores on which royalty at half per cent was Rs. 7,44,636 and royalty in respect of the sales outside India was Rs. 2,46,505. Together the total royalty payable was Rs. 9,91,141.
4. Before the ITO, the Indian agent (i.e., the Indian company), claimed that the royalties were not taxable. We may mention that in the earlier assessment years there was no dispute on this point and the assessments were made treating these amounts as taxable receipts. The change in the attitude of the company arose from a reading of the decision of the Supreme Court in the case of Carborandum Co. v. CIT : 108ITR335(SC) . The company was of opinion that the facts are on all fours with that case and, therefore, nothing was taxable in India. The ITO, however, did not accept this submission. He pointed out that according to the agreement, all payments to be made by Premier Tyres Ltd. would be after deduction of tax. He also pointed out that one of the executives of the American company, Mr. Hubbers, visited India from 25-2-1976 to 11-3-1976 for the purpose of quality audit and the expenses in connection with his stay were incurred by the Indian company. Mr. Hubbers came to India and rendered services as an officer of the assesse-American company. Reliance was also placed on the provisions of section 9(1) (vi) of the Income-tax Act, 1961 (the Act) which deemed any payment of royalty as income arising in India.
5. The assessee had claimed certain expenses to be set off against the royalties if the same is held as taxable. The ITO, rejecting the claim that 40 per cent of the receipts should be treated as expenses, estimated the same at 15 per cent and allowed a deduction of Rs. 1,48,671.
6. Against this assessment, the assessee appealed. It appears that the contention of the company was that no services were rendered in India and, therefore, no income arises in India. It was submitted before the Commissioner (Appeals) that whenever there were any difficulties in manufacturing or technical problems, the Indian company carried on correspondence with the American company and assistance during the year was wholly rendered through correspondence. It was next submitted that no income could be deeded to accrue or arise in India because there was no business connection between the Indian company and the assessee. For this purpose, reliance was placed on the decision of the Bombay High Court in CIT v. Tata Chemicals Ltd. : 94ITR85(Bom) .
It was also submitted that section 9(1) (vi) would not apply and for this purpose a Gujarat High Court decision in Meteor Satellite Ltd. v. ITO : 121ITR311(Guj) was relied on. The Commissioner (Appeals), however, held that the income is taxable in India. He had held that the provisions of section 9(1) (vi) would apply and any payment of royalty would be considered as income arising in India. He further pointed out the decision of the Gujarat High Court in the case of Meteor Satellite Ltd. (supra) had held that the provisions of section 9(1) (vi) are special provisions relating to royalty and those provisions would apply in preference to the other sub-sections in section 9. According to him by applying the ratio of the Gujarat High Court decision, the royalty of Rs. 9,91,141 received is taxable.
7. In the alternative, he also relied on the fact of Mr. Hubbers visit to India and stated that the purpose of quality control was very important in the agreement between the two companies. As such, the provisions of section 9(1) (vi) itself would apply. But, considering that the nexus involved is only a brief visit, he was of the opinion that only 20 per cent of the royalty could be treated as income accruing in India.
8. With regard to the expenditure, he held that an estimated expenditure of 20 per cent could be allowed as a deduction.
9. Against this, the assessee has come in appeal. Shri V. P. Mehta, for the assessee, submitted that there is some confusion in the order of the Commissioner (Appeals). He has held in the last para of his order that 20 per cent of the receipts would be taxable and he has also held that 20 per cent of the expenses would be allowable. If the finding of the Commissioner (Appeals) is that 20 per cent is taxable and an equal amount is allowable as deduction, then that may be made clear by the Tribunal because in that event there will be nothing to be brought to tax. We are not accepting this submission of Shri Mehta because the Commissioner (Appeals) has given a very clear finding in para 14 that the entire amount of Rs. 9,91,141 is taxable subject to the deduction of certain expenditure. The expenditure has been quantified by him at 20 per cent of the receipts and this will be clear from the last line in para 15 of his order. In para 15, the Commissioner (Appeals) was giving an alternative finding assuming that the finding given in para 14 is not correct. In the alternative, he has held that at least 20 per cent of the receipts would be taxable. So read, there is no confusion in the order of the Commissioner (Appeals). Shri Mehta, however, submitted that the receipts are not taxable at all. He pointed out that this was an agreement made before 1-4-1976. The agreement was for rendering technical assistance. He submitted that the technical assistance had been rendered outside India. So, the income accrues outside India. For this purpose he relied on the decision of the Supreme Court in the case of Carborandum Co. (supra). Assuming that the deeming provisions of section 9 apply, he submitted that sub-section (1) will not apply because there is no income accruing or arising from any business connection in India. He further submitted that clause (vi) also will not apply because the payment is by way of technical fees and such payment is covered by clause (vii) and not be clause (vi). According to him, what was paid was only for technical services and in respect of such payment the proviso to clause (vii) exempts them from taxation. The proviso states that an agreement made before 1-4-1976, as approved by the Central Government, would not be taxable under that clause. With reference to the point made by the Commissioner (Appeals) regarding the visit of Mr. Hubbers, he submitted that his visit had nothing to do with the agreement. If at all it has to be construed as giving certain services then since he stayed in India only for two weeks, only that proportion of the receipts should be treated as deemed income under section 9.
10. Shri Makhija, for the department, submitted that the provisions of section 9(1) (vi) would apply to the facts of the case since the receipt is in the nature of income by way of royalty. It is payable by a resident in respect of certain information used by the assessee for the purpose of business carried on by the assessee. He also submitted that the payment is not covered by the proviso to clause (vi). He further referred to Explanation 2 which defined what was meant by royalty and he submitted that clause (iv) of that Explanation covered the case because there was imparting of information concerning technical, industrial for commercial knowledge, experience or skill. He further drew our attention to the fact that the agreement itself calls the payments as royalty. He then referred to the decision of the Gujarat High Court in the case of Meteor Satellite Ltd. (supra) which was referred to by the Commissioner (Appeals) and submitted that the case has laid down the ratio under which the receipts will be taxable. The particular case on facts was dealing with a lump sum payment which is not the case here.
11. We have heard the parties. The issues arising in this appeal could be framed as follows :
1. On the facts of this case, does any income accrue or arise in India under section 5(2) of the Act ?
2. If not, can the receipts be deemed as income under section 9 ?
3. Is it royalty governed by clause (vi) or is it fees for technical services governed by clause (vii) ?
4. What are the expenses to be allowed if the receipts are taxable ?
12. The issue whether any income accrues under section 5(2) itself has be largely decided on factual findings. The assessee had relied on the Supreme Court decision in the case of Carborandum Co. (supra) but in that case there was a clear finding given that services were performed by the American company abroad. In this case, there is no such clear finding given by the lower authorities. In fact, in the Supreme Court case, their Lordships pointed out that the finding given by the Tribunal has not been challenged. The case was, therefore, decided on the accepted finding of fact that the services were rendered outside India.
13. We are unable to give such a clear finding in this case. It is pertinent to note that the parties have agreed that the receipts would be subject to Indian taxation. That means that the parties had agreed on facts that the services were being rendered in India, otherwise no income would become taxable in India. The agreement itself shows that for considerations receive, the American company is under an obligation to render the services to the assessee. Article, II, which has been reproduced in para 2 of this order, would show that Uniroyal will furnish or cause to be furnished to the Indian company detailed information as set forth in the Appendix to the agreement regarding the processes and formulae followed and used in regular production by the American company. So, it is the duty of the American company to furnish the information to the Indian company. The American company may depute some one to India company. That agent can be the post office. It was stated that the problems were being referred to the American company which were being solved by them in America. For this submission, no factual background has been given. In any case, it is against the tenor of the agreement which requires the American company to furnish information to the Indian company. If the information has been sent through post, then the post office was only acting as agent of the American company. This position in law is now well settled by the decision of the Supreme Court in the case of CIT v. Ogale Glass Works Ltd. : 25ITR529(SC) .
14. Clause 2.2. in Article II reinforces the above findings. By this clause, the American company has to convey their information as provided in clause 2.1 and Appendix A and they have to advise and assist the Indian company. Clause 5.3 in Article V states that all written information supplied or otherwise obtained from Uniroyal shall be kept in a suitably locked depository when not in actual use. The word supplied in this clause is significant. Appendix A gives the details of the information to be supplied to Premier. All these clauses taken together would show that it was incumbent on the American company to supply the information to the Indian company. How the Indian company would be given the information is a matter of detail left to the American company. Under these circumstances, we have to give a finding that as per agreement the services have to be done in India and, therefore, income accrues or arises under section 5(2) itself. There is no basis for the assessees contention that the services were rendered abroad. At least no material had been placed before us to give this finding of fact.
15. Assuming that the above findings are not correct, even then the receipts cannot be exempted. To our mind, it is clear that clause (vi) of section 9(1) would apply. The payment is clearly of the type referred to as royalty. It is described as royalty in the agreement. We are referred to Appendix A which lists out the information to be given to the Indian company. Clause (B) of the Appendix requires recommendations regarding the processes to improve manufacturing operations. Clause (D) thereof requires mould designs, specifications and blue-prints to the extent such designs, specifications and blue-prints which relate to tread designs which are in commercial use by Uniroyal. With regard to development, clause (A) required supply of formulations using approved materials. All these would bring the information imparted within Explanation 2 of clause (vi) of section 9(1). They are to be used in the business of the assessee and they are of the nature concerning the working or the use of model, design, secret formula or process. We are satisfied that the payments have to be considered as royalties. We are unable to accept the submission that the payments are in the nature of fees for technical services which are covered by section 9(1) (vii). To our mind, fees for technical services is a larger concept, of which royalty could be one such. A royalty payment can also be considered as a payment of fees for technical services. In other words, technical services is the general expression which takes in also special services for which royalties would become payable. Section 9(1) deals with both royalties, which are special services, as well as technical services fees which are general service. When in the same section separate provision has been made for special services and for general services, the provision with regard to special services must apply when considering those cases which are specifically provided for. It is, therefore, clear to us that we have to consider the payment of fees as royalty, which is only a specie of the payment of fees for technical services under clause (vi) only. Since under clause (vi), the income would be deemed to have accrued or arisen in India, the amount received has to be considered as taxable unless it gets exempted under any of the provisions in clause (vi) itself. For this purpose, Shri Mehta had relied on the proviso found therein. But that proviso will exempt only lump sum payments. On facts, since we are not concerned with lump sum payments, the proviso will not save the assessee. So, on this consideration also, we find that the receipts are taxable. This will dispose of issue Nos. (2) and (3). This will also dispose of the arguments raised by Shri Mehta that the proviso to clause (vii) would apply. Since clause (vii) itself will not apply, there is no question of going into the proviso of that clause.
16. We come to the last issue, i.e., the expenses to be allowed. On this no argument had been raised before us. We find that the Commissioner (Appeals) had gone into the issue and he had fixed 20 per cent as reasonable. It has not been shown that this is not correct. We will, therefore, hold that the deduction of 20 per cent as fixed by the Commissioner (Appeals) for expenditure should be allowed.
17. In the result, the assessees appeal would stand dismissed.