1. This appeal by the revenue, pertaining to the assessment year 1972-73, has the following factual background.
2. Ruston & Hornsby Ltd., an English company, is the assessee. Ruston & Hornsby (India) Ltd. is an Indian company. There were business connections between these two companies since several years. Under an agreement entered into on 1-3-1951, read with several supplemental indentures, the English company had permitted the Indian company to manufacture YDA diesel engines. The English company was holding a patent for the manufacture and sale of air-cooled engines identified as YWA engines. By an agreement dated 28-7-1967 the English company agreed to grant a licence to the Indian company to manufacture in India YWA engines under certain conditions. The agreement, mentioned above had been reached by the parties after the approval of the Government of India. At this stage, it is enough to mention that a sum of Rs. 2,62,500 was payable to the English company as consideration for the supply and delivery of the 'know-how'. Initially, there was a prohibition on Indian company to cater export market, but it was, however, relaxed under certain conditions and as per the terms, the Indian company had to pay engineering fees at 5 per cent on the net selling price of YDA engines exclusive of sales tax, packing, freight and insurance charges. There was a similar condition in regard to export of YWA engines.
3. In the assessment year 1972-73, the Indian company had paid the English company engineering fees of Rs. 28,498. The authorised capital of the Indian company was formerly Rs. 29,38,500 and this was raised to Rs. 1 crore. As a consequence, 29,385 shares of Rs. 100 each were issued. The Indian company paid Rs. 2,62,500 to the English company by issuing equity shares in India towards the supply of know-how of YWA engines.
4. The assessment of 1972-73 had the chequered career. An assessment passed at the first instance by the ITO under Section 143(3), read with Section 144B, of the Income-tax Act, 1961 ('the Act') and in that he had brought into charge Rs. 28,498 received by the assessee as engineering fees and the amount of Rs. 2,62,500 received on account of supply of technical know-how. The assessee had succeeded in the appeal and the matter had reached the Tribunal on an appeal by the department-being IT Appeal No. 3422 (Bom.) of 1974-75-which was disposed of by an order dated 4-3-1977 whereby it was remanded to the ITO for passing a fresh assessment order. The Tribunal had directed the ITO to record a finding as to where the English company had delivered the know-how to the Indian company. The ITO passed a fresh assessment on 26-9-1979 wherein two amounts aggregating to Rs. 2,90,998 were included in the income for the purpose of tax. On appeal to the Commissioner (Appeals), the additions were deleted. Thus, the revenue is on appeal before the Tribunal.
5. Taking first the issue of includibility of Rs. 28,498 paid towards engineering fees, we find that the very point had been considered by the Tribunal in the case of the assessee for the assessment years 1976-77 to 1978-79 in IT Appeal Nos. 1447 and 1448 of 1981 and 988 of 1982. It would appear that the order of the Tribunal for the earlier years (1964-65 to 1966-67) were also in favour of the assessee. The fact situation remaining constant, there is little to be said for not departing from the earlier view. Following the* same, we uphold the decision of the Commissioner (Appeals) in the present appeal.
6. The main controversy in the appeal is about inclusion of Rs. 2,62,500, the amount payable as consideration for the supply and delivery of the know-how regarding YWA engines. This amount was paid by the Indian company to the English company by issuing 2,625 equity shares of the Indian company in lieu of the lump sum amount payable as per the terms of the agreement dated 28-7-1977. The ITO held that as the shares had been issued in India, the payment had been made in India for the purposes of Section 5(2)(a) of the Act. A Circular No. 21 of 1969, dated 9-7-1969 (see Taxmann's Direct Taxes Circulars, Vol. 1, 1985 edn., p. 177) issued by the CBDT greatly relied upon by the assessee, was not held to cover this case. A question on which the ITO was required to record a finding as per the direction of the Tribunal while remanding, namely, in regard to the place where the English company had delivered the know-how to the Indian company, somehow remained unanswered by him. But the Commissioner (Appeals) held that the know-how had not been delivered in India. The assessee was entitled to succeed on the basis of the CBDT Circular No. 21 of 1969, according to the Commissioner (Appeals).
7. The taxability of Rs. 2,62,500 may be considered in various manners.
Section 5(2) provides the income of a non-resident being brought to charge if such income is either (a) received or deemed to be received, or (b) if such income accrues or arises or is deemed to accrue or arise in India during the relevant year. First, it has to be seen from the point of Section 5(2)(b). The income can be said to have been accrued or arisen or deemed to accrue or arise in India, if, under the contract, the obligations of the English company had to be, or had been performed in India.
The English company shall supply and deliver to the Indian company the necessary 'know-how' for the manufacture of the YWA Engines and shall receive in payment, therefor, Rs. 2,62,500.
The English company had to supply the know-how. It had, further, to deliver the know-how to the Indian company. Leaving away the other obligations, and clause 6 of the agreement, whereby it had to send technical assistant to work in India for which he should be paid salary, etc., from the Indian company, which may not be considered as an activity carried on within taxing territory, in view of the decision of the Supreme Court in Carborandum Co. v. CIT  108 ITR 335.
Clause 4(2)(a) set forth above specifies that the English company shall supply the know-how to the Indian company. The description of the document fails to ascertain precisely the place of delivery of know-how. The incorporation of the words' deliver to the Indian company' in addition to the word 'supply* may warrant an inference that the know-how was to be delivered at the place of the Indian company.
9. Record bears only the certificate evidence to show that the know-how had been delivered in England by the English company to James Greaves & Co. on 26-8-1974 and the latter had taken for and on behalf of the the Indian company. It is not apparent as to the circumstances that lead to handing over the know-how to James Greaves & Co. in England. There must have been preceding correspondence between the English company and the Indian company, nominating James Greaves & Co. as agents to take delivery of the know-how and this important material is withheld from production at the risk of adverse comment. For all that, the know-how might have been delivered in England by mutual consent for business convenience. Then the income should be deemed to have accrued or arisen in India if as per the agreement the know-how was to be delivered at the place of Indian company.
10. Assuming for the sake of argument that an inference that the English company was not expected to deliver the know-how to the Indian company in its place upon a proper construction to be placed upon clause 4(2)(a) and, consequently, that Section 5(2)(b) is not implicated, still the case of the assessee is not on firm ground as we presently point out.
11. The parties must have agreed upon as to the place of delivery of the know-how even though it has been left at large in the description in the f document. The agreement had been brought forward in England and clause 35 reads that it shall be construed and interpreted in all respects and for all purposes in accordance with the laws of England.
If the contract does not specify where performance is to take place, the place of performance depends upon the implied intention of the parties, to be judged from the nature of the contract and all the surrounding circumstances. If no place of performance is specified even by implication, but performance requires the concurrence of promise, the general rule is that the promisor must seek the promisee and perform his promise wherever the promisee may be.
We are to look at the words of the instrument and to the acts of the parties to ascertain what their intention was, if the words of the instrument be ambiguous, we may call in the aid of the acts done under it as a clue to the intention of the parties.
The intention of the parties may be collected from the language of the instrument and may be elucidated by the conduct they have pursued.
Positing that the intention is to be gathered from the subsequent conduct, the place of delivery was England, as James Greaves & Co. had received the know-how for and on behalf of the Indian company. Then all that we may say is that no activity had taken place in India to exclude the operation of Section 5(2)(V).
the sums payable to the English company should be paid to it in sterling by means of draft on a London bank. As to the place where such draft is to be tendered, the document is silent. The normal English rule is that where no place of payment is expressly or impliedly specified by the contract, it is the debtor's duty to seek the creditor in order to pay him at his place of business or residence. But payment of debt may be satisfied by the creditor agreeing to take something in lieu of cash"-see Chitty on Contracts, paras 1155 and 1166.
14. Under the agreement as a whole not only the Indian company had to pay money consideration in sterling but also had to offer shares to the English company. The capital of the Indian company was increased from Rs. 29,38,500 to Rs. 1 crore by issuing 2,385 shares of Rs. 100 each.
Out of that, the Indian company had to offer 74 per cent of the new issue of capital to James Greaves & Co. and the remaining 26 per cent of the issue of the new capital to the English company. Rs. 2,65,500 being the payment towards the supply of know-how had been satisfied out of issue of 2,625 equity shares issued by the Indian company in lieu of payment to be made therefor. As equity shares had been delivered at the locus of the issuing company, the receipt of the income is within the mischief of Section 5(2)(a). With this, we proceed to consider whether avoidance is possible on the basis of the CBDT's circular.
15. The CBDT, in its wisdom, thought fit to minimise the rigour of Section 5(2) to cases not covered by Section 5(2)(6) by issuing Circular No. 21 of 1969, dated 9-7-1969, and it remains to be seen whether the assessee can take the benefit thereunder. The material portion is para 11 which reads : With reference to cases of foreign capital participation it may be noted that where shares are allotted to a non-resident participant in the form of equity capital of an Indian concern, in consideration for transfer abroad of technical know-how or services or delivery abroad of machinery and plant, and the payment is not taxable under Section 5(2)(b) [of the income-tax Act] as income accruing or arising or deemed to accrue or arise in India, it has been decided that no attempt should be made by the department to bring to tax the profits or gains on such transaction merely on the ground that the situs of the shares is in India. However, if any operations are effected or services are rendered in India, the income will, to that extent, accrue or arise in India and will be chargeable to tax in India. If payments of royalty are made by way of a free issue of equity shares, the value thereof will of course be liable to tax. It is only those shares which are issued at the time of incorporation of the Indian company in lieu of a lump sum payment for the technical know-how delivered abroad, that will be exempt from income-tax as well as the tax on capital gains.... (P. 180) 16. Now, the first part of para 1.1 favours the argument of Shri Pooran. The latter part is specific to say that only chose equity shares which are issued at the incorporation of the Indian company in lieu of lump sum payment for the technical know-how delivered abroad that will be exempt from tax. The present is not a case answering to the latter conditions. The Commissioner (Appeals) states: I find that to distinguish the assessee's case in the manner in which the Income-tax Officer has done, it would amount to insisting on words and forgetting sense which is conveyed by the circular. In the circumstances, I hold that if one has to understand the spirit behind the circular then on that basis the assessee is entitled to succeed and as such I will hold that the assessee succeeds.
We are unable to express our concurrence to the above ignoring the distinguishable fact. The argument of Shri Pooran that there cannot be an instance of issuing equity shares to non-resident at the incorporation of the Indian company and that taking a literal view of the latter part of the circular would render the circular nugatory cannot succeed.
17. Non-resident participation in companies incorporated in India need only previous permission of the Reserve Bank of India, under Section 31 of the Foreign Exchange Regulation Act, 1973 (FERA). We must note that there is no prohibition as such. But in 1969, when the circular under discussion was issued, there was not a provision similar to Section 31 of the FERA, 1947. When the CBDT granted concession to certain class of cases under conditions there can be no escape unless the case factually comes within the four corners of the circular and all the conditions are satisfied. While reversing the order of the Commissioner (Appeals) we hold that Rs. 2,62,500 is taxable.
18. There was dispute between the Commissioner (Appeals) about the taxable rate which he did not consider, since on the question of taxability, he found it in favour of the assessee. As his order in this behalf is being reversed, we direct that the first appellate authority shall hear the parties and decide the rate and, accordingly, the assessment shall follow.