Decided on July 14,1982



K.S. Viswanathan, Accountant Member - (1.) THIS is an appeal by the assessee, a limited company, who has been treated as the agent of a non-resident company by name Uniroyal inc., USA. There is no dispute that the assessee is the agent. The point at despute is that the amount remitted by the Indian agent, Premier Tyres Ltd., to Uniroyal Inc. is not income accruing or arising in India. It is also not income which could be deemed to accrue or arise in India. Therefore, nothing is taxable.
(2.) Premier Tyres Ltd., the Indian company, had entered into an agreement with the American company for technical services. There was an agreement subsisting between these two companies, dated 23-2-1962, but that agreement was terminated 10 years later. A new agreement was made out on 1-4-1974 between them which governs the assessment year we are concerned with. Article II 2-1 provides for the technical assistance to be given by the American company and it reads as follows: UNIROYAL will furnish or cause to be furnished to PREMIER detailed information, as set forth in Appendix A hereto, on manufacturing equipment, methods, process and formulas, followed and used in regular production by UNIROYAL and any subsidiary of UNIROYAL in the manufacture of Agreement Products, and will continue, subject to Section 2-8, to furnish or cause to be furnished to PREMIER such information from time to time during the term of this agreement. Appendix A is hereby incorporated by reference and made a part of this Agreement. Nothing in this agreement shall be construed as requiring UNIROYAL to furnish or cause to be furnished any information, the disclosure of which would be in violation of an obligation of secrecy owed to another by UNIROYAL or any subsidiary of UNIROYAL having to make any payment to a third party (not a subsidiary of UNIROYAL)." Apart from the above provision, the American company is also required, if it considers necessary, to send to the Indian company one or more persons for 30-man working days to advise and assist the Indian company in establishing the use of the information furnished and for rearranging and making such factory layouts as may be necessary. If so requested by the Indian company, the American company will undertake special product or developmental services. The payments for these services are governed by Article IV. According to this Article, the American company will be entitled, for information and services rendered, to a royalty calculated at half per cent of the net sales in India of the products which are manufactured by using the technical aid given by the American company. Similarly, in respect of sales outside India, 5 per cent royalty is payable. During the accounting year concerned, the net sales in India were Rs. 23.7 crores on which royalty at half per cent was Rs. 7,44,636 and the royalty in respect of the sales outside India was Rs. 2,46,505. Together the total royalty payable was Rs. 9,91,141.
(3.) BEFORE the ITO, the Indian agent (i.e., the Indian company), claimed that the royalties were not taxable. We may mention that in the earliei assessment years there was no dispute on this point and the assessments were made treating these amounts as taxable receipts. The change in the attitude of the company arose from a reading of the decision of the Supreme Court in the case of Carborundum Co. v. CIT[1977] 108 ITR 335. The company was of opinion that the facts are on all fours with that case and, therefore, nothing was taxable in India. The ITO, however, did not accept this submission. He pointed out that according to the agreement, all payments to be made by Premier Tyres Ltd. would be after deduction of tax. He also pointed out that one of the executives of the American company, Mr. Hubbers, visited India from 25-2-1976 to 11-3-1976 for the purpose of quality audit and the expenses in connection with his stay were incurred by the Indian company. Mr. Hubbers came to India and rendered services as an officer of the assessee-American company. Reliance was also placed on the provisions of Section 9(1)(vi) of the Income-tax Act, 1961 ('the Act') which deemed any payment of royalty as income arising in India.;

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