Sabyasachi Mukharji, J.
1. Under s. 256(1) of the I.T. Act, 1961, the Tribunal has referred to us the following question of law :
'Whether, on the facts and in the circumstances of the case, the amounts received by the assessed (English company) from M/s Dunlop Rubber Co (India) Ltd (Indian company) as per agreement dated 29th January, 1957, constituted income assessable to tax ?'
2. We may incidentally mention that four different questions were prayed for by the Revenue for reference in its application. The Tribunal thought that the question which has been referred to us would cover all the material aspects and, accordingly, referred the question to this court, as indicated hereinbefore. It was suggested that the Tribunal had no power to do so. We are not inclined to consider this aspect and we do not find any lack of jurisdiction of the Tribunal in referring the question to this court as if has done.
3. This reference relates to four different assessment years, viz, the assessment years 1965-66, 1966-67, 1967-68 and 1968-69 and the corresponding accounting periods were the respective calendar years. The assessed is an English non-resident company here. It holds 51 per cent. shares in Dunlop Indian Ltd, which is called hereinafter as the Indian company. The Indian company. the statement of the case records, does not maintain any research department in India. The English company, which has a world wide net work of subsidiaries and associated companies, maintain in the United Kingdom extensive technical research establishments which is known as service departments for the entire Dunlop organisation through-out the world. The English company communicates the latest information, processes and inventions relating to goods manufactured by them to its subsidiaries and associated companies on certain terms and conditions. There was an agreement in the year 1949 between the English company and the Indian company and the said agreement was dated 26th April 1949. There was another agreement dated 29th January, 1957, between the English company and the Indian company which was operative for the years under reference. It would be necessary to refer to certain clauses of the said agreement. After reciting the relevant facts, the agreement, inter alia, provided as follows :
'1. (A) The English company shall as and when it shall, from time to time, be requested by the Indian company so to do communicate to and make available for the Indian company all information, processes and inventions which have been applied or which the English company intended from time to time to apply to goods manufactured by the English company and which (in the opinion of the English company) relate to or may conveniently be used by the Indian company in connection with manufacture of similar goods being manufactured by the Indian company at the date of this agreement, a list of which is set out in the schedule hereto, such listed goods being hereinafter referred to as 'the listed goods'.
(B) Subject always to clause 4 hereof the English company hereby grants to the Indian company the sole right to manufacture the listed goods or any of them in India, Nepal, Bhutan, the territories of Pondicherry, Mahe and Karaikal and the territories of Goa, Daman and Diu (here inafter together called the 'Indian company's territory') and to use the processes and inventions of the English company communicated and made available to the Indian company hereunder subject to any limitation or restriction to which such use by the English company may be subject.
2. (A) if any of the said processes and inventions so communicated to the Indian company by the English company are protected by Letters Patent or other protection within the Indian company's territory, the English company will if and when requested by the Indian company so to do and subject to sub-clause (B) of this clause grant to the Indian company a royalty free license under Letter Patent or other protection for the unexpired residue to the term thereof. Any such license shall, subject to the provisions of sub-clause (C) of this clause and clause 4 hereof be non-exclusive. All renewal fees and other expenses in connection with the maintenance in force of any such Letter Patent shall be paid by the Indian company.
(B) The Indian company shall pay to the English company in respect of each and every license granted to it by the English company pursuant of sub-clause (A) of this clause, a proportionate part of the cost of the acquisition by the English company of the patient, invention or right in respect whereof such license is granted. The cost of acquisition shall mean and include the price paid by the English company to any other party for the patent, invention or right and all costs and expenses in connection therewith and/or all costs and expenses of the English company of applying for and obtaining patent protection. The proportionate part of such cost of acquisition shall be mutually agreed or failing agreement shall be fixed by Messrs. Whinney Smith & Whinney, Chartered Accountants of London. If in any case the English company has (whether or not in addition to the cost of acquisition) to pay a royalty or periodical sum in respect of the use of the patent, invention or right, the license granted to the Indian company in respect thereof shall, in addition to the payment of any proportionate part of the cost of acquisition, be subject to the payment of such sum as shall, after deduction of any Indian Income-tax, remittance tax or withholding tax of a similar nature, amount to a similar royalty or proportionate part of such periodical sum.'
4. Clause 5 of the said agreement to which our attention was drawn states as follows :
'5. All costs and expenses incurred by the English company in connection with the communication of such information, processes and inventions and/or the grant of any such license as aforesaid and/or the giving of any advice or assistance provided for hereunder by the English company to the Indian company shall be paid by the Indian company. The Indian company shall also pay to the English company a proportionate part of the costs and expenses (including salaries and general research and development expenditure) incurred by the English company in the acquisition, discovery and development of such information, processes and inventions. Such proportionate part of the said costs and expenses shall be mutually agreed or failing agreement shall be fixed by the said Messrs. Whinney Smith & Whinney.'
5. Clause 6(A) was to the following effect :
'6. (A) The Indian company shall, as and when it shall from time to time be requested by the English company, so to do communicate to and make available to the English company all information, processes, inventions, designs and trade marks which have been applied or which the Indian company intend from time to apply to goods manufactured by the Indian company and which in the opinion of the Indian company relate to or may conveniently be used by the English company in connection with the manufacture of any goods for the time being and from time to time manufactured by the English company or any of its subsidiary companies.'
6. Clause 8 of the said agreement states as follows :
'8. All costs and expenses incurred by the Indian company in connection with communication of such information, process, inventions, designs and trade marks obtaining patent or like protection under clause 7(B) and/or the transfer vesting or license of any such Letters patent registered designs or trade marks by the Indian company to the English company shall be paid by the English company.'
7. Clause 13 is also relevant, to which our attention was drawn, and in view of the contention raised before us, it is not necessary to refer to the said clause. Clause 22 of the said agreement recites that the determination of the previous agreement between the parties dated 26th April, 1949, could not effect or limit the rights or obligation or either of the said parties under cls. 9 and 10 of that agreement. Clauses 9 and 10 of the said agreement to which our attention was drawn, read as follows :
'9. The Indian company will when called upon so to do by the English company expenses on payment to it by the English company or rupees one hundred execute a formal assignment or assignments of its rights and title to all trade marks patents and designs then owned by it or of which it is the reputed owner in the said territories of Burma, Afghanistan, Baluchistan and East and West Pakistan (details of which marks patents and designs now owned by the Indian company are included in the second schedule hereto) together with the goodwill of the Indian company in such territories.
10. The English company shall pay to the Indian company a royalty at the rate of one per cent. of the net annual turnover as hereinafter defined in the said territories of Burma, Afghanistan, Baluchistan and East and West Pakistan for a period of fifteen years from a date or dates to be mutually agreed between the parties hereto but such date not in any event to be prior to the date of any assignment made pursuant to the preceding clause hereof. The English company shall at any time herein after be entitle to commute the royalty as aforesaid by payment of a lump sum based on the book value of the royalty at the time of communication at three per cent. for the unexpired period at the average annual royalty of the preceding three years. Provided that if the English company shall elect to commute such royalty at any time prior to the expiration of the first three years from the date or dates upon which it shall be commenced the amount of the lump sum payable by the English company shall be determined by mutual agreement between the English company and the Indian company and in default of agreement shall be determined as hereinafter provided. The royalty payable as aforesaid and the communication thereof shall, unless mutually agreed, be calculated and certified by Messrs. Whinney Smith & Whinney and their certificate or certificates shall be binding on both parties. For the purpose of this clause, the net annual turnover shall mean the aggregate of the invoice price less all discounts, rebates and sales tax of all goods sold direct to customers other than to associated companies by or on behalf of the English company or by any company established hereafter by the English company.'
7. We may incidentally point out that the Govt. of India by its letter dated 31st October, 1956, permitted the Indian company to make payment of research contribution to the English company subject to a ceiling of 0.67 per cent. of the volume of sales. The letter to that effect written by the Govt. of India was produced by the Department before the Tribunal. The Indian company thereafter paid to the English company to the extent of 0.67 per cent. on the sales of the Indian company towards the proportionate costs and expenses. The ITO by his letter dated 12th December, 1957 called for the comments of the English company on the taxability of buying commission and the technical fees paid by the Indian company. The English company by its letter dated 24th December, 1957, submitted its Explanationn. Before the ITO the English company contended that the amount received by it from the Indian company did not constitute income as the payments were merely reimbursement of the expenditure incurred in connection with the research work and so these amounts could not be assessed in their hands. It was also submitted that the English company incurred large expenditure but only a part of it was allocated to various subsidiary companies in the world and what it received from subsidiary companies was only a part of the expenses by it and as such there was no element of profit. In this connection, reference was made to the certificate of the chartered accountants to show that the expenses incurred by the English company had been fairly allocated to the subsidiaries and associated companies and as such costs did not include any element of profit. The ITO, however, did not accept this position. He held that the English company had transmitted information, processes and inventions already available with it and such knowledge, namely, inventions or the patents, were capital assets and user there of the Indian company might only be termed as royalty. He further observed that the payment was linked with the turnover of the Indian company and the payment was an essential characteristic of all royalty payments He further observed that in the 1949 agreement the word 'royalty' was mentioned and not the word 'reimbursement' of expenses. Even in the draft agreement, according to the ITO originally sent to the Govt. of India, before the 1957 agreement was finalised, the word mentioned was 'royalty' though it was omitted in the final agreement. Clauses 9 and 10 deal with Indian company right to demand for supply of certain trade mark, patent and information and on receipt of the same of English company would pay royalty to the Indian company. thereforee a question may arise whether the receipt of such royalty by the Indian company would amount to either capital receipt or revenue receipt. We are in this reference not concerned with the question of receipt of royalty by the India company or whether the receipt was either in the nature of capital or revenue. But we are here concerned with the receipt by the English company and certain payments made by the Indian company. The ITO held that there was no evidence regarding the current services being rendered to the Indian company except bulletins and literature showing technical and secret information. He held that the entire payments received by the English company should be treated as royalty. In the absence of the details of the expenditure, he allowed 55 per cent. of the gross amount as expenditure incurred by the English company and the balance be treated as income. He mainly gave reasons for the assessment year 1965-66 and followed the same reasoning for the subsequent years.
8. The assessed preferred an appeal before the AAC. It was urged before him that the English company had recouped only a part of the expenses incurred by it and as such there was no element of profits or income. Before him samples and technical information and data and services which flowed from the English company to the Indian company were produced. It was also urged that the ITO did not give any reasons to question the validity of the 1957 agreement. The AAC held that it was necessary to go beyond the terms of the agreement to see whether the necessary to go beyond the terms of the agreement to see whether the payments were for the proportionate expenses or it was the price for the purchase of technical know-how. He held that the English company sold information, processes and inventions already available with it and there could not be any doubt that such knowledge or patents were of the nature of capital assets and the payment for using the same could be legitimately termed as royalty. Whatever may be the terms of the agreement, the use of these informations and the payment thereforee by the Indian company could not but be termed as royalty. He further held that the certificate of the auditors by itself did not prove that the payments made were for the reimbursement of the expenses. He further observed that as the nature of payment was royalty, the Govt. of India had to restrict such payment to 0.67% of the turnover of the Indian company. He also rejected the contention that the services were rendered outside India and the payments were also received outside India and as such the receipts were not taxable in India. He also found that the production of aerotyres was very much limited by the Indian company. He had that the ITO was right in treating the payment as royalty. He accordingly confirmed the order of the ITO.
9. The assessed went up in appeal before the Tribunal. The Tribunal after considering the rival contentions and taking into consideration the relevant clauses of the agreement and the certificate of the auditors and after referring to the fact that the percentage of 0.67 on sales was due to the restrictions imposed by the Govt. of India for remitting the amounts and in view of the restrictions imposed thereon the remittance was to the extent of 0.67% on the turnover of the Indian company, observed, inter alia, as follows :
'In the years under appeal, we do not find any justification to doubt the certificate issued by the auditors of the English company. On the basis of the certificate, it is clear that the English company has recouped only part of the expenses. In our view the receipts by the English company did not constitute any income and cannot be taxed. Shri B. L. Pal, the learned counsel for the Department, strongly urged that the payment by the Indian company to the English company was for the receipt of technical 'know-how' and so it was a revenue receipt. In this connection, he strongly placed reliance on the decision of the House of Lords in Rolls Royce Ltd.  40 TC 443;  56 ITR 580. It is true that it was held in that case that the lump sum received for the 'know-how' was revenue receipt. This decision was followed again in Musker v. English Electric Co. Ltd.  41 TC 556 , as well as in Murray v. Imperial Chemical Industries : 71ITR661(Cal) . In Imperial Chemical Industries Ltd., Lord Denning M. R. held that the lump sum for 'know-how' may be a revenue receipt as the capital remained with the owner and all that he did was to put it to use. These decisions are not applicable to the facts of the instant case. In the instant case, the English company has only recovered part of the expenses incurred by it. If the English company had recovered more than the expenditure it had incurred, then the excess would have been treated as revenue receipts. Hence the above decisions are not of any help. Another contention that was strongly urged by Shri Pal, learned counsel for the Department, is that the payment was in the nature of royalty and, in fact, the word 'royalty' was used in the later part of the agreement and so the same must be taken for the purpose of the earlier part. We are unable to agree with this submission also. Clauses 1(A) and 5 of the 1957 agreement clearly shows that what was recouped was part of the expenses. Thus, it cannot be treated as payment of royalty. It was for the Department to place evidence to show that there was an element of profit in receiving the payment. Thus, they could have established only if they had shown in reference to the entire turnover of the subsidiary companies as well as the English company and total expenditure incurred and by showing that the expenditure borne by the English company was not in proportion to its turnover. This has not been done. He also relied on the draft agreement submitted by the assessed prior to the execution of the 1957 agreement. In our view no reliance can be place on that as those terms were not incorporated in the agreement finally executed. It was also urged that the Indian company did not manufacture the sophisticated and other specialised items and the expenditure incurred by the English company for research was on a large number of items. But the Indian company also manufactures aero-tyres even though to a small extent. Thus, the Indian company has made use of inventions and processes in respect of these new items also. A list of various informations communicated to the Indian company was furnished to the Appellate Assistance Commissioner. So, it cannot be said that the English company did not communicate the various informations on the sophisticated items.'
10. In the aforesaid view of the matter, the Tribunal was of the view that the Revenue was not justified in taxing the English company in respect of the payments made to it by the Indian company as what was recouped by the English company was part of the expenses incurred by it. We must determine the true nature of the receipt from the clauses of the agreement, the object and the manner of the receipt and also taking into account the previous document. It appears to us that the Tribunal was right in arriving at the view that it was the recoupment of the expenses incurred for the technical data for which a research department was maintained in London. The result of the research was for the benefit of all concerned including the head office and the subsidiary concerns. It was for sharing of the expenses of the research which was utilised by the subsidiaries as well as the head office organisation that the payments were made by the Indian company and received by the London company. The fact that after the termination what was to happen to these informations gathered was not mentioned indicates that it could not be anything but sharing of the expenses because if it had provided that the information would belong either to the parent company or to the subsidiary, then perhaps it might have been contended that payment were either royalty or hiring charges of the information as such could be treated as income. But the very fact that the technical data was jointly obtained and the expenses were shared together indicates that it could not be treated as income. The fact that only 0.67% of the turnover was allowed is because of the restrictions imposed by the Government. In that view of the matter we are of the opinion that the Tribunal arrived at the correct decision keeping in view the background of the agreement. In the aforesaid view of the matter the question referred to us must be answered in the negative and in favor of the assessed.
11. In the facts and circumstances of the case, the parties will pay and bear their own costs.
Suhas Chandra Sen, J.
12. I agree