Madras High Court
Commissioner Of Income-Tax vs Ruti Machinery Works Ltd. on 7 October, 1999
Equivalent citations: [2000]243ITR442(MAD)
Author: R. Jayasimha Babu
Bench: R. Jayasimha Babu
JUDGMENT R. Jayasimha Babu, J.
1. The question referred to us is a composite one covering the issue raised by the assessee regarding royalty and the issue of technical know-haw raised by the Revenue. The assessment years involved are 1976-77, 1977-78 and 1979-80 in so far as the technical know-how is concerned, and in respect of royalty payment, the assessment years are 1979-80 and 1980-81.
2. The composite question referred to us as to whether, on the facts and in the circumstances of the case, the technical know-how and the royalty payable under the collaboration agreement dated April 9, 1974, between the assessee and Lakshmi Automatic Loom Works has accrued or deemed to have been accrued in India within the meaning of Section 9 so as to be exigible to income-tax.
3. The assessee is a company incorporated in Switzerland. It manufactures weaving machines and is said to be 130 years old. It entered into a collaboration agreement with Lakshmi Automatic Loom Works Limited. The collaboration was in respect of all types of machinery described in the agreement. The agreement contemplated manufacture of the machinery in India by the Indian company to which the assessee was to subscribe 25 per cent. of the equity capital and on which, it was to have two nominees as directors. It was to receive royalty on the product manufactured by the Indian company, and marketed by it in India and abroad. The assessee under the agreement was to hand over all the documents to the Indian company to start manufacture of the "C" type weaving machines, bobbins and spares thereof. The consideration for the documents was fixed at one million Swiss Francs free of Indian taxes, if any, and that amount was to be paid in cash in Switzerland in three equal instalments. The agreement also provided for payment to the assessee of royalty on the weaving machines manufactured by the Indian company. The royalty was to be paid at the rate of 5 per cent. subject to Indian taxes, on domestic sales on the net selling price minus sales commission and the landed cost of the imported components and imported raw materials, freight, insurance and customs duty.
4. The amount received by the assessee as consideration for the documents supplied by it which documents were essential for the manufacture of the machines in India, as also the amount received by it as royalty were held to be exigible to income-tax in this country, by the Income-tax Officer. The assessee having carried the matter in appeal, the Commissioner (Appeals) agreed with the assessee's contention that the fees paid for the documentation for which payment was effected in Switzerland could not be subject to tax here. He also held that only 60 per cent. of amount received by the assessee as royalty is taxable.
5. The Tribunal has affirmed the view of the Commissioner so far as the payment of or the documentation is concerned. On the question of exigi-bility of the tax on the royalty payment, it held that the assessee is liable to pay tax on the whole of the amount of royalty received and not merely on 60 per cent. thereof.
6. The Tribunal has found that the documentation for which the payment was made were handed over to the assessee in Switzerland and that the payment therefor in cash was also made in Switzerland. Having regard to the finding of fact, the Tribunal has correctly proceeded to hold that the amount of one million Swiss Francs received by the assessee as consideration for the documentation supplied by it to the Indian company was not exigible to Indian income-tax. That income to the assessee did not arise or accrue to it in India. We agree with the conclusion of the Tribunal.
7. With regard to the royalty payment, the Tribunal has found that the assessee had business connection in India. It had invested 25 per cent. in the equity capital of the Indian company and had two of its nominees as directors on the board in the Indian company. It had the right to inspect the accounts of the Indian company for ascertaining the correct amount of royalty payable. It had sent technical persons to the Indian company to help them in the production of weaving machines. It has given licence to the Indian company to manufacture and sell the machinery in India and abroad under the trade name "RUTI" which was owned by the assessee. All the machinery manufactured by the company were required to bear the trade name "Ruti". The inference drawn by the Tribunal on the basis of the fact that the assessee had business connection in India is rightly drawn. The Tribunal has also noticed the fact that the Government of India while approving the collaboration agreement had directed that the technical documentation would not be subject to Indian income-tax but royalty would be subject to Indian income-tax.
8. The royalty payment made by the assessee is clearly a payment made in respect of the products manufactured in a business carried on under licence from the assessee, in which business the assessee itself had an interest as a shareholder as also as an entity which had two nominees as directors on the board of the Indian company. There was, therefore, a clear business connection between the assessee and the Indian company. The Tribunal was right in holding that the royalty payments were exigible to tax in India, as the income received by the assessee as royalty from the Indian company had arisen or accrued to it in India.
9. We, therefore, answer the question referred to us in so far as it concerns fees for the documentation, in favour of the assessee, and in so far as it concerns royalty in favour of the Revenue.
10. In the circumstances of the case, the parties shall bear their respective costs in these references.