TMI Blog1982 (2) TMI 24X X X X Extracts X X X X X X X X Extracts X X X X ..... ne. 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 assessee is an English non-resident company here. It holds 51 per cent. shares in Dunlop India 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 operati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the cost of the acquisition by the English company of the patent, invention or right in respect whereof such licence 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 licence 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." Clause 5 of the said agreement to whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reement. 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's expenses on payment to it by the English company of 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 hereinafter be entitled ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated 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 thereof by 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 this 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te 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 held that the ITO was right in treating the payment as royalty. He accordingly confirmed the order of the ITO. The assessee 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in proportion to its turnover. This has not been done. He also relied on the draft agreement submitted by the assessee prior to the execution of the 1957 agreement. In our view no reliance can be placed 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 Assistant Commissioner. So, it cannot be said that the English company did not communicate the various informations on the sophisticated items. " 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 m ..... X X X X Extracts X X X X X X X X Extracts X X X X
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