1982 (2) TMI 24 - HC - Income Tax

Payments under 1957 agreement were reimbursements for shared research expenses benefiting head office and subsidiaries, not taxable income

HC held the Tribunal correctly found that payments made by the Indian company to the non-resident company under the 1957 agreement were recoupment of ... Characterisation of receipts as revenue or capital - recoupment of expenses - payment for technical know-how / know-how receipts - royalty - substance over form in classification of receiptsRecoupment of expenses - payment for technical know-how / know-how receipts - characterisation of receipts as revenue or capital - substance over form in classification of receipts - Whether the amounts received by the English assessee from the Indian company under the 29th January 1957 agreement constituted income assessable to tax - HELD THAT: - The Court accepted the Tribunal's conclusion that the receipts were recoupment of part of the research and development costs borne by the English company and not payments representing profit or consideration for transfer of a capital asset. The 1957 agreement (notably cls. 1(A) and 5) and the auditors' certificate supported that the London research establishment produced technical information for the benefit of the whole Dunlop organisation and that the Indian company contributed a proportionate share of those costs. The limited remittance (0.67% of turnover) reflected a Governmental restriction and did not alter the substantive character of the payments. The Court rejected the Revenue's reliance on authorities treating lump sum or know how receipts as revenue where, on the facts, the receipts exceeded expenditure or constituted a price for use of a proprietary asset. Here there was no evidence that the English company had recovered more than its allocated expenses or that the payments were a price for acquisition or exclusive use of capitalised know how; accordingly the payments could not be treated as royalty or other taxable income.The payments were held to be recoupment of expenses and did not constitute income assessable to tax.Final Conclusion: The reference is answered in the negative; the amounts received by the English company under the 1957 agreement are not taxable as income for the assessment years 1965-66 to 1968-69, and each party shall bear its own costs. Issues Involved:1. Jurisdiction of the Tribunal in referring the question to the court.2. Nature of the amounts received by the English company from the Indian company under the agreement dated 29th January, 1957.3. Whether the payments constituted income assessable to tax.Summary:1. Jurisdiction of the Tribunal:The Tribunal referred a single question to the court u/s 256(1) of the I.T. Act, 1961, despite the Revenue's application for four different questions. The court found no lack of jurisdiction in the Tribunal's action.2. Nature of the Amounts Received:The case involved four assessment years (1965-66 to 1968-69) and the corresponding accounting periods. The English company, a non-resident entity, held 51% shares in the Indian company and maintained extensive technical research establishments in the UK. The agreement dated 29th January, 1957, between the English and Indian companies provided for the communication of information, processes, and inventions by the English company to the Indian company. The Indian company paid the English company 0.67% of its sales towards proportionate costs and expenses, as permitted by the Government of India.3. Assessability of Payments as Income:The ITO treated the payments as royalty and assessed them as income, allowing 55% of the gross amount as expenditure and treating the balance as income. The AAC upheld this view, considering the payments as royalty for using capital assets. However, the Tribunal, after examining the agreement and the auditor's certificate, concluded that the payments were merely a recoupment of expenses incurred by the English company and did not constitute income. The Tribunal noted that the payments were for sharing research expenses and not for acquiring technical know-how or royalty.The court agreed with the Tribunal's view, emphasizing that the payments were for sharing research expenses and not for acquiring or using capital assets. The restriction of 0.67% on the turnover was due to government regulations. Thus, the amounts received by the English company did not constitute income assessable to tax.Conclusion:The question referred to the court was answered in the negative and in favor of the assessee. The parties were directed to bear their own costs.