TMI Blog1983 (5) TMI 16X X X X Extracts X X X X X X X X Extracts X X X X ..... ives 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. 11(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, modern wrist-watch manufacturing factory as a unit of HMT has been established and is in full operation from April 1, 1963. 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 h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e standard price of wrist-watch shall be fixed at pounds 250 (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 instalment 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." In terms of these clauses, Citizen has received various payments from HMT from time to time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... On an examination of the contention urged before him, the ITO by separate but similar orders made on March 30, 1981 (annexs. 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 (annexs. 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. 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 (ann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w and a reference thereto on questions of law either to the Supreme Court or to this court. Before examining the contentions urged for the petitioner on merits, it is necessary to examine some of the preliminary objections raised by Sri K. Srinivasan, learned senior standing counsel appearing for the Revenue, as some of them, if accepted, go to the very root of the matter and make it unnecessary to examine the merits. 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., AIR 1963 SC 1124. 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, had not merged in the order of the Commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Indian IT. 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 right of appeal to the Appellate Assistant Commissioner against any orders passed by the Income-tax Officer. " According to this enunciation, there will be no merger of a portion of composite order th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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. The Board, concurred with the orders of the ITO on documentation fee and technical assistance fee. Notwithstanding 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 leg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mentation 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. 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Clause 28 of the agreement between the Government and the petitioner provides for payment of a sum not exceeding pounds 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 cl. 31 of the agreement. On the very terms of this agreement the fee payable for supply of documents and information under cl. 28 of the agreement and the royalty payable under cls. 30 and 31 cannot be treated as one and the same. 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. 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; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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 [1977] 108 ITR 335 and of this court in VDO Tachometer Werke, West Germany v. CIT [1979] 117 ITR 804. Sri Srinivasan has sought to support the reasoning and conclusion of the ITO. 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. 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TA applies to the receipts by the petitioner. Article X(k) of the DTA that is relevant reads thus : " (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. " Earlier I have held that the technical assistance fee was not royalty ". The technical assistance fee was a separate fee and was not 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. 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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