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 ... Jurisdiction of the Tribunal in referring the question to the court - Non-resident - Whether, the amounts received by the assessee (English company) from M/s. Dunlop Rubber Co. (India) Ltd. (Indian company) as per agreement dated 29th January, 1957, constituted income assessable to tax? - HELD THAT:- 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 must determine the true nature of the receipt from the clauses of the agreement, the object and the manner of the receipt and also taking into account the previous document. It appears to us that the Tribunal was right in arriving at the view that it was the recoupment of the expenses incurred for the technical data for which a research department was maintained in London. The result of the research was for the benefit of all concerned including the head office and the subsidiary concerns. It was for sharing of the expenses of the research which was utilised by the subsidiaries as well as the head office Organisation that the payments were made by the Indian company and received by the London company. The fact that after the termination what was to happen to these informations gathered was not mentioned indicates that it could not be anything but sharing of the expenses because if it had Provided that the information would belong either to the parent company or to the subsidiary, then perhaps it might have been contended that payment were either royalty or hiring charges of the information as such could be treated as income. But the very fact that the technical data was jointly obtained and the expenses were shared together indicates that it could not be treated as income. The fact that only 0.67% of the turnover was allowed is because of the restrictions imposed by the Government. In that view of the matter we are of the opinion that the Tribunal arrived at the correct decision keeping in view the background of the agreement. In the aforesaid view of the matter the question referred to us must be answered in the negative and in favour of the assessee. 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.