Calcutta H.C : The facts material as on record in and the proceedings leading up to this reference are, inter alia, that N. V. Philips’ Gloeilempenfabrieken, the assessee, which is a non-resident company incorporated in the Netherlands, entered into an agreement with one Crookes Interfran Ltd.

DIPAK KUMAR SEN, J.:

The facts material as on record in and the proceedings leading up to this reference are, inter alia, that N. V. Philips’ Gloeilempenfabrieken, the assessee, which is a non-resident company incorporated in the Netherlands, entered into an agreement with one Crookes Interfran Ltd., an Indian company, in writing on July 8, 1964, under which the assessee agreed to furnish to the Indian company assistance and information at the disposal of the assessee in respect of working methods, manufacturing processes and methods of application relating to vitamin D to enable the Indian company to manufacture, use and sell vitamin D in India. The agreement provided, inter alia, that the assessee would provide to the Indian company the following data, assistance and information: (a) Drawings with detailed instructions and directions for a plant to be set up in the specified territory by the Indian company of an agreed capacity of production for the purpose of manufacturing vitamin D. (b) Data regarding working methods and manufacturing processes including indications, instructions, specifications, standards and formulae as also methods of analysis and quality control to enable the Indian company to start and carry on the manufacture of vitamin D with basic ingredients in an economical and efficient way. (c) In particular, the assessee would supply information relating to the processes of irradiation of basic materials, the purification thereof, solution in suitable solvents and conversion thereof into other compounds. (d) If required by the Indian company, further assistance and information relating to manufacture of a basic cholesterol compound at the disposal of the assessee. (e) Medical and other information relating to pharmacological and pharmaceutical properties of vitamin D at the disposal of the assessee. (f) Training of technicians of the Indian company in the factory of the assessee at Netherlands for the setting up of the plant in the specified territory or placing at the disposal of the Indian company a technical expert for erection and initial working of the plant. (g) Training of qualified staff members of the Indian company in the manner to be agreed upon for their being acquainted with the working methods and manufacturing processes of the assessee in respect of vitamin D. (h) Assistance to the Indian company in the initial costing of production and advice in respect of problems arising out of establishment, installation, running and administration of the plant. (i) Analysis in the laboratories of the assessee, in Netherlands, of samples of the products of the Indian company free of charge of each batch of production by the Indian company in quantities as might be agreed upon from time to time. (j) Salaries, costs and expenses incurred for making available experts and training by the assessee of the members of the Indian company would be borne by the latter. (k) The Indian company would pay to the assessee in consideration of the technical assistance and information as above, 5 per cent of the net selling price of vitamin D manufactured and sold by the Indian company subject to taxation under the Indian law. (l) The agreement would remain in force for 10 consecutive years and would continue for a further one year unless terminated by either party on six months’ previous notice in writing. Crookes Interfran Ltd. subsequently came to be known at Duphar Interfran Ltd.

In the asst. yrs. 1973-74 and 1974-75, the corresponding accounting years ending on the 31st December of the calendar years 1972 and 1973, the assessee received from Duphar Interfran Ltd. Rs. 31,080 and Rs. 26,475, respectively, under the said agreement.

The assessee was assessed to income-tax in the said assessment years. It was contended by the assessee that the said amounts had been received by the assessee from the Indian company as and by way of technical assistance fees and as such only 10 per cent of the said amounts could be treated as taxable income of the assessee in India. This contention was initially accepted by the ITO in the asst. yr. 1973-74. The CIT subsequently set aside the said assessment under s. 263 of the IT Act, 1961, on the ground that the said payments to the assessee were more in the nature of royalty than technical assistance fees. An appeal to the Tribunal against the said order of the assessee was unsuccessful.

On reassessment, the ITO found that the entire payments made on account of technical assistance, know-how and information supplied by the assessee to the Indian company including all services rendered by the assessee to the Indian company in connection therewith under the said agreement should be treated as royalty. He held that 80 per cent of the said receipt would be taxable in the hands of the assessee in India.

For the asst. yr. 1974-75, the amount received by the assessee from the Indian company was also treated as payment on account of royalty by the ITO and taxed as such. On appeal, the CIT (Appeals) set aside the order of the ITO with the direction to make a fresh assessment in terms of the order of the CIT passed under s. 263 of the Act of 1961 in the earlier assessment year. In the reassessment made pursuant thereto, the ITO, following the assessment for the earlier assessment year, held that the amount received by the assessee from the Indian company was also in the nature of royalty and taxable as such.

Being aggrieved, the assessee preferred appeals from the said two orders of assessment to the CIT (Appeals). The CIT held that the payments by the Indian company to the assessee had an element of royalty as also an element of fee. He came to the conclusion that 50 per cent of the payments received by the assessee from Duphar Interfran Ltd. was in the nature of fees for technical assistance and information and should be taxed as such. The balance 50 per cent should be treated as royalty and taxed accordingly.

Being aggrieved, both the Revenue and the assessee preferred appeals from the order of the CIT (Appeals) to the Tribunal. The Tribunal on a construction of the agreement between the assessee and the Indian company and the meaning and connotation of the word ” royalty ” held, inter alia, as follows: (a) The payments had been made by the Indian company to the assessee under an agreement for use of rights in the nature of a patent.(b) Even though no patent had been obtained by the assessee in respect of the know-how, information and technical assistance supplied by the assessee to the Indian company, payments in respect thereof would still be payments in the nature of royalty. (c) Some of the information to be furnished by the assessee including data, instructions and directions for the setting up of a plant as also general information in respect of the product to be manufactured would, however, amount to rendering of technical service and payment received in respect thereof would not be royalty.

9. The Tribunal affirmed the decision of the CIT (Appeals) in estimating 50 per cent of the payment received by the assessee from the Indian company as royalty and the balance as fees for technical services. On the facts, the Tribunal declined to interfere with the estimate made by the CIT (Appeals) in respect of the quantum.

10. On an application of the assessee under s. 256(1) of the IT Act, 1961, the Tribunal referred the following question as a question of law arising out of its order for the opinion of this Court : ” Whether, on the facts and in the circumstances of the case and on a proper interpretation of the agreement dated July 8, 1964, between N. V. Philips’ Gloeilempenfabrieken and Crookes Interfran Ltd. (now known as Duphar Interfran Ltd.), the Tribunal was right in holding that so much of the payment made under cl. 5 of the said agreement as was referable to the provision of such data, assistance and information as have been referred to in cls. 2(ii) and 2(iii) thereof was to be regarded as ‘royalty’ and not as ‘technical service fees’ for the purpose of the income-tax assessment of N. V. Philips’ Gloeilempenfabrieken for the asst. yrs. 1973-74 and 1974-75 ? “

11. On an application of the assessee under s. 256(2) of the IT Act, 1961, the Tribunal was directed also to refer the following questions as questions of law arising out of the order of the Tribunal for the opinion of this Court : ” (a) If the answer to question No.1 is in the affirmative, whether the Tribunal’s finding that the CIT (Appeals) was justified in holding that 50 per cent of the payments made under the agreement referred to in question No.1 above was assessable as royalty was based on no material on record or was otherwise perverse ? (b) If the answer to question No.1 is in the affirmative, whether the Tribunal having regard to the true scope and effect of its earlier decision dated November 13, 1962, in ITA Nos. 1578 to 1581 and 1377 to 1380 of 1961-62 and the assessee’s admission solely based thereon or even otherwise, was right in upholding the view that 80 per cent of such royalty income was taxable in India? “

The question referred under s. 256(1) of the IT Act, 1961, as noted hereinabove was the subject-matter of IT Ref. No. 129 of 1983. The said reference has been disposed of by our judgment dated May 6, 1987 ((1988) 172 ITR 521). The question referred was answered in the affirmative and in favour of the Revenue.

In the present references, we are concerned with the other two questions which the Tribunal was directed to refer to this Court under s. 256(2) of the IT Act, 1961, as noted above. Inasmuch as the records and proceedings relevant to these two references had been included in the paper book in IT Ref. No. 129 of 1983 and as the statement of case sent up by the Tribunal in the said income- tax reference was comprehensive and also covered the questions involved in the present references, no separate statement of case was sent up by the Tribunal nor was any separate paper book filed in this reference.

At the instance of the parties, the two references were heard together and are being disposed of by this common judgment.

At the hearing, learned advocate for the assessee contended that, under the agreement dated July 8, 1964, the assessee was required to supply to the Indian company information, technical assistance and data only in respect of some items, namely, working methods and manufacturing processes relating to vitamin D and its basic compounds and information relating to pharmacological and pharmaceutical properties of the product, which could be held to be secret and exclusive to the assessee. Payment in respect thereof might be treated as payments on account of royalty. Other items in the said agreement requiring the assessee to provide to the Indian company, namely, assistance in the setting up of a plant, training of technicians and staff members, costing, advice in respect of day to day problems and analysis in the laboratories of the assessee’s samples of the products and supply of general information were in the nature of technical service required to be provided by the assessee to the Indian company and payment in respect thereof was payment of fees for technical service. Under the agreement, the items of technical know-how, processes and information, secret and exclusive to the assessee, consisted of a minor part of what was required to be provided to the Indian company by the assessee. It was contended that the CIT (Appeals) without any evidence or material whatsoever estimated that 50 per cent of the amount received by the assessee from the Indian company would be held to be payment in respect of items in the nature of royalty and the balance to be allocated for providing technical service and would be considered to be a fee for such service. It was submitted that this estimate was arbitrary, erroneous and without any legal basis, It was submitted further that on a proper construction of the agreement and consideration of facts, it should have been held that a much larger proportion of the payment made by the Indian company to the assessee under the said agreement would be in the nature of fee for technical services and taxed as such. In support of his contention, the learned advocate for the assessee relied on and cited the following decisions: (a) Dhakeswari Cotton Mills Ltd. vs. CIT (1954) 26 ITR 775 (SC) : In this case, an assessment was made under s. 23(3) of the Indian IT Act, 1922, by the ITO. The ITO estimated the gross profit on sales of the assessee at 40 per cent. On appeal the order of the ITO was upheld by the AAC. On further appeal, the Tribunal reduced the rate of gross profit from 40 per cent to 35 per cent. None of the authorities had stated on what material the estimates were based.

On appeal to the Supreme Court from the order of the Tribunal by way of special leave, it was held that the Tribunal in making its estimate of the gross profits had violated the principles of natural justice inasmuch as the Tribunal did not disclose to the assessee the information supplied by the Revenue and did not give any opportunity to the assessee to rebut the same, though the Tribunal declined to accept or consider the materials relied on by the assessee. The Supreme Court held further that the estimate of the gross profit rate on sales both by the ITO and the Tribunal were based on surmises, suspicions and conjectures. On the above grounds, the order of the Tribunal was set aside and the matter was remanded to be considered afresh after giving full opportunity to the assessee. (b) CIT vs. Walchand and Co. Private Ltd. (1967) 65 ITR 381 (SC) : In this case, in the assessment years involved, the assessee, a private limited company had increased the remuneration of its directors and officers. In making the assessments, the ITO disallowed the increase of such remuneration on the ground that the same was not justified in the absence of corresponding increase in the profits of the assessee and that as such the expenditure was not made wholly and necessarily for the purpose of the business of the assessee. On appeal, the AAC upheld the order of the ITO. On further appeal, the Tribunal modified the order of assessment. On a consideration of the previous salaries drawn by the directors and officers, the Tribunal directed that a part of the increase in their salary be allowed as deduction. No reason was given for disallowing the balance of the increase.

On a reference, it was held by the Bombay High Court that the Tribunal in disallowing a part of the increase of the remuneration had acted without evidence. On further appeal, the Supreme Court affirmed the order of the High Court and held that the order of the Tribunal disallowing the claim for allowance of the additional remuneration in part was not supported by any evidence.

Learned advocate for the Revenue contended, on the other hand, that it was not in dispute in this reference that some part of the payment made by the Indian company to the assessee should be allocated towards royalty and the balance towards fees for provision of technical services. At the hearing before the CIT (Appeals) and the Tribunal, the assessee did not adduce any evidence nor bring any material on record on the basis of which a more accurate estimate could be made. It was within the special knowledge of the assessee as to what it had supplied to the Indian company under the said agreement and the assessee was in a position to furnish a break-up of the amount received by it from the Indian company showing different heads against which the said payments had been adjusted. The assessee, having failed to do so, was not entitled to complain that the estimate made was inaccurate.

On a consideration of the facts and circumstances and the respective submissions of the parties, it appears to us that in the instant case, the entire case of the assessee before the authorities below was that the entire amount paid to the assessee by the Indian company was in the nature of a fee for technical services rendered and not royalty. The assessee did not make any attempt to show which part of the payments should be allocated against the technical services rendered by it to the Indian company and which part should be allocated towards supply of technical know-how, secret processes and information which would be in the nature of royalty. It was for the assessee to explain as to how 5 per cent of the net selling price of the product of the Indian company should be divided among the types of the services to be rendered by the assessee to the Indian company which the assessee failed to do.

All that the authorities below had before them as materials on record was the agreement between the assessee and the Indian company which enumerated the various items of service as also the items of technical know-how, secret processes and information to be rendered or furnished by the assessee to the Indian company. On a consideration of the aforesaid, an estimate was made.

It does not appear to us that in view of the material on record, the estimate was unreasonable. An estimate is not expected to be mathematically accurate. In any estimate, there is always an element of guess. It cannot be said that the estimate was made without any material whatsoever though the materials available were scanty.

We also take note of the fact that the taxable amounts involved are not substantial. In one year, 80 per cent of half of Rs. 31,380 and in the other year, 80 per cent of half of Rs. 26,475 would be taxed as royalty. We are not inclined to prolong the proceedings and initiate a detailed enquiry by remanding the matter.

For the above reasons, we answer question No. 1 referred to us in the negative and in favour of the Revenue. Learned advocate for the assessee did not press question No. 2 and as such we refrain from answering the same. The reference is disposed of accordingly. There will be no order as to costs.

SHYAMAL KUMAR SEN, J.:

I agree.

[Citation : 172 ITR 541]