Dipak Kumar Sen, J. - (1.) N.V. Philips Gloeilempenfabrieken Bindhhoven, Holland, the assessee, is a non-resident company incorporated in the Netherlands. On July 8, 1964, the assessee entered into an agreement with one Crookes Interfran Ltd;, an Indian company, under which the assessee agreed to furnish to the Indian company technical information relating to vitamin D and its manufacture, use and sale, inter alia, on the following terms and conditions ; (a) The assessee would render to the Indian company all assistance and furnish information from time to time in respect of the working methods, manufacturing processes and methods of application relating to vitamin D. (b) The assessee would provide the Indian company with the following data, assistance and information : (i) Drawings with detailed instructions and directions for a plant to be set up in the territory specified in the agreement of a capacity of 1,000 kg. per annum producing vitamin D. (ii) Data regarding working methods and manufacturing processes (including indications, instructions, specifications, standards and formulae), methods of analysis and quality control and other particulars to enable the Indian company to start and carry on the manufacture of vitamin D. (iii) Medical and other information relating to the pharmacological and pharmaceutical properties of vitamin D. (iv) The training of one or more technicians of the Indian company in the factory of the assessee in the Netherlands for setting up the plant as aforesaid and/or the placing at the disposal of the Indian company of a technical expert for the erection and initial working of the plant as also the training of an agreed number of qualified staff of the Indian company in the factory of the assessee in the Netherlands. (v) Assistance to the Indian company in the initial costing of production and advice on problems in respect of establishment, installation, running and administration of the said plant. (vi) Analysing in the laboratory of the assessee in the Netherlands samples produced by the Indian company free of charge of each batch of vitamin D manufactured by the Indian company. (c) Any information disclosed by the assessee to the Indian company under the agreement would be solely for the use of the Indian company, would be considered as having been disclosed in confidence and would not become the property of the Indian company until such time and to the extent that such information would become public by application and user. (d) The Indian company would take all reasonable care to keep such information confidential and not disclose the same to third parties except as may be necessary in the actual and normal course of use thereof. The Indian company would obtain corresponding undertakings of secrecy from its employees in suitable form. (e) The Indian company would undertake during the continuance of the agreement and thereafter not to copy the equipment, tools and instruments supplied by the assessee to the Indian company nor to cause or permit the same to be copied and not to prepare or permit the drawings thereof. (f) The Indian company would pay to the assessee in consideration of the technical assistance and information supplied 5% of the net selling price of vitamin D manufactured and sold by the Indian company subject to Indian income-tax. (g) The agreement would take effect from the start of the manufacture of vitamin D by the Indian company and would remain in force for ten consecutive years and would continue thereafter for a period of one year, unless terminated by either party giving to the other six months' previous notice in writing before the end of the original or the extended period.
(2.) In the assessment year 1973-74, the corresponding accounting year ending on December 31, 1972, the assessee received a sum of Rs. 31,080 from Dupher Interfran Ltd., the successor-in-interest of Crooks Inter-fran Ltd., under the said agreement dated July 8, 1964. In its assessment to income-tax in the said assessment year, the assessee contender before the Income-tax Officer that the said amounts had been received from the Indian company as and by way of technical assistance fees. The Income-tax Officer in the first instance accepted the contention of the assessee and held that only 10% of the receipts of the assessee from Dupher Interfran Ltd. would be treated as taxable income of the assessee as the same were technical assistance fees. The Commissioner subsequently set aside the said assessment under Section 263 of the Income-tax Act, 1961 ("the Act"), as he was of the opinion that the payments received by the assessee from the Indian company were more in the nature of royalty than technical assistance fees. The assessee preferred an appeal before the Tribunal against the order of the Commissioner under Section 263. The appeal was unsuccessful.
(3.) The Income-tax Officer, in the reassessment after construing the agreement in the background of Explanation II to Clause (vi) of Sub-section (1) of Section 9, held that it was obvious that technical assistance, know-how and information furnished by the assessee to the Indian company were nothing else but royalty. He made a distinction between technical assistance fee and technical service fee. He held that technical assistance fee was paid for passing on technical information and services rendered in connection therewith whereas technical service fee was paid for rendering actual technical services. He held that the assessee had received the payments from the Indian company in consideration of passing on of certain technical know-how and information and even if certain services have been rendered in connection therewith, the entire receipt would be taxed as royalty. The Income-tax Officer noted that in the tax deduction certificates issued by the Indian company to the assessee, the said payments had been described as royalty. It was not in dispute that if the said amounts are treated as technical services fees, only 10 per cent. of the amount paid would be taxable in the hands of the assessee whereas if the said amounts were treated as royalty, 80 per cent, of the same would be taxable in the hands of the assessee.;