PRAGA TOOLS LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE Income-tax Appellate Tribunal, Hyderabad Bench, has, at the instance of the assessee, referred the following question of law under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as " the Act ") for the opinion of this court:

(2.) IN order to appreciate the scope and ambit of the question, we shall briefly refer to the facts admitted or found by the Tribunal which gave rise to the question : The applicant-assessee is a Government company under Section 617 of the Companies Act, 1956, which has been carrying on business in the manufacture of precision and machine tools, machinery and forgings since 1942. On January 2, 1961, the assessee-company had entered into a licence agreement with a foreign collaborator, M/s. A. A. Jones and Shipman Ltd., Leicester, U. K., for the manufacture of what is described as " Jones-Shipman " Tool and Cutter Grinding Machine Model 310--16"X8" capacity, complete with all items of standard equipment, M. 20 motor-drive unit and X-17 INdexing attachment for which the collaborator was to supply the necessary designs, drawings, technical know-how and assistance. Jones and Shipman agreed to assist the assessee in the production of the main castings of the machine and also to sell all relative jigs, fixtures, tools, gauges, raw materials and special parts as ordered at their normal commercial retail value. Jones and Shipman also agreed to furnish all the technical information with the latest modifications and standards. IN consideration of the grant of the manufacturing rights and for providing assistance under the agreement, the assessee-company agreed to pay to Jones and Shipman 1,000--500 on the signing of the agreement and 500 on the supply of the documents mentioned in Clause 4 of the agreement--and royalty of 5% of the INdian selling price on the production of the machine described in Clause 1 during the currency of the agreement. Clause 13 of the agreement provides that royalty would become due when any machine or part thereof is completed and ready for despatch from the works of the assessee-company. The net amount of royalty to be paid by the assessee for the ten years from the signing of the agreement shall not be less than 20,000 sterling and it shall be payable half-yearly in sterling within sixty days of the half-years ending with 31st March and 30th September, respectively, and shall be subject to INdian taxes. The agreement is for a period of 10 years and it may be renewed thereafter for a period of five years by mutual consent, Under Clause 15, the termination of the agreement shall not affect the rights of the assessee-company to use for the purpose of their business all the information, techniques, patents, copyrights, drawings, plans and documents relating to the machine which have been transferred from the foreign collaborators to the assessee or which may have come into their possession during the agreement. The assessee would be entitled to use this information free of any royalty or other payments and without any objection on the part of the foreign collaborator provided that all payments under the agreement have been duly paid by the assessee. However, the assessee-company shall no longer have the right to use the Jones and Shipman name or trademark. The rights and liabilities of either party to the agreement shall not be assigned to a third party without the written consent of the other party according to Clause 17.

(3.) BY virtue of the aforesaid agreements, the assessee had paid by way of royalty to the aforesaid two foreign collaborators the following amounts during the accounting years relevant for the assessment years under consideration.