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TMI Blog2001 (12) TMI 201X X X X Extracts X X X X X X X X Extracts X X X X ..... n technology system relating thereto. It entered into a Corporate Visual Identity Agreement with LME on1-1-1997for the use of their trademark "Ericsson". As per the terms of the aforesaid agreement, the assessee was required to pay royalty Ca) 196 of total net sales to LME for the use of the trademark 'Ericsson' on all its product. On30-12-1997, the assessee made a provision for royalty in its books of account as follows: ---------------------------------------------------------------------- Royalty A/c Debit Rs. 2,24,96,669 Accrued Expenses A/c Credit Rs. 2,24,96,669 ---------------------------------------------------------------------- No tax was deducted by ECPL at the time of passing these entries. On18-8-1998ECPL passed the following entries: ---------------------------------------------------------------------- Accrued Expenses A/c & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ced to Rs.44,99,334 under section 154. 4. As a result of the order under section 201(1), the Assessing Officer also levied interest under section 201(1A) amounting to Rs.39,14,480 vide order dated 7-3-2000 which was later on rectified under section 154 and the interest was reduced to Rs.16,31,009. 5. The matter was carried before the CIT (A), who has upheld the order of Assessing Officer under section 201(1) by holding as under: "(1) Income from royalty accrued to the parent foreign company by virtue of the Corporate Visual Identity Agreement. This agreement has neither been abrogated nor modified so as to remove the consideration clause in para 17. The foreign company also did not waive its right to receive the royalty. Therefore, as per the terms of the agreement, the income from royalty accrued to the foreign company the moment sale was made by the Indian Company i.e. assessee. Therefore, a legally enforceable right to earn the royalty arose from the agreement and consequently, the income by way of royalty was chargeable to tax. Reliance was placed on the Supreme Court judgment in the case of Tuticorin Alkali Chemicals & Fertilisers Ltd. v. CIT [1997] 227 ITR 172/93 Taxman 50 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... our attention to Press Note No. 9 (2000 series) dated 8-9-2000 appearing at pages 111 & 112 of the paper book which permitted the payment of royalty by subsidiary company to its non-resident parent company. In view of these materials, it was submitted by him that payment of royalty by 100% subsidiary company to its holding company was permitted by the Government of India only w.e.f.8-9-2000and prior to that there was absolute prohibition for paying the same. Further, the agreement between the parties for payment of royalty against the use of trade mark was never approved by the Government of India and, therefore, such agreement was void in the eye of law and consequently, no enforceable right or liability accrued to either party under the said agreement. In support of his contention, he relied on the decision of the Delhi High Court in the case of Universal Plast Ltd. v. Santosh Kumar Gupta AIR 1985Delhi383. Therefore, it was strongly argued by him that no enforceable debt was created in favour of the non-resident parent company and consequently, no income accrued to LME. Hence, assessee was not liable to deduct tax at source under section 195. Consequently, assessee could not be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... licy. She further relied on the decision of Allahabad High Court in the case of S. Harinder Singh v. ITO [1987] 166 ITR 763 4 for the proposition that under the Act, the authorities are not concerned with whether the activities of the assessee are legal or illegal. Lastly, she placed reliance on the Supreme Court decision in the case of CIT v. Shiv Prakash Janak Raj & Co. (P.) Ltd. [1996] 222 ITR 583 for the proposition that the concept of real income cannot be employed so as to defeat the provisions of the Act and rules and, therefore, there is no room - nor it would be permissible for the court to import the concept of real income so as to whittle down, qualify or defeat the provisions of the Statute. It was further argued by her that both the parties entered into the agreement with the intention to act upon the same and in furtherance thereof the necessary entries were made by the assessee which itself shows that income accrued from the contract. The reversal of entries were made only after the survey. Therefore, it cannot be said that income did not accrue to the non-resident company. It was also submitted by her that only the guidelines have been issued by the Government which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icer, the assessee failed to deduct the tax under section 195 in respect of royalty payable under the agreement dated1-1-1997to the non-resident parent company. According to Section 195, every person responsible for paying any interest (not being interest on securities) or any other sum chargeable under the provisions of this Act (not being income chargeable under the head "salaries") is under obligation to deduct the tax at source at the time of credit of such income to the account of the payee or at the time of payment thereof. So the condition precedent for invoking section 195 is that the sum being paid or credited must be chargeable to tax under the Act. Section 4 of the Act is a charging section according to which, the total income of every person is chargeable to tax. The total income of a non-resident, as per section 5(2), includes all income which is either received inIndia, or accrues or arises or is deemed to accrue or arise inIndia. The income which is deemed to accrue or arise inIndiais defined in section 9 with which we are not concerned in the present case since the case of the Assessing Officer is that income by way of royalty accrued to the assessee inIndiaas per t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... void agreement, it cannot be said that any right or liability accrues or arises to either of the parties of such agreement. 12. The aforesaid legal position is fortified by the decision of the Hon'ble Delhi High Court in the case of Universal Plast Ltd. In that case, the plaintiff agreed to sell 4200 spindles with motor and accessories to the defendant against consideration of Rs.1,02,440. The defendant agreed to pay Rs.10,000 in advance and balance amount by3rd September, 1973. The agreement was by virtue of letter dated5th July, 1973which recorded a fact that possession of spindles had already been delivered to defendant. Since, the defendant did not make the balance payment, the plantiff filed a suit for recovery of the same along with interest. The defendant, inter alia, raised a contention that agreement was void since the spindles could not be disposed of in view of the absolute prohibition by the provisions of Woollen Textiles (Production and Distribution) Control Order, 1962 issued under Essential Commodities Act, 1955. Consequently, the suit could not be decreed in favour of the plaintiff. After referring to various decisions of Hon'ble Supreme Court, the High Court held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greement void if it is opposed to public policy. Therefore, the contention of the ld.Sr. DRthat only the prohibition by the provisions of a Statute would render the agreement void, cannot be accepted. 13. Having held as above, let us now examine as to whether the agreement between the assessee and the non-resident company "LME" can be said to be void. Paragraph 6(ii) of the Industrial Policy declared by Ministry of Industry for the consideration of Foreign Direct Investment (FDI) proposals by the Foreign Investment Promotion Board (FIPB) reads as under: "6. The Board should examine the following while considering the proposals submitted to it for consideration:--(ii) whether the proposal involves technical collaboration and if so (a) the source and nature of technology sought to be transferred, (b) the terms of payment (payment of royalty by 100% subsidiaries is not permitted)." The assessee vide letter dated 28th June, 2000 sought clarification as to whether the assessee could pay the royalty to its foreign parent company by virtue of the approval letter of the Government dated5-2-1996. The Government of India, Ministry of Commerce and Industry, Department of Industrial Policy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r law prior to17-1-1997, when these guidelines were published." The Government ofIndiavide letter dated12-4-2001replied as under: "I am directed to refer to your letter dated 5-4-2001 on the above mentioned subject with reference to this Ministry's letter referred to above and to clarify that prior to the issue of Press Note No. 3, dated17-1-1997royalty on sale or use of trademarks was prohibited to 100% subsidiaries. Royalty for sale or use of trademarks has been permitted only with prospective effect from8-9-2000in accordance with the provisions of Press Note No. 9 (2000)." The above material clearly shows that payment of royalty by 100% subsidiary company to its non-resident parent company was absolutely prohibited under the policy of the Government of India till8-9-2001. The payment of royalty was only permitted by the Government by virtue of Press Note No. 9 of 2000 series dated8-9-2000. Therefore, at the time when agreement was entered into, there was absolute prohibition for payment of royalty by 100% subsidiary company to its non-resident parent company. Admittedly, the assessee is 100% subsidiary company of the non-resident foreign company, 'LME'. Further, undisputedly ..... X X X X Extracts X X X X X X X X Extracts X X X X
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