TMI Blog2001 (12) TMI 201X X X X Extracts X X X X X X X X Extracts X X X X ..... information 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 Debit Rs. 2,24,96,669 LM Ericsson A/c Credit Rs. 2,24,96,669 ---------------------------------------------------------------------- 3. A survey under section 133A of the Act was conducted at the premises of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive 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 502. (2) The 'New Industrial Policy' of the Government of India was tabled in Parliament on24-7-1991. As per this policy, the Government decided to take a series of initiative in respect of foreign investment and other matters. The policy clarifies that there shall be no bottleneck for giving approval to foreign investment. Consequent to the new policy, any number of multi-nationals have been doing business inIndiathrough their wholly owned subsidiaries and are making remissions including royalty remissions to the non-resident parent company. (3) Under the provisions of section 195 the liability to deduct tax at source arises at the time of credit of income to the non-resident. The appellant was accordingl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty 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 deemed as assessee in default under section 201 of the Act. Regarding the decision of Supreme Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. v. CIT [1997] 227 ITR 172, it was submitted by him that the said decision is distinguishable inasmuch as the accrual of income itself is challenged in the present case. Regarding the entries in the books of account, it was submitted by him that these are not determinative of the accrual of income. Regarding the finding No. 2 of the CIT(A) as noted by us in earlier paragraph, it was submitted by him that the same is unwarranted since it is not supported by any material or evidence. Accordingly, it was prayed by him that order of CIT (A) be quashed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 are in the nature of administrative guidelines and could be changed at any time by the Government and consequently, such guidelines could not be considered as law. Therefore, it could not be said that agreement between the parties was prohibited by law. 8. In reply, the learned counsel for the assessee relied on the decision of the Supreme Court in the case of Maddi Venkataraman Co. (P.) Ltd. v. CIT [1998] 229 ITR 534 wherein illegal business has been distinguished from illegal act in the course of regular business. It was further submitted by him that the issue regarding accrual of income was never before the Court in the cases relied upon by the learned Sr. DR. He did not dispute the submissions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the terms of agreement between the assessee and LME. 10. Admittedly, in the present case there is no dispute that LME is a non-resident company. It is also not in dispute that there is no actual payment of royalty by the assessee to LME as is apparent from the finding of Assessing Officer to the effect. "Hence, the transaction was complete except that the physical payment had to be made to the foreign party". Reference can be made to Reason No. 3 given by Assessing Officer for rejecting the contentions of the assessee. Therefore, the only question to be considered is whether any income by way of royalty accrued to the LME in terms of the agreement dated1-1-1997. It is a settled legal position that in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 that the agreement between the parties was void and therefore, the claim of plaintiff could not be allowed. The relevant observations of the Hon'ble Delhi High Court were as under: "The prohibition in law to the transfer of spindles is absolute. The law is so strict that no one could even change the location of the spindles. Transfer could be effected only with the prior permission in writing of the Textile Commissioner. Permission of the Textile Commissioner is not, therefore, an idle formality. Where an agreement to sell spindles was entered into without prior permission of the Textile Commissioner in spite of prohibition against sale of spindles without such permission contained in a Control ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lves 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 and Promotion vide letter dated11-7-2000addressed to the assessee clarified as under: "I am directed to refer to your letter dated28-6-2000on the above mentioned subject and to clarify that neither the FC approval dated5-2-1996permits payment of royalty to the foreign collaborator nor does the extant policy provide for royalty payment to the parent foreign collaborator by the Indian wholly owned subsidiary." The material placed before us further shows that Government of India, Ministry of Commerce and Industry, Department of Industrial Policy and Promotion (FC Division) vide Press Note No. 9 (2000 series) dated 8th September, 2000 declared as under: 'In pursuance of Government's commitme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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 the agreement was entered into on1-1-1997when there was absolute prohibition for payment of royalty. Therefore, it is held that the agreement between the assessee and 'LME' was opposed to the industrial policy declared by the Government of India and, therefore, the agreement was void by virtue of section 23 of the Contract Act. 14. Regarding entries in the books of account of the assessee, we are of the view that such entries are not determinative of the nature of income. Reference can be made to the decision of Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals Fertilisers Ltd. wherein it has been held that accounting system, even though recognised byInstituteofCharte ..... X X X X Extracts X X X X X X X X Extracts X X X X
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