Commissioner of Income Tax vs Ruti Machinery Works Ltd.

Jayasimha Babu, J.—The question referred to us is a composite one covering the issue raised by the assessee regarding royalty and the issue

of technical know-how raised by the revenue. The assessment years involved are 1976-77, 1977-78 and 1979-80 insofar as the technical know is

concerned, and in respect of royalty payment, the assessment years are 1979-80 and 1980-81.

The composite question referred to us is 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 9-4-1974 between the assessee and Lakshmi Automatic Loom Works has accrued or deemed

to have been accrued in India within the meaning of section 9 of the Income Tax Act, 1961 so as to be exigible to Income Tax.

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 Ltd. 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 manufacturing of the ''C'' type weaving machines, dobbies 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 royalty on the weaving machine 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.

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 was 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 which payment was effected in Switzerland could not be subject to tax here. lie also held that only 60 per cent of the amount

received by the assessee as royalty is taxable.

The Tribunal has affirmed the view of the Commissioner so far as the payment for the documentation is concerned. On the question of exigibility

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

The Tribunal has found that the documentation for which the payment was handed over to the assessee in Switzerland and that the payment

there for in cash was also made in Switzerland. Having regard to that 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.

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 machineries in India and abroad

under the trade name ''RUTI'' which was owned by the assessee. All machineries 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.

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.

We, therefore, answer the question referred to us insofar as it concerns fees for the documentation, in favour of the assessee, and insofar as it

concerns royalty, in favour of the revenue.

In the circumstances of the case, the parties shall bear their respective costs in these references.