1. Since these three appeals filed by the revenue relate to the same assessee, they are disposed of by a common order, for the sake of convenience.
2. These three appeals arise out of the income-tax assessments of Vine Chemicals Limited, UK, for the three assessment years 1973-74, 1974-75 and 1978-79. The assessee follows the calendar year as its previous year. As the dispute in these appeals for the first two years involves a common point, we will consider them first.
3. The assessee-company was originally known as Barium Chemicals Ltd. till 30-4-1974, when its name was changed to its present name, namely, Vine Chemicals Ltd. and it is a non-resident company.
4. For the assessment year 1973-74, for the previous year ended 31-12-1972, the ITO issued a notice under Section 147(a) of the Income-tax Act, 1961 ('the Act'), in response to which the assessee filed a 'nil' return. In Part III of the return, the assessee stated that a sum of Rs. 5,00,000 was receivable from Metazinc (P.) Ltd. and claimed that no income accrued from this amount of Rs. 5,00,000 for the reason that this represented the amount paid for technical know-how handed over outside India and as such no income accrued in India.
5. The ITO, however, did not accept this claim of the assessee. For the reasons elaborately discussed by him in the assessment order for 1974-75, he held that the first instalment of Rs. 2,50,000 was receivable according to the terms of the agreement during the previous year, relevant for the assessment year 1973-74 and that income from this receipt accrued in India. He further held that both the agreements entered into by the assessee with the Indian company on 17-12-1971, one for engineering and know-how and the other for services, should be read together in order to understand the real intention of the parties, that it was very clear that the assessee's responsibility did not end with the handing over outside India of the technical know-how, that even under the first agreement, the assessee had certain obligations, which could be discharged only in India such as, the preliminary layout, including the outline, floors and sections and equipment with specifications that were required to be purchased indigenously, as specified in Clause 3 of the said agreement. According to the ITO, all this could be done after considering the local conditions in India, which involve a visit to India. He further relied on Clause 5 relating to the guarantee performance and guarantee tests, which had to be conducted at the request of the assessee and under supervision of the assessee. He pointed out that under the said clause, the assessee would not be entitled to receive the second instalment, if the guarantee performance tests were not done to the satisfaction of the Indian party. According to him, this was the position if the provisions of the engineering and know-how agreement alone were considered and that if both the agreements were read together, the assessee had to render substantial services in India. Applying the ratio of the decision of the Bombay High Court in the case of Aziende Colori Nazionali Affini v.CIT  110 ITR 145, the ITO held that income did accrue in India as a part of the services were as a matter of fact rendered in India and that the handing over of the know-how for secret process was intimately connected and concerned with the obligation to show as to how the same was to be worked in actual practice. He, therefore, held, following the basis adopted by him for the assessment year l974-75, that 20 per cent of this income accrued in India. Thus, the ITO determined the income accruing or arising in India to the assessee at Rs. 50,000, representing 20 per cent of the first instalment of Rs. 2,50,000 received by the assessee during this year.
6. For the next assessment year 1974-75, for the previous year ended 31-12-1973, the assessee filed its return of income disclosing a net income from royalty of Rs. 89,520. The ITO, however, determined the assessee's total income of Rs. 1,50,710 by adding a sum of Rs. 50,000, as the income accruing or arising to the assessee at 20 per cent of the second instalment of Rs. 2,50,000 received by the assessee under the engineering and know-how agreement, as attributable to the operations carried out in India. In the assessment order for this year, the ITO has set out his detailed reasons in paragraphs 3 to 6 to reject the contention of the assessee that no income accrued or arose out of the amount of Rs. 5,00,000 received by the assessee under the engineering and know-how agreement from the Indian company.
7. The assessee preferred appeals objecting to these assessments and raised a number of contentions. The Commissioner (Appeals) considered the same at great length in the light of the various clauses of the agreement and the decisions relied on by the learned counsel and held in paragraph 20 of this order, that on a fair reading of Clause 8.2 of the service agreement regarding the assessee's technicians, it would appear that while they were in India, they continued to be the employees of the assessee and that it was not as in the Carborandum Co.
v. CIT  108 ITR 335, before the Supreme Court, where the Court had observed that the employees of the American company were taken over as employees by the Indian company and paid their salary as they worked under the direct control of the Indian company. The Commissioner (Appeals), therefore, held that this being the position it was manifest that there was merit in the lAC's conclusion that the guarantee test was performed in India by the assessee. Then the Commissioner (Appeals) examined the only other question whether the principles laid down by the Andhra Pradesh High Court in the case of CIT v. Hindustan Shipyard Ltd.  109 ITR 158 were decisive of the matter and pointed out that on this issue this was the only authority and that it would be improper for him to come to any other decision. He, therefore, held that the IAC was in error in coming to the conclusion which he did, viz., attribute 20 per cent of Rs. 2,50,000 as income arising to the assessee by way of performance guarantee test being carried out in India. He, therefore, deleted the addition of Rs. 50,000 made by the ITO in both the years. Aggrieved by these orders of the Commissioner (Appeals), the revenue has filed the present appeals to the Tribunal.
8. Shri G.S. Bhargava, the learned departmental representative, took us through the various clauses of the two agreements entered into between the assessee and the Indian company and submitted that the conclusions reached by the Commissioner (Appeals) were erroneous and unsustainable.
Shri Bhargava argued that the assessee was not only to supply the know-how to the Indian company, but also to render assistance in the erection of the plant, commission the plant, perform guarantee tests and also supply the technical personnel for the efficient performance of the plant. Shri Bhargava argued that the two agreements between the parties should be read together and not separately. He further pointed out that the decision of the Andhra Pradesh High Court relied on by the Commissioner (Appeals) was not applicable to the facts of the present case and that the decision of the Bombay High Court in the case of Aziende Colori Nazionali Affini (supra), relied on by the ITO was directly in point and applicable to the facts of the present case. The learned departmental representative also relied on the decision of the Supreme Court in the case of Carborandum Co. (supra). He, therefore, argued that the orders of the Commissioner (Appeals) required to be reversed and that of the ITO be restored.
9. Shri B.A. Palkhivala, the learned counsel for the assessee, submitted that the findings of the Commissioner (Appeals) were perfectly correct, just and in accordance with law and that they did not call for any interference at our hands. Shri Palkhivala pointed out that the policy of the Government of India in all cases of technical collaboration between Indian companies and foreign companies, was to bifurcate between services rendered in India and outside India and advise the parties to execute two separate agreements, one for the supply of know-how and the other for rendering services and giving assistance to the Indian company, so that there would not be any confusion in the interpretation of the agreements ; and that it was in conformity with these instructions of the Government, the assessee had entered into the two agreements with the Indian company on the same date on 17-12-1971, one for the supply of know-how and the other for rendering services and giving assistance to the Indian company. Shri Palkhivala contended that the entire erection and supervision of the plant in India was the work and responsibility of the Indian company and for this purpose he relied on clauses 4.1, 4.1.1 and 4.1.3 of the agreement. He submitted that this was not a case of execution of a turn-key project by the assessee-company in India, but was a case of mere assistance rendered to the Indian company for the erection of the plant by supplying the engineering data and know-how, outside India. He further relied on Clause 5 relating to the guarantee performance tests and submitted that this test was carried out by the Indian company and that no one from the assessee company had come from the UK for the purpose of carrying out the guarantee performance test, as the assessee's engineers were already there under the second agreement for services Shri Palkhivala contended that the guarantee clause contained in this agreement was the normal and usual clause contained in any agreement of sale for supply of goods or know-how and that it did not establish any business connection of the assessee in India to justify the interence that any income accrued or arose to the assessee in respect of the two instalments of Rs. 2,50,000 each received by the, assessee in each of these years under the first agreement for the transfer of engineering and know-how. In support of this plea, the learned counsel also relied on the decision of the Supreme Court in the case of CIT v. R.D. Aggarwal & Co.  56 ITR 20. He then argued that even, if it is to be assumed for the sake of argument that there was any business connection in the case of the assessee, the profits should be attributable to any of the operations in India as held by the Bombay High Court in the case of CIT v. Tata Chemicals Ltd.  94 ITR 85. Shri Palkhivala contended that no profit's were attributable to the guarantee performance tests, which were carried out only by the Indian company but in the presence of the assessee's engineers. In support of these submissions, the learned counsel also relied on two decisions of the Tribunal, Bombay Bench 'A' in the case of Fredrick Udhe Gmbh [IT Appeal Nos. 654 (Bom.) of 1978-79 and 840 (Bom.) of 1979] and the other in the case of Hitachi Shipbuilding & Engineering Co.
Ltd. in IT Appeal Nos. 2825 to 2828 (Bom.) of 1979 dated 2-7-1981]. The learned counsel pointed out that the facts of the present case were similar to the facts considered by the Tribunal, in the two decisions referred to above and that, therefore, the assessee was entitled to succeed in these appeals also in the light of the said decisions of the Tribunal. He, therefore, submitted that the orders of the Commissioner (Appeals) deserved to be upheld.10. We have carefully considered the rival submissions of parties in the light of the materials placed before us and the decisions referred to above.
11. In the assessment order for 1974-75, the ITO accepts in paragraph 6(/) that 'no doubt the scope of the technical data to be furnished by BCL as contemplated in Clause 3 of the agreement related to documentation of know-how. The supply of know-how in the form of technical data has taken place outside India and the necessary material was handed over to the Indian company in the UK'. The ITO then refers to Clause 5 of the agreement and quotes Clause 5.2 relating to the guarantee performance tests and proceeds to hold that this clause read along with the other clauses of the agreement go to show that the assessee company was under an obligation not only to supply the necessary documentation in UK but also guarantee its due performance in accordance with certain specified standards and that this guarantee clause, by its very nature, can be given effect to only within the country because what is guaranteed is the performance of the plant erected according to the documentation provided in the UK. Thus, it would be clear that the entire case of the revenue is based on the fact that the guarantee performance tests carried out under Clause 5.2 of the agreement brought the assessee within the mischief of Section 9(1) of the Act and that, therefore, there was business connection giving rise to accruing or arising of income taxable under the Income-tax Act in this country. The assessee's case is that this guarantee performance test could only be carried out in India, but, this fact alone would not justify the inference sought to be drawn by the revenue in regard to accruing or arising of income taxable under Section 9 and reliance is placed on the decision of the Andhra Pradesh High Court in the case of Hindustan Shipyard (supra).
12. It would be seen that there is no dispute in the present case that the entire documentation relating to the engineering data and know-how was handed over by the assessec-company to the Indian company in UK outside India. There can also be no dispute that the sum of Rs. 5 lakhs paid to the assessee under the first agreement was only in respect of such documentation of engineering data and technical know-how though paid in two instalments of Rs. 2,50,000 each, the first instalment during the previous year relevant for the assessment year 1973-74 and the second instalment during the previous year relevant for the assessment year 1974-75. According to the revenue, even in respect of these payments, some income had accrued or arisen to the assessee in India by virtue of the guarantee performance tests carried out under Clause 5.2 of the agreement. Since the entire case of the revenue rests on clauses 5.1 and 5.2 of the first agreement relating to engineering and know-how we set out below the said clauses for facility of reference : 5.1 Provided that the plant has been constructed and operated in accordance with the appropriate specifications, drawings and advice of BCL and work not within the scope of BCL's duties has been properly performed and the raw materials used meet the specifications set out in the first schedule hereto, BCL guarantees that the plant will produce the product of such capacity and of such quality as that specified in the second schedule hereto.
5.2 In order to verify the fulfilment of the guarantee herein, guarantee performance tests shall be carried out at MTZ's request and under its supervision in the presence of such personnal as BCL shall approve as soon as possible after the completion of the mechanical testing of the plant but in any event not later than one month from the same. MTZ will give 15 days notice to BCL in writing stating the date on which such tests will begin and thereupon MTZ shall make all necessary arrangements for such tests.
For the above purpose MTZ shall provide free of charge such raw materials, labour, electricity, fuel and water as may be required from time to time to carry out efficiently such tests.
Guarantee performance tests shall only cover production capacity of the plant and quality of the product.
BCL shall be deemed to have completely fulfilled and exhausted the guarantee provisions set out in Clause 5.1 when the plant shall have operated for a period of 7 days continuous operations and shall have produced during such period not less than 43 tonnes of the product of the quality specified in the second schedule hereto when analysed by the methods specified in, the manual on analytical techniques provided by BCL to MTZ pursuant to Clause 3(1).
If the results of the performance tests carried out pursuant hereto do not meet the capacity and quality specifications set out in the Second Schedule hereto, BCL shall as soon as possible advise MTZ of the modifications required to achieve such specifications and further guarantee performance tests shall be carried out in like manner to those specified in this clause within one month of such modification being made. Any modifications required to be made under this Sub-clause (for whatever reason) shall be carried out at the expense of MTZ so far as they do not exceed Rs. 1,00,000 (one hundred thousand rupees) in cost.
13. Clause 5.1 read along with Clause 2.2 shows that the plant in India was erected by the Indian company only. The contention of the learned counsel for the assessee is that even the guarantee performance test was also carried out only by the Indian company, at the request of the Indian company and under its supervision, but in the presence of such personnel as the assessee-company approved. It is, therefore, the assessee's case that even the guarantee performance test was not performed by the assessee-company, but by the Indian company itself, but in the presence of the engineers of the assessee-company, whose services were lent separately under the service agreement and that, therefore, there was no question of any visit of the assessee's engineers to India for the purpose of carrying out the guarantee performance tests contemplated under this clause.
14. In our view, the submissions of the learned counsel are correct and have to be accepted. A careful reading of Clause 5.2 quoted above, shows that the guarantee performance tests were to be carried out at the request and under the supervision of the Indian company but in the presence of the engineers of the assessee-company. This shows that the guarantee performance tests were also carried out only by the Indian company, but in the presence of the employees of the assessee, who were approved by the assessee-company for this purpose. This clause does not require or show that the assessee-company was to depute any of its personnel from England to India for the purpose of carrying out the guarantee performance tests, as assumed by the revenue. As rightly contended by the learned counsel, the employees of the assessee-company were already there in India under the service agreement for the purpose of rendering services and assistance to the Indian company on the terms and conditions specified in the service agreement. It is out of those employees, the assessee-company approved some in whose presence the guarantee performance tests were to be carried out by' the Indian company. It, therefore, follows that the assessee-company did not carry out any operation in India for the purpose of performing the guarantee performance tests under Clause 5.2 of the above agreement to hold that any income accrued or arose to the assessee-company in India out of the sum of Rs. 5 lakhs payable under the first agreement. We may point out that the two agreements executed by the assessee-company with the Indian company are in conformity with the guidelines issued by the Ministry of Industry and Civil Supplies, in Circular No. 25, dated 20-10-1975. In this view of the matter, we would hold that the Commissioner (Appeals) was right in his conclusion that no part of the sum of Rs. 5 lakhs could be treated as having accrued or arisen to the assessee in India to justify the estimated addition of Rs. 50,000 in each of these years, with reference to the carrying out of the guarantee performance tests contemplated in Clause 5.2, referred to above.
15. Even assuming, for the sake of argument that the guarantee performance tests were carried out by the assessee-company only, in India, as held by the IAC and as approved by the Commissioner (Appeals), still we are of the view that it would not in any way justify the inference or conclusion that any income accrued or arose to the assessee in India by the performance of these tests and to sustain the estimated addition of Rs. 50,000 made by the ITO, in each of these years, as contended by the revenue. The guarantee performance tests referred to in Clause 5.2 of the agreement are intended to satisfy the Indian company on two matters, namely: (i) production capacity of the plant; and (ii) quality of the product manufactured by the said plant, erected by the Indian company, according to the specifications contained in the engineering and technical know-how documentation supplied to it by the asssesee-company under the agreement. It would further be noticed that under this clause, the Indian company is to provide free of charge the various items of raw materials and utility services as specified in the First Schedule to the agreement and also labour, electricity and fuel, to the assessee-company for the purpose of carrying out these guarantee performance tests. The requirements of this clause are fulfilled completely and exhausted, when once the assessee-company is able to run the plant erected by the Indian company for a period of 7 days continuous operations and produce during that period not less than 43 tonnes of the product of the quality specified in the Second Schedule to the agreement. It is for the fulfilment of this clause that the assessee-company has to perform these tests in India to show that it has sold the know-how and engineering documentation for the manufacture of zinc oxide powder of the quality conforming to IS 3399-1965 as acceptable for use in the rubber industry, as agreed to by it, to the Indian company. If once it is accepted that the technical know-how and the engineering documentation were supplied by the assessee-company to the Indian company in the UK and outside India and that all the subsequent operations regarding the erection of the plant was done by the Indian company though, no doubt, according to the specifications contained in the said documentation and on the advice of the assessee-company, yet the performance of the guarantee tests is only to ensure that the buyer Indian company obtained the technical know-how and the engineering documentation, which it had bargained for with the assessee-company under this agreement. It is only for this limited purpose, the assessee has to perform these guarantee tests in India to satisfy its buyer, namely, the Indian company, to establish that it had given the right type of technical know-how and engineering documentation under the agreement to the Indian company to enable it to achieve the production capacity of 2,000 tonnes per annum and also to assure the quality of the product manufactured in the plant as acceptable for use in the rubber industry as specified in the agreement. When once these two conditions relating to production capacity and the quality of the product manufactured, are achieved by the guarantee performance tests carried out by the assessee-company in the new plant erected by the Indian company, then the assessee is discharged from its liability as specified in this clause. If these tests do not yield the above results, there is the further liability on the assessee-company to advise possible modifications to the plant, at the cost of the Indian company, not exceeding Rs. 1 lakh. The guarantee clause or any work performed thereunder is only the usual condition of guarantee or implied warranty given by the seller of any goods to a buyer in the course of the sale.
It does not establish that the assessee-company had any interest in the plant erected by the Indian company or in the products manufactured in the said plant, on the contrary, the plant belonged to the Indian company. The raw materials, labour, fuel, electricity and other utility services were all supplied by the Indian company free of charge and, therefore, the final product also naturally belonged to the Indian company only. The obligation on the part of the assessee was only to ensure the production capacity of the commodity sold-in this case the manufacturing plant; as well as the quality of the product manufactured by the said plant, i.e., to establish that the plant erected by the Indian company is capable of manufacturing 2,000 tonnes of the product of the quality as specified in the agreement. In our view, these guarantee performance tests do not constitute any business operations carried out by the assessee at all in India, nor do these establish any business connection of the assessee in India as contemplated in Section 16. The decision of the Andhra Pradesh High Court in the case of Hindustan Shipyard (supra), relied on by the Commissioner (Appeals), fully supports the case of the assessee. In our view, the facts in the case of the present assessee are stronger than in the case of Hindustan Shipyard (supra). In that case, it was held that though the Polish company agreed to render certain limited services, the services were connected with the effective fulfilment of the contract of sale and were merely incidental to the contract and were usually included in all such contracts by way of guarantee of the efficient working of the products sold and that, therefore, there was no business connection between the assessee and the Polish company.
17. The decision of the Bombay High Court in the case of Aziende Colori Nazionali Affini (supra) relied on by the learned departmental representative, related to the question about the taxability of the technical service fee received by an Italian company, which is not the case in the appeal before us. For the technical services and assistance rendered by the assessee-company to the Indian company, the assessee was entitled to receive royalty under the service agreement at the rate of 3 per cent on sales and the assessee has also returned this royalty amount as its income chargeable to tax for the assessment year 1974-75 and, therefore, there is no dispute about the taxability of the technical service or assistance fee received by the assessee-company in the present case. Therefore, this decision of the Bombay High Court is not applicable to the facts of the present case, as rightly contended by the learned counsel for the assessee.
18. The two decisions of the Tribunal, relied on by the learned counsel are also in favour of the assessee and the facts of the said cases were also similar to the facts in the present case. We, therefore, respectfully follow the decision of the Andhra Pradesh High Court in the case of Hindustan Shipyard (supra) and the two decisions of the Tribunal and hold that the Commissioner (Appeals) was right in accepting the assessee's contentions that no portion of the amount of Rs. 2,50,000 received in each of these two years, was chargeable to tax as income which accrued or arose in India and in consequently deleting the addition of Rs. 50,000 made by the ITO, in each of these years.
Accordingly, we confirm the order of the Commissioner (Appeals) deleting the additions of Rs. 50,000 in both the years.
19. In the third year 1978-79, the revenue's objection is to the direction given by the Commissioner (Appeals) to allow 10 per cent of the gross royalty as expenditure in computing the assessee's income from royalty. The assessee had claimed an allowance of 20 per cent as expenditure, but the ITO did not allow any such deduction. The Commissioner (Appeals) found that in the earlier two years on the basis of the same facts, the ITO himself had allowed a deduction of 10 per cent from the royalty income and that he did not find any ground to reject the assessee's claim for a similar deduction of 10 percent in the year under appeal. Accordingly, he allowed a relief of Rs. 19,627.
20. Apart from relying on the order of the ITO the learned departmental representative was unable to point out any valid reason to disturb the order of the Commissioner (Appeals) on this point. The revenue does not dispute the fact that the ITO himself had allowed 10 per cent deduction for expenditure in the two assessment years 1976-77 and 1977-78. In fact, the assessment order for 1974-75 shows a similar allowance of 10 per cent expenditure out of the royalty income by the ITO himself as against the assessee's claim of 20 per cent expenditure out of the gross income from royalty. We, therefore, do not see reason to interfere with the order of the Commissioner (Appeals), in this year also.