1. M/s. Citizen Watches Company Ltd., Japan (hereinafter referred to as 'Citizen'), a company incorporated in the highly industrialised Japan under the laws of that country, with its registered office situated on 20th Floor, Shinjuku Mitsui Building, 1-1-2 Chome Nissi Shinjuku, Shinjuku-ku, Tokyo, a world leader in the manufacture of wrist watches, is the common petitioner in these cases.
2. Before India attained independence and thereafter wrist-watches manufacturing industry in the country was not well developed. With the avowed object of establishing wrist-watches industry on a firm footing in public sector, to sarve the ever growing demands for wrist-watches in the country, Government of India (hereinafter referred to as 'Government') in the later part of 1959, through its accredited representatives negotiated with the Citizen to provide the technical know-how for establishing a modern wrist-watch manufacturing industry in the country. After protracted and delicate negotiations, a technical collaboration agreement was entered into between Government and Citizen on March 25, 1960, (Annex. A) under which the latter agreed to supply the technical know-how to the former for the establishment of a modern watch factory in India on the terms and conditions stipulated in that agreement. In terms of that agreement, Government by its letter No. L.E. Ind. II (23)/59/-ENG-PR dated 3/4-2-1961 (Annex. B) addressed to the petitioner, transferred their rights, obligations and responsibilities to one of its wholly owned company called 'Hindustan Machine Tools Ltd., Bangalore' (hereinafter referred to as 'HMT'). With the technical know-how provided by Citizen, a modern wrist-watch manufacturing factory as a unit of HMT has been established and is in full operation from April 1, 1963.
3. Not unnaturally, the said agreement provided for payment of various amounts to Citizen for the services or the technical know-how provided by it to Government/HMT. The clauses that regulate payments under the heading 'Remuneration' which alone are material for the purpose of these cases reads thus :
'28. Government shall pay to citizen a total sum not exceeding pound 24,000 (twenty- four thousand pounds sterling) for the supply of drawings and other information referred to in articles 7, 11, 16, 12 and 24. Actual payments shall be made within 60 days from the date of receipt of relative drawings and other information and supporting bills.
29. In consideration of the technical and other assistance rendered by Citizen, government shall pay to Citizen a technical assistance fee of a total sum not exceeding pound 106,330 (one hundred and six thousand and three hundred and thirty pounds sterling). The payment shall be made in eight yearly instalments, commencing from the end of the first year following the commencement of operation. The amount of the instalment relating to each of the year following the commencement of operation shall be as specified below.
Provided that, if during any year, the production of wrist-watches fall below that specified in the programmes of production in annexure - I, the instalment relating to that year shall be reduced proportionately.
---------------------------------------------------------------------Year following the Amount of installmentcommencement relating to the yearof operation (pounds sterling)---------------------------------------------------------------------First 2,500Second 7,500Third 12,000Fourth 12,000Fifth 12,000Sixth 20,000Seventh 20,000Eighth 20,330-------1,06,330-------In case, the total payment does not reach pound 106,330 (One hundred and six thousand and three hundred and thirty pounds sterling) at the end of the period of currency of this agreement, the balance shall be paid within sixty days thereafter. The above technical assistance fee shall be free from Indian taxes.
30. Government shall pay to Citizen a royalty at the rate of two per cent. of the amount, calculated in accordance with the provisions of article 31, relating to the preceding year. The royalty shall be subject to Indian taxes.
31. For the purpose of calculating the royalty due to Citizen the standard price of wrist-watch shall be fixed at pound 2-5.0 (Two pounds sterling and five shillings. The amount on which royalty shall be due is the value of wrist-watches produced in the factory during each of the years following the commencement of operation calculated at the standard price, after deducting therefrom the c.i.f. cost of wrist-watch parts imported for the purpose of assembly and production of wrist-watches. The date of commencement of operation shall be the first day of the calendar month following the month during which the first batch of wrist-watches is despatched from the factory for the purpose of sale.
32. The amounts of installment of technical assistance fee payable, and the royalty due to Citizen shall be paid within 60 days after the expiry of the period to which they relate. Interest shall be payable at six per cent. per annum on overdue amounts.
33. Government shall furnish to Citizen, periodically and whenever so required all information necessary for the calculation of the instalment of technical assistance fee payable and the royalty due to Citizen.'
4. In terms of these clauses, Citizen has received various payments from HMT from time to time.
5. For the assessment years 1964-65, 1965-66, 1966-67, 1967-68, 1968-69, 1969-70 and 1970-71 relevant to the accounting periods ending on March 31, 1964, March 31, 1965, March 31, 1966, March 31, 1967, March 31, 1968, March 31, 1969, and March 31, 1970, respectively, the petitioner filed its returns under the I.T. Act, 1961 (Central Act 43 of 1961) (hereinafter referred to as 'the Act') before the IInd ITO, Company Circle, Bangalore (hereinafter referred to as 'the ITO'), disclosing the receipts from HMT under three heads called 'documentation fee', 'technical assistance fee' and 'royalty'. On the amounts received as royalty, while claiming certain deductions towards expenses, the petitioner did not dispute its liability to pay the income-tax chargeable under the Act. But on the amounts received as documentation fee and technical assistance fee, the petitioner claimed total exemption from payment of income-tax on the basis of clause 29 of the agreement. By different but substantially similar orders made on different dates for different assessment years (annex's. C1 to C7), the ITO accepted the case of the petitioner on receipts from documentation fee on the ground that the same had been received outside the taxable territory and rejected its claim on receipts from technical assistance fee, allowing a deduction to the extent of 1/4th on the ground that the same had been received outside the taxable territory and completed the assessments for the aforesaid years on that basis.
6. Against the aforesaid orders of the ITO, the petitioner filed appeals before the AAC, Bangalore (hereinafter referred to as 'the AAC'), who by different but substantially similar orders made on different dates (annex's. E, F and G) allowed the said appeals and remitted the cases to the ITO for fresh determination. In those appeals, the petitioner had filed an affidavit sworn to by one Sri. I. K. Ametha, who was then working as the joint general manager of HMT watch factory unit, Bangalore.
7. On remands, the cases were dealt by the IAC, Range-V, Bangalore, evidently by virtue of the power conferred on him by the Commissioner of Income-tax, Karnataka Circle (hereinafter referred to as 'the Commissioner'), under s. 125 of the Act, and his jurisdiction for having dealt with the cases is not in dispute. But, still in the course of my order hereafter, I will refer to him also as ITO. On an examination of the contention urged before him, the ITO by separate but similar orders made on March 30, 1981 (annex's. H-1 to H-7), held that there was no distinction and difference between the documentation fee, technical assistance fee and royalty and all receipts were royalty and, therefore, chargeable to income-tax under the Act. On that basis, the ITO completed the assessment and issued consequent demand notices on that day (annex's J-1 to J7), demanding a total sum of Rs. 35,18,683 from the petitioner as balance of tax and interest for the aforesaid assessment years.
8. On April 25, 1981, the auditors of the petitioner, viz., M/s. Brammayya & Co., Chartered Accountants, Bangalore, who were representing it before the I.T. authorities, in their anxiety to oversimplify the matter, which, however, has only complicated the matter, wrote to the Central Board of Direct Taxes, New Delhi (hereinafter referred to as 'the Board') (annex. L-2), requesting it to intervene and direct the I.T. authorities to exempt the receipts from documentation fee and technical assistance fee from income-tax. But, on that letter, the Board by its letter No. F. 484/4/80-FTD, dated May 26, 1981 (annex. M), rejected the same and held that those receipts were chargeable to income-tax.
9. On July 7, 1981, the petitioner presented these writ petitions under art. 226 of the Constitution, challenging the assessment orders of the ITO in so far as they determined its liability on the documentation fee and technical assistance fee and the order of the Board with an interesting and novel prayer to file appeals against the disallowance of expense claimed on royalties. On July 9, 1981, Chandrakantaraj Urs. J., issued rule nisi and stayed the recovery of taxes on the petitioner or its collaborator furnishing guarantee to the satisfaction of the ITO.
10. On July 15, 1981, the petitioner filed 7 appeals before the Commissioner (Appeals)-I, Bangalore, against the assessment orders of the ITO, dated March 30, 1981, (annex's H-1 to H-7), in so far as they related to deductions on receipts from royalties. On February 16, 1982, the Commissioner has disposed of them granting substantial or considerable relief to the petitioner (annex. R1).
11. Between the Government of India and Japan, an agreement for 'Avoidance of Double Taxation of Income' between the two countries had been entered into on January 5, 1960, and on its notification and exchange of instruments thereto, that agreement has been published by Government in its notification No. GSR 692, dated March 16, 1960 (June 13, 1960 ?). In the course of this order the said agreement will be hereafter referred to as'DTA.'
12. Among others, the petitioner has urged that the order made by the Board and the ITO concluding that the documentation and technical assistance fees were chargeable to Income-tax, had ignored the affidavit of Amitha, the agreement dated March 25, 1960, entered into between the Government and Citizen and the DTA and were manifestly illegal.
13. In their common return, the respondents while justifying the impugned orders have urged that these petitions challenging only a part of the orders of the ITO, that had merged in the appellate order of the Commissioner (annex. R-1) that is not challenged, are not maintainable. Secondly, the respondents have urged that even otherwise these are fit cases in which this court should decline to exercise its extraordinary jurisdiction, as the petitioner had deliberately failed to avail of the legal remedies of appeals available under the Act, on questions of fact and of law and a reference thereto on questions of law either to the Supreme Court or to this court.
14. Before examine the contentions urged for the petitioner on merits, it is necessary to examine some of the preliminary objections raised by Shri K Srinivasan, learned senior standing counsel appearing for the Revenues, as some of them, if accepted, go to the very root of the matter and make it unnecessary to examine the merits.
15. Sri Srinivasan has strenuously contended that the impugned orders made by the ITO had merged in the orders of the Commissioner that were not challenged and, therefore, these writ petitions were not maintainable and were liable to be dismissed in limine. In support of his contention Sri Srinivasan has strongly relied on the ruling of the Supreme Court in Collector of Customs, Calcutta v. East India Commercial Co. Ltd. : 2SCR563 .
16. Sri T Subbarao, learned counsel for the petitioner has urged that that part of the orders of the ITO challenged in these writ petitions had not been challenged in the appeals before the Commissioner and the orders of the ITO to the extent they are challenged in these writ petitions, has not merged in the order of the Commissioner. In support of his contention Sri Subbarao has strongly relied on the ruling of the Supreme Court in CIT v. Amritlal Bhogilal & Co. : 34ITR130(SC) .
17. As seen earlier, the petitioner challenged only that part of the orders of the ITO that related to the disallowance of expenditure on royalty and not the other portions of those orders before the Commissioner. In his order (annex. R-1), the Commissioner has very rightly dealt with that part of the orders of the ITO, that were challenged before him and not the other parts of the orders that are challenged in these writ petitions.
18. That an order of the original authority, when challenged in an appeal or revision and the appellate or the revisional authority disposes of that appeal or revision, the original order is merged in the appellate or the revisional order and the person who seeks to void the original order, must also challenge the appellate or the revisional order, are too elementary, and admit of no doubt and are firmly concluded by the ruling of the Supreme Court in East India Commercial Co. Ltd;s case : 2SCR563 . But, the question is whether the principle applies to the present peculiar and interesting situation.
19. What was challenged in appeals, and dealt by the appellate authority, was only a specific part of the order of the ITO. When that is so, there would be a merger only to the extent that was challenged and decided by the appellate authority and not the other portions of the orders that are challenged only before this court. The incongruity in the proceedings, assuming there is any such incongruity, cannot and does not result in the merger of the orders of the ITO that are expressly challenged in these writ petitions and were not challenged in appeals before the Commissioner. On any legal principle it is difficult to hold that the orders made by the ITO to the extent they are challenged in these petitions and were not challenged before the Commissioner had merged in the order of the Commissioner.
20. In East India Commercial Co. Ltd;s case, the precise question in the matter it has arisen did not arise for consideration and, therefore, the ratio in that case does not bear on the point.
21. In Amritlal Bhogilal & Co;s case : 34ITR130(SC) , one of the questions that arose for consideration before the Supreme Court was whether an order of registration of a firm made under the Indian I.T. Act of 1922 (hereinafter referred to as 'the 1922 Act') that was not appealable, could be challenged by the Revenue in an appeal filed by the assessee against the assessment order before the appellate authority. On that question the Supreme Court speaking through Gajendragadkar J. (as he then was), expressed thus (p. 138) :
'The powers of the Appellate Assistant Commissioner, however wide, have, we think, to be exercised in respect of the matters which are specifically made appealable under section 30(1) of the Act. If any order has been deliberately left out from the jurisdiction of the Appellate Assistant Commissioner it would not be open to the appellate authority to entertain a plea about the correctness, propriety or validity of such an order. Indeed, if the respondent's contention is accepted it would virtually give the Department a right of appeal against the order in question and there can be no doubt that the scheme of the Act is not to give the Department a right of appeal to the Appellate Assistant Commissioner against any orders passed by the Income-tax Officer.'
22. According to this enunciation, there will be no merger of a portion of a composite order that is neither challenged nor can be challenged. This enunciation made by the Supreme Court in examining a case arising under the 1922 Act, is applicable to decide the question whether there is a merger or not of a case arising under the 1961 Act also. On this principle that is more apposite, the contention urged for the Revenue has no merit.
23. Sri. Srinivasan has next contended that the petitioner who voluntarily sought the intervention of the Board, cannot challenge its order and the same cannot be annulled at its instance.
24. The fact that the petitioner voluntarily and unadvisedly sought the intervention of the Board, does not take away its right to challenge the prejudicial order that is made by the Board, against it. So long as there is a prejudicial order made by the Board, it is open to the petitioner to challenge the same, notwithstanding the fact that the same was made at its instance. For these reasons, I see no merit in this contention of Sri Srinivasan and I reject the same.
25. At this very stage, it is also proper to examine the validity of the order made by the Board.
26. The Board is the highest administrative authority under the Act (vide s. 116 of the Act). Section 119 of the Act empowers the Board to issue orders, instructions and directions to the I.T. authorities for the administration of the Act. A circular or an order made by the Board is binding on the subordinate authorities. But that very same section directs the Board not to interfere with the assessment for a particular year or years and the judicial discretion of the appellate authorities under the Act. Without any doubt the order made by the Board, interferes with the assessments made or to be made by the original, appellate and revisional authorities under the Act, which are quasi-judicial in nature. On this ground as also on the ground that any order to be made would embarass the authorities under the Act, the Board, should have refrained from entertaining the representation and making an adverse order. Even otherwise, the order made by the Board, without affording an opportunity of hearing and assigning reasons is violative of the principles of natural justice. For all these reasons the order of the Board, is liable to be quashed.
27. Sri Srinivasan has lastly contended that the order made by the ITO on documentation and technical assistance fee was appealable both on questions of fact and law and that on the failure of the petitioner to avail of that remedy, but availing of the same on a portion of those orders, these are fit cases in which this court should decline to exercise its extraordinary jurisdiction in favour of the petitioner.
28. Earlier, I have noticed the circumstances in which the Board, made its order and found that the same was illegal and liable to be quashed.
29. The Board, concurred with the orders of the ITO on documentation fee and technical assistance fee. Not withstanding the circumstances in which the Board, made its order, the petitioner could not have challenged the same, at any rate, in first appeals before the AAC or the Commissioner, on whom it was binding. Any challenge by the petitioner before the Commissioner against the assessment orders of the ITO, was doomed to fail though in a way it contributed to that situation. So long as the petitioner could not also file first appeals, it could not also file second appeals before the Income-tax Appellate Tribunal or, under s. 256 of the Act, seek a reference to the Hon'ble Supreme Court or this court. On these facts it is not possible to hold that the petitioner had alternative legal remedies under that Act, and had not exhausted them before approaching this court.
30. Assuming that the effective legal remedies of appeals and a reference thereto under the Act, were available to the petitioner and had not been availed of before approaching this court, that does not touch on the jurisdiction of this court to entertain these writ petitions and interfere with the impugned orders, if there are justifiable grounds. The existence of an alternative remedy is one of the factors to be taken into consideration in exercising the extraordinary jurisdiction conferred on this court and that aspect should more appropriately be examined before issuing rule nisi. After issue of rule nisi, it would not be proper for a High Court to throw out the writ petitions on such a ground, more so when the period for filing the appeals under the Act, had expired. For these reasons also, I reject this objection of Sri Srinivasan
31. As I have rejected the preliminary objections urged by Sri Srinivasan, it is now necessary to examine the merits.
32. Sri Subbarao has contended that the previous orders made by the ITO, granting total relief to the assessee on receipts from documentation fee, had not been challenged by it and had become final, was not open for re-examination and determination to the contrary.
33. Sri Srinivasan has urged that on the very terms of the remand orders it was open to the ITO to re-examine and redetermined the receipts from documentation fee as royalty.
34. On the receipts from documentation fee for the assessment year 1964-65,the ITO accepting the case of the assessee expressed thus :
'2. Article 28 of the agreement prescribed that M/s. Hindustan Machine Tools shall pay to M/s. Citizen Watch Co. a total sum not exceeding pound 24,000 for the supply of drawings and other information referred to in Articles 7,11,16,21 and 24. The annexure to the order indicates the number of the articles, the subject-matter of the article and the services rendered (annexure I). As the services referred to in those clauses are done from Japan, the payments towards the sum pound 24,000 fixed under the agreement will be treated as not accruing in the taxable territories.'
35. For the other assessment years also, the ITO gave relief to the assessee on this view only. From this it is clear that the petitioner had succeeded in its entirety on receipts from documentation fee and, therefore, that part of the order being challenged before the AAC did not at all arise and as a matter of fact also, the petitioner did not challenge them before the AAC.
36. Sri Srinivasan is right in maintaining that the AAC had set aside the assessment orders of the ITO and remitted the cases to him for fresh disposal. But the question is whether the AAC had set aside that part of the orders of the ITO that was favourable to the assessee and had, therefore, not been challenged by it at all before him.
37. The orders of the ITO, in so far as they dealt with receipts from documentation fee, were separate, distinct and severable. Hence, the petitioner challenging that part of the orders of the ITO or the AAC examining, much less directing a fresh determination, did not arise and was even unthinkable. From this it follows that the orders of the AAC should only be read as not dealing and deciding the receipts from documentation fee that was not challenged before him but should be so construed as setting aside and remitting the cases only to the extent they had been challenged before him. The orders of remand made by the AAC cannot be read in any other manner. In this view the earlier orders of the ITO on receipts from documentation fee had become final and was not open for re-examination and re-determination by the ITO. On this short ground this contention of the petitioner has to be upheld.
38. Let me assume that the remand orders made by the AAC permitted the ITO to re-examine the receipts from documentation fee and examine the case on that basis also.
39. In his earlier orders, the ITO had held that the receipt from documentation fee by the assessee was outside the taxable territory and was not chargeable to tax under the Act. The assertion of the petitioner to that effect is not denied by the respondents and the same has, therefore, necessarily to be accepted as a fact. From this, it follows that the receipts from documentation fee was outside the taxable territory of India and was not chargeable to tax under the Act.
40. Sri I K Amitha, an officer of the HMT watch manufacturing unit, intimately connected with it ever since its establishment and who currently held the position of a managing director, has stated on oath that the petitioner mailed the documents referred to in clause 28 of the agreement, dated March 25, 1960, from Japan inferentially suggesting that payments for the same were made outside the taxable territory of India :
41. Sri Amitha is a responsible officer of HMT, a wholly owned Government company. Sri Amitha has no axe to grind and cannot be called a partisan witness. Unfortunately the ITO has rejected the affidavit of Amitha on the ground that he was not able to answer some intricate questions on the terms of the agreement put to him and that his affidavit was a tailored one. Assuming that Amitha was not able to answer a question, it does not necessarily follow that he had not stated the truth and that his affidavit was a tailored one. In my view, the entire approach made by the ITO and the reasons to reject the affidavit of Amitha are illegal and unwarranted. On the other hand, the ITO should have accepted the affidavit of Amitha and acted on it.
42. On the facts stated by Amitha in his affidavit, it is clear that the earlier conclusion of the ITO that the receipts from documentation fee was outside India was sound and legal and there was hardly any ground to take a different view on remand. On this ground also the receipts from documentation fee was not chargeable to tax under the Act.
43. In his order dated March 30, 1981, for the assessment year 1964-65 adopted for the other year also, the ITO has held that the receipts from documentation fee was royalty and was chargeable to income-tax under the Act.
44. Clause 28 of the agreement between the Government and the petitioner provides for payments of a sum not exceeding pound 24,000 on receipt of drawings and other information referred to in arts. 7,11,16,21 and 24 of that agreement and payment of royalty at 2 per cent. on the amounts to be calculated in accordance with clause 31 of the agreement. On the very terms of this agreement the fee payable for supply of documents and information under clause 28 of the agreement and the royalty payable under cls. 30 and 31 cannot be treated as one and the same.
45. The term 'royalty', which is not a term of art, is not defined in the Act or in the General Clauses Act. Hence, the meaning of the term 'royalty' occurring in the agreement has to be ascertained from the context in which it occurs.
46. Oxford Advanced Learner's Dictionary of Current English by A. S. Hornby (3rd Edn.) defines the term 'royalty' as hereunder
'Payment of money by a mining or oil company to the owner of the land; oil royalties; sum (to be) paid to the owner of a copyright or patent : a royalty of 10 per cent. of the price of the book on all copies sold.'
47. Stroud's Judicial Dictionary (3rd Edn.) defines the said terms as hereunder (p. 2632) :
'In its secondary senses the word 'royalties' signifies, in mining leases that part of the credendum which is variable, and depends upon the quantity of minerals gotten (A. G. Ontario v. Mercer, Sup.  8 AAC 767 (P.C.); see hereon Greville-Nugent v. Mackenzie,  AC 83 , cited RENT; Listowel v. Gibbings Sup.  9 Ir CLR 223; or the agreed payment to a patentee on every article made according to the patent, on which see Re Graydon  1 QB 417 cited Personal Labour.'
48. From the above meaning, the term 'royalty' referred to in the agreement is referable to payments to be made for the use of patents, etc; by the Government/HMT and does not include the fee payable for supply of documents and information.
49. The ITO has relied on the definition of the term 'royalty' occurring in Expln. 2 to s. 9(1)(vi)(c) of the Act, without noticing that the definition was not a general definition and had no application in interpreting that term wherever it occurs. Even otherwise, the opening part of Expln. 2 itself states that that definition would apply for purposes of that clause only and not to the other portions of the Act. Last but not the least, s. 9(1)(vi)(c) of the Act applies to agreements made on and rom April 1, 1976, and not before that date. From this it follows that the reliance placed by the ITO on the definition of the term 'royalty' occurring in Expln. 2 to s. 9(1)(vi)(c) of the Act was illegal and unwarranted.
50. In my view, the entire discussion of the ITO based on the technical know-how literature of the United Nations Industrial Development Organisation titled Guidelines for Evaluation of Transfer of Technology Agreements (United Nations, New York, 1979), was wholly irrelevant to decide the nature of the receipts . The nature of the receipts had to be determined on the very terms of the agreement or the intention of the parties and the provisions of the Act, and not with reference to the literature referred to and relied on by him.
51. Sri Subba Rao has next contended that the receipts from technical assistance fee by the assessee was not taxable under the terms of the agreement dated March 25, 1960 (annex. A), and the DTA. In support of his contention Sri Subbarao has strongly relied on the ruling of the Supreme Court in Carborandum Co. v. CIT : 108ITR335(SC) and of this court in VDO Tachometer a Werke, West Germany, v. CIT : 117ITR804(KAR) .
52. Sri Srinivasan has sought to support the reasoning and conclusion of the ITO.
53. Briefly stated, the ITO has held that the receipts from technical assistance fee by the assessee was royalty, and that the same would not attract art. X(k) of the DTA but would attract art. X(e) of the DTA and was, therefore, chargeable to income-tax under the Act.
54. On the very terms of the agreement, dated March 25, 1960, that treats the technical assistance fee as a separate fee from royalty and for the very reasons stated in dealing with the receipts from documentation fee, it would be wrong to hold that the receipts from technical assistance fee was royalty.
55. In his orders the ITO has held that the receipts from technical assistance fee had been received by the assessee outside India. On this very finding, which is also the case of the petitioner, the receipts were outside the taxable territory of India and was not chargeable to Income-tax under the Act. On this short ground also, the petitioner is entitled to succeed on the receipts from technical assistance fee.
56. In one cryptic sentence and without any discussion and reasons, the ITO has held that the receipts from technical assistance fee was governed by the principles enunciated by the Supreme Court in Performance Right Society Ltd., v. CIT : 106ITR11(SC) . But the principles enunciated in that case that turned on the question as to whether the receipts had accrued or deemed to have accrued in India had hardly any application to the question that arises for determination in these cases. In VDO Tachometer Werke's case : 117ITR804(KAR) , a Division Bench of this court has also distinguished that case on this very ground (vide p. 816).
57. While examining the case of the petitioner on documentation fee, I have found that there was no justification for the ITO to reject the affidavit of Amitha. For that very reason, I hold that there was no justification for the ITO to reject the statements made by Amitha on oath on receipts from technical assistance fee also and also the same requires to be accepted and acted upon.
58. The Board declared the petitioner as a company under the Act. The petitioner has carried all its business operations from outside India. On these facts and on the application of the principles enunciated by the Supreme Court in Carborandum Co;s case : 108ITR335(SC) , and of this court in VDO Tachometer Werke's case, the receipts from documentation and technical assistance fees were not chargeable to income-tax under the Act.
59. Without any discussion the ITO has held that the receipts from documentation fee and technical assistance fee do not attract art. X(k) of the DTA but would attract art. X(e) of that agreement. Even the Board has held that those receipts would attract art. X(e) and not art. X(k) of the DTA and was, therefore, chargeable to income-tax under the Act.
60. As seen earlier, the DTA duly ratified by the Governments of India and Japan providing for avoidance of double taxation came into force on the day mentioned in art. 16 of that agreement. The agreement was entered into by the Government of India under s. 49A of the 1922 Act corresponding to s. 90 of the present Act. The DTA continues to be in force as if made under the present Act (vide s. 297(2) of the Act). Hence, as found by the Board and the ITO, the DTA applies to the receipts by the petitioner.
61. Article X(k) of the DTA that is relevant reads thus 39 ITR 52 :
'(k) Fees for technical services payable to an enterprise shall be treated as income from sources within the Contracting State in which are rendered the services for which such fees are paid.'
62. Earlier I have held that the technical assistance fee was not 'royalty.' The technical assistance fee was a separate fee and was not a royalty or a similar payment dealt in art. X(e) of the DTA. From this it followed that the payments made by the HMT for technical assistance fee attracts art.X(k) of the DTA and not art. X(e) and was, therefore, exempt from payment of income-tax under the Act.
63. The liabilities of the petitioner for taxes should be ascertained with reference to the provisions of the Act only and that no question of promissory estoppel arises can hardly be doubted. But, still, in construing the nature of payments and the liabilities to taxes, we must bear in mind that one of the contracting parties was the Government of India itself that administers the Act, and it was well aware of its legal rights and obligations and was not an ordinary contracting party anxious to avoid the taxes due to the state.
64. On the examination of all the facts and the circumstance and the law bearing on the point, it is clear that the case of the petitioner that the receipts from documentation and technical assistance fees were not chargeable to income-tax under the Act, was well founded and should have been allowed by the ITO. But, the ITO in rejecting the same has committed manifest illegalities apparent on the face of the record and the same, therefore, calls for interference of this court. From this, as also to give effect to the order of the Commissioner, it follows that the impugned demand notices also require to be quashed.
65. In the light of my above discussion, I make the following orders :
(a) I quash the letter/order No. F. 484/4-80FTD, dated May 26, 1981, (annex. M) of the CBDT, New Delhi, respondent No. 4;
(b) I quash the impugned order dated March 31, 1981 (annex's. H-1 to H-7), of the IAC, Range-V, Bangalore, respondent No. 1, in so far as they relate to assessment of income-tax on documentation fee and technical assistance fee and the demand notices issued by him thereto (annex's. J-1 to J-7) in their entirety.
(c) I direct the IAC, Range-V, Bangalore, responded N0.1, to make a computation or recomputation of the income and the income-tax payable thereon by the petitioner for the assessment years 1964-65 to 1970-71 in conformity with this order and the order of the Commissioner (Appeals)-I, Bangalore, in I.T.A. No. 77 to 83/00/CII/ (A-I) 81-82, dated February 16, 1982 (annex. R-I), and issue fresh demand notices for the aforesaid assessment years in accordance with law.
66. Rule issued is made absolute. But in the circumstances of the case, I direct the parties to bear their own costs.