Citizen Watch Co. Ltd. vs Inspecting Assistant Commissioner

Puttaswamy, J.—Citizen Watch Co. Ltd., Japan (hereinafter referred to as ''Citizen''), a company incorporated in the highly industrialised Japan under the laws of that country, with its registered office situated on 20th Floor, Saijuku Mitsui Building, 1-1-2 Chome Nishi Shinjuku, Shinjukuku, Tokyo, a world leader in the manufacture of wrist watches, is the common petitioner in these cases. Before India attained independence or there after wrist watches manufacturing industry in the country was not well developed. With the avowed object of establishing wrist watches industry on a firm footing in the public sector, to serve the ever growing demands for wrist watches in the country, the Government of India (''Government'') in the later part of 1959, through its accredited representatives negotiated with Citizen to provide the technical know-how for establishing a modern wrist watch manufacturing industry in the country. After protracted and delicate negotiations, a technical collaboration agreement was entered into between the Government and Citizen on 25-3-1960 (Annexure A) under which the latter agreed to supply the technical know-how to the former for the establishment of a modern watch factory in India on the terms and conditions stipulated in that agreement. In terms of that agreement, the Government by its Letter No. L.E. Ind. 11(23) /59-ENG.-PR, dated 3/4-2-1961 (Annexure B) addressed to the petitioner, transferred their rights, obligations and responsibilities to one of its wholly owned companies called ''Hindustan Machine Tools Ltd., Bangalore'' (''HMT''). With the technical know how provided by Citizen, a modern wrist watch manufacturing factory as a unit of HMT has been established and is in full operation from 1-4-1963.

Not unnaturally, the said agreement provided for payment of various amounts to Citizen for the services or the technical know-how provided by it to the Government/HMT. The clauses that regulate payments under the heading ''Remuneration'' that alone are material for the purpose of these cases read thus:

Government shall pay to Citizen a total sum not exceeding ;� 24,000 (Twenty-four thousand pounds sterling) for the supply of drawings and other information referred to in articles 7, 11, 16, 12 and 24. Actual payments shall be made within 60 days from the date of receipt of relative drawings and other information and supporting bills.

In consideration of the technical and other assistance rendered by Citizen, Government shall pay to Citizen a technical assistance fee of a total sum not exceeding � 1,06,330 (one hundred and six thousand and three hundred and thirty pounds sterling). The payment shall be made in eight yearly instalments, commencing from the end of the first year following the commencement of operation. The amount of the instalment relating to each of the year following the commencement of operation shall be as specified below:

Provided that, if during any year, the production of wrist watches falls below that specified in the programmes of production in Annexure I, the instalment relating to that year shall be reduced proportionately.

Year following the commencement of operation

Amount of instalment relating to the year (pounds sterling)

First

2,500

Second

7,500

Third

12,000

Fourth

12,000

Fifth

12,000

Sixth

20,000

Seventh

20,000

Eighth

20,330

1,06,330

In case total payment does not reach � 1,06,330, (one hundred and six thousand and three hundred and thirty pounds sterling) at the end of the period of currency of this agreement, the balance shall be paid within sixty days thereafter. The above technical assistance fee shall be free from Indian taxes.

Government shall pay to Citizen a royalty at the rate of two per cent of the amount, calculated in accordance with the provisions of article 31, relating to the preceding year. The royalty shall be subject to Indian taxes.

For the purpose of calculating the royalty due to Citizen, the standard price of a wrist watch shall be fixed at � 2-5-0 (two pounds sterling and five shillings). The amount on which royalty shall be due is the value of wrist watches produced in the factory during each of the years following the commencement of operation calculated at the standard price, after deducting therefrom the C.I.F. cost of wrist watch parts imported for the purpose of assembly and production of wrist watches. The date of commencement of operation shall be the first day of the calendar month following the month during which the first batch of wrist watches is despatched from the factory for the purpose of sale.

The amounts of instalment of technical assistance fee payable, and the royalty due to Citizen shall be paid within 60 days after the expiry of the period to which they relate. Interest shall be payable at six per cent per annum on overdue amounts.

Government shall furnish to Citizen, periodically and whenever so required all information necessary for the calculation of the instalment of technical assistance fee payable and the royalty due to Citizen.

In terms of these clauses the Citizen has received various payments from HMT from time to time.

For the assessment years 1964-65, 1965-66, 1966-67, 1967-68, 1968-69, 1969-70 and 1970-71 relevant to the accounting periods ending on 31-3-1964, 31-3-1965, 31-3-1966, 31-3-1967, 31-3-1968, 31-3-1969 and 31-3-1970, respectively, the petitioner filed its returns under the income tax Act. 1961 (''the Act'') before the ITO disclosing the receipts from HMT under three heads called ''documentation fee'', ''technical assistance fee'' and ''royalty''. On the amounts received as royalty, while claiming certain deductions towards expenses, the petitioner did not dispute its liability to pay the income tax chargeable under the Act. But on the amounts received as documentation fee and technical assistance fee, the petitioner claimed total exemption from payment of income tax on the basis of clause 29 of the agreement. By different but substantially similar orders made on different dates for different assessment years (Annexures C1 to C7), the ITO accepted the case of the petitioner on receipts from documentation fee on the ground that the same had been received outside the taxable territory and rejected its claim on receipts from technical assistance fee, allowing a deduction to the extent of one-fourth, on the ground that the same had been received outside the taxable territory and completed the assessments for the aforesaid years on that basis.

Against the aforesaid orders of the ITO, the petitioner filed appeals before the AAC who by different but substantially similar orders made on different dates (Annexures E, F and G) allowed the said appeals and remitted the cases to the ITO for fresh determination. In those appeals, the petitioner had filed an affidavit sworn to by one Shri I.K. Amitha, who was then working as the Joint General Manager of HMT watch factory unit, Bangalore.

On remand, the cases were dealt by the IAC evidently by virtue of the power conferred on him by the Commissioner, u/s 125 of the Act and his jurisdiction for having dealt with the cases is not in dispute. But, still in the course of my order hereafter, I will refer to him also as the ITO. On an examination of the contention urged before him, the ITO by separate but similar orders made on 30-3-1981 (Annexures H1 to H7) held that there was no distinction and difference between the documentation fee, technical assistance fee and royalty and all receipts were royalty and, therefore, chargeable to income tax under the Act, On that basis, the ITO completed the assessment and issued consequent demand notices on that day (Annexures J1 to J7) demanding a total sum of Rs. 35,18,683 from the petitioner as balance of tax and interest for the aforesaid assessment years.

On 25-4-1981, the auditors of the petitioner, viz., Brammayya & Co., Chartered Accountants, Bangalore, who were representing it before the income tax authorities, in their anxiety to over simplify the matter, which however has only complicated the matter, wrote to the CBDT, New Delhi (Annexure L2) requesting it to intervene and direct the income tax authorities to exempt the receipts from documentation fee and technical assistance fee from income tax. But, on that letter, the Board by its Letter No. F. 484/4/80-FTD, dated 26-5-1981 (Annexure M) rejected the same and held that those receipts were chargeable to income tax.

On 7-7-1981, the petitioner presented these writ petitions under article 226 of the Constitution challenging the assessment orders of the ITO insofar as they determined its liability on the documentation fee and technical assistance fee and the order of the Board with an interesting and novel prayer to file appeals against the disallowance of expense claimed on royalties. On 9-7-1981, Chandrakantaraj Urs, J. issued rule nisi and stayed the recovery of taxes on the petitioner or its (sic) collaborator furnished guarantee to the satisfaction of the ITO.

On 15-7-1981, the petitioner filed 7 appeals before the Commissioner (Appeals) against the assessment orders of the ITO dated 30-3-1981 (Annexures H1 to H7) insofar as they related to deductions on receipts from royalties. On 16-2-1982, the Commissioner has disposed of them granting substantial and considerable relief to the petitioner (Annexure R1).

Between the Governments of India and Japan, an agreement for ''Avoidance of Double Taxation of Income'' between the two countries has been entered into on 5-1-1960 and on its ratification and exchange of instruments there to, that agreement has been published by the Government in its Notification No. GSR 692, dated 13-6-1960. In the course of this order, the said agreement will hereafter be referred to as ''DTA''.

Among others, the petitioner has urged that the order made by the Board and the ITO, concluding that the documentation and technical assistance fees were chargeable to income tax, ignored the affidavit of Amitha, the agreement dated 25-3-1960 entered into between the Government and Citizen and the DTA were manifestly illegal.

In their common return, the respondents while justifying the impugned orders have urged that these petitions challenging only a part of the orders of the ITO, that had merged in the appellate order of the Commissioner (Annexure R1) that is not challenged, are not maintain able. Secondly, the respondents have urged that even otherwise these are fit cases in which this Court should decline to exercise its extra ordinary jurisdiction, as the petitioner had deliberately failed to avail the legal remedies of appeals available under the Act on question of facts and law and a reference thereto on questions of law, either to the Supreme Court or this Court.

Before examining the contentions urged for the petitioner on merits, it is necessary to examine some of the preliminary objections raised by Shri K. Srinivasan, the learned senior standing counsel appearing for the revenue, as some of them, if accepted, go to the very root of the matter and make it unnecessary to examine the merits.

Shri Srinivasan has strenuously contended that the impugned orders made by the ITO had merged in the order of the Commissioner that were not challenged and, therefore, these writ petitions were not maintainable and were liable to be dismissed in limine. In support of his contention, Shri Srinivasan has strongly relied on the ruling of the Supreme Court in Collector of Customs, Calcutta Vs. East India Commercial Co. Ltd.,

Shri T. Subbarao, the learned counsel for the petitioner, has urged that that part of the orders of the ITO challenged in these writ petitions, had not been challenged in the appeals before the Commissioner and the orders of the ITO to the extent they are challenged in these writ petitions, had not merged in the order of the Commissioner. In support of his contention, Shri Subbarao has strongly relied on the ruling of the Supreme Court in Commissioner of Income Tax, Bombay Vs. Amritlal Bhogilal and Co.,

As seen earlier, the petitioner challenged, only that part of the orders of the ITO that: related to the disallowance of expenditure on royalty and not the other portions of those orders before the Commissioner. In his order (Annexure R1), the Commissioner has very rightly dealt with that part of the orders of the ITO, that were challenged before him and not the other parts of the orders that are challenged in these writ petitions.

An order of the original authority, when challenged in an appeal or revision and the appellate or the revisional authority disposes of that appeal or revision, the original order is merged in the appellate or the revisional order and the person that seeks to a void the original order, must also challenge the appellate or the revisional order is too elementary, admits, of no doubt and firmly concluded by the ruling of the Supreme Court in East India Commercial Co. Ltd.''s case (supra). But, the question is whether that principle applies to the present peculiar and an interesting situation.

What was challenged in appeals and dealt by the appellate authority, was only a specific part of the order of the ITO. When that is so, there would be a merger only to the extent that was challenged and decided by the appellate authority and not the other portions of the orders that are challenged before this Court. The incongruity in the proceedings, assuming there is any such incongruity, cannot and does not result in the merger of the orders of the ITO that are expressly challenged in these writ petitions and were not challenged in appeals before the Commissioner. On any legal principle, it is difficult to hold that the orders made by the ITO to the extent they are challenged in these petitions and were not challenged before the Commissioner had merged in the order of the Commissioner.

In East India Commercial Co. Ltd.''s case (supra), the precise question in the matter that has arisen, did not arise for consideration and, therefore, the ratio in that case does not bear on the point.

In Amritlal Bhogilal & Co.''s case (supra) one of the questions that arose for consideration before the Supreme Court was whether an order of registration of a firm made under the Indian income tax Act, 1922 (''the 1922 Act'') that was not appealable, could be challenged by the revenue in an appeal filed by the assessee against the assessment order before the appellate authority. On that question, the Supreme Court speaking through Gajendragadkar, J. (as he then was) expressed thus:

...The powers of the Appellate Assistant Commissioner, however wide, have, we think, to be exercised in respect of the matters which are specifically made appealable u/s 30(1) of the Act. If any order has been deliberately left out from the jurisdiction of the Appellate Assistant Commissioner it would not be open to the appellate authority to entertain a plea about the correctness, propriety or validity of such an order. Indeed, if the respondent''s contention is accepted it would virtually give the department a right of appeal against the order in question and there can be no doubt that the scheme of the Act is not to give the department a right of appeal to the Appellate Assistant Commissioner against any orders passed by the ITO...." (p. 138)

According to this enunciation, there will be no merger of a portion of a composite order that is neither challenged nor can be challenged. This enunciation made by the Supreme Court in examining a case arising under the 1922 Act is applicable to decide the question whether there is a merger or not of a case arising under the Act. On this principle that is more apposite, the contention urged for the revenue has no merit.

Shri Srinivasan has next contended that the petitioner, who voluntarily sought the intervention of the Board, cannot challenge its order and the same cannot be annulled at its instance.

The fact that the petitioner voluntarily and inadvisably sought the intervention of the Board, does not take away its right to challenge the prejudicial order that is made by the Board against it. So long as there is a prejudicial order made by the Board, it is open to the petitioner to challenge the same, notwithstanding, the fact that the same was made at its instance. For these reasons, I see no merit in this contention of Shri Srinivasan and I reject the same.

At this very stage, it is also proper to examine the validity of the order made by the Board.

The Board is the highest administrative authority under the Act (vide section 116 of the Act). Section 119 of the Act empowers the Board to issue orders, instructions and directions to the income tax authorities for the administration of the Act. A circular or an order made by the Board is binding on the subordinate authorities. But that very section directs the Board not to interfere with the assessment for a particular year or years and the judicial discretion of the appellate authorities under the Act. Without any doubt the order made by the Board interferes with the assessments made or to be made by the original, appellate and revisional authorities under the Act, which are quasi-judicial in nature. On the ground as also on the ground that any order to be made would embarrass the authorities under the Act, the Board should have refrained to entertain the representation and make an adverse order. Even otherwise, the order made by the Board without affording an opportunity of hearing and assigning reasons is violative of the principles of natural justice. For all these reasons, the order of the Board is liable to be quashed.

Shri Srinivasan has lastly contended that the order made by the ITO on documentation and technical assistance fee was appealable both on questions of fact and law and that on the failure of the petitioner to avail that remedy, but availing the same on a portion of those orders, these are fit cases in which this Court should decline to exercise its extraordinary jurisdiction in favour of the petitioner.

Earlier, I have noticed the circumstances in which the Board made its order and found that the same was illegal and liable to be quashed.

The Board concurred with the orders of the ITO on documentation fee and technical assistance fee. Notwithstanding the circum stances in which the Board made its order, the petitioner could not have challenged the same, at any rate, in first appeals before the AAC or the Commissioner, on whom it was binding. Any challenge by the petitioner before the Commissioner, against the assessment orders of the ITO, was deemed to fail though in a way it contributed to that situation. So long as the petitioner could not also file first appeals, it could not also file second appeals before the Tribunal u/s 265 of the Act and seek a reference to the Hon''ble Supreme Court or this Court. On these facts, it is not possible to hold that the petitioner had alternative legal remedies under that Act and had not exhausted them before approaching this Court.

Assuming that the effective legal remedies of appeals and a reference thereto under the Act were available to the petitioner and they had not been availed before approaching this Court, that does not touch on the jurisdiction of this Court to entertain these writ petitions and interfere with the impugned orders, if there are justifiable grounds. The existence of an alternative remedy is one of the factors to be taken into consideration in exercising the extraordinary jurisdiction conferred on this Court and that aspect should more appropriately be examined before issuing rule nisi. After issue of rule nisi, it would not be proper for a High Court to throw out the writ petitions on such a ground, more so when the period for filing the appeals under the Act had expired. For these reasons also, I reject this objection of Shri Srinivasan.

As I have rejected the preliminary objections urged by Shri Srinivasan, it is now necessary to examine the merits.

Shri Subbarao has contended that the previous orders made by the ITO granting total relief to the assessee on receipts from documentation fee, had not been challenged by it and had become final, was not open for re-examination and determination to the contrary.

Shri Srinivasan has urged that on the very terms of the remand orders, it was open to the ITO to re-examine and redetermine the receipts from documentation fee as royalty.

On the receipts from documentation fee for the assessment year 1964-65, the ITO accepting the case of the assessee expressed thus:

Article 28 of the agreement prescribed that M/s Hindustan Machine Tools shall pay to M/s Citizen Watch Co., a total sum not exceeding f 24,000 for the supply of drawing and other information referred to in articles 7, 11, 16, 21 and 24. The Annexure to the order indicates the number of the articles, the subject-matter of the article and the services were rendered (Annexure I). As the services referred to in those clauses are done from Japan, the payments towards the sum of � 24,000 fixed under the agreement will be treated as not accruing in the taxable territories.

For the other assessment years also, the ITO gave relief to the assessee on this view only. From this it is clear that the petitioner had succeeded in its entirety on receipts from documentation fee and, therefore, that part of the order being challenged before the AAC did not at all arise and as a matter of fact also, the petitioner did not challenge them before the AAC.

Shri Srinivasan is right in maintaining that the AAC had set aside the assessment orders of the ITO and remitted the cases to him for fresh disposal. But the question is whether the AAC had set aside that part of the orders of the ITO that was favourable to the assessee and had, therefore, not been challenged by it at all before him.

The orders of the ITO insofar as they dealt with receipts from documentation fee were separate, distinct and severable. Hence, the question of petitioner challenging that part of the orders of the ITO or the AAC examining, much less directing, a fresh determination did not arise and was even unthinkable. From this, it follows that the orders of the AAC should only be read as not dealing and deciding the receipts from documentation fee that was not challenged before him but should be so construed as setting aside and remitting the cases only to the extent they had been challenged before him. The orders of remand made by the AAC cannot be read in any other manner. In this view, the earlier orders of the ITO on receipts from documentation fee had become final and was not open for re-examination and re-determination by the ITO. On this short ground, this contention of the petitioner has to be upheld.

Let me assume that the remand orders made by the AAC permitted the ITO to re-examine the receipts from documentation fee and examine the case on that basis also.

In his earlier orders, the ITO had held that the receipt from documentation fee by the asses see was outside the taxable territory and was not chargeable to tax under the Act. The assertion of the petitioner to that effect is not denied by the respondents and the same has, therefore, necessarily to be accepted as a fact. From this, it follows that the receipt from documentation fee was outside the taxable territory of India and was not chargeable to tax under the Act.

Shri I.K. Amitha, an officer of the HMT watch manufacturing unit, intimately connected with it ever since its establishment and who currently holds the position of a managing director, has stated on oath that the petitioner mailed the documents referred to in clause 28 of the agreement, dated 25-3-1960, from Japan inferentially suggesting that payments for the same were made outside the taxable territory of India.

Shri Amitha is a responsible officer of HMT, a wholly owned Government company. Shri Amitha has no axe to grind and cannot be called a partisan witness. Unfortunately, the ITO has rejected, the affidavit of Amitha on the ground that he was not able to answer some intricate questions on the terms of the agreement put to him and his affidavit was a tailored one. Assuming that Amitha was not able to answer a question, it does not necessarily follow that he had not stated the truth and his affidavit was a tailored one. In my view, the entire approach made by the ITO and the reasons to reject the affidavit of Amitha is illegal and unwarranted. On the other hand, the ITO should have accepted the affidavit of Amitha and acted on it.

On the facts stated by Amitha in his affidavit, it is clear that the earlier conclusion of the ITO that the receipts from documentation fee was outside India was sound and legal and there was hardly any ground to take a different view on remand. On this ground also, the receipt from documentation fee was not chargeable to tax under the Act.

In his order dated 30-3-1981 for the assessment year 1964-65, adopted for the other year also, the ITO has held that the receipts from documentation fee was royalty and was charge able to income tax under the Act.

Clause 28 of the agreement between Government and the petitioner provides for payment of sum not exceeding � 24,000 on receipt of drawings and other information referred on in articles 7, 11, 16, 21 and 24 of that agreement and payment of royalty at 2 per cent on the amounts to be calculated in accordance with clause 31 of the agreement. On the very terms of this agreement, the fee payable for supply of documents and information under clause 28 of the agreement and the royalty pay able under clauses 30 and 31 cannot be treated as one and the same.

The term ''royalty'' which is not a term of art, is not denned in the Act or the General Clauses Act. Hence, the meaning of the term ''royalty'' occurring in the agreement has to be ascertained from the context in which it occurs.

Oxford Advanced Learner''s Dictionary of current English by A.S. Horby, Third edition, defines the term ''royalty'' as thereunder:

Payment of money by a mining or oil company to the owner of the land; oil royalties; sum (to be) paid to the owner of a copyright or patent; at 10 per cent of the price of the book on all copies sold.

Stroud''s Judicial Dictionary, Third edition, defines the said terms as hereunder:

In its secondary senses the word ''royalties'' signifies, in mining leases, that part of the red dendum which is variable, and depends upon the quantity of minerals gotten (A.G. Ontario v. Mercer, supra; see hereon Greville-Nugent v. Mackenzie (1900) AC 83, cited Rent; Listowel v. Gibbings, supra) ; or the agreed payment to a patentee on every article made according to the patent, on which see Re. Graydon [1896] 1 QB 417, cited Personal Labour.

From the above meaning, the term ''royalty'' referred to in the agreement is referable to payments to be made for the use of patents, etc., by the Government/HMT and does not include the fee payable for supply of documents and information.

The ITO has relied on the definition of the term ''royalty'' occurring in Explanation 2 to section 9(1)(vi)(c) of the Act, without noticing that the definition was not a general definition and had no application interpreting that term whenever it occurs. Even otherwise, the opening part of Explanation 2 itself states that that definition would apply for purposes of that clause only and not to the other portions of the Act. Last but not least, section 9(1)(vi)(c) applies to agreement made on and from 1-4-1976 and not before that date. From this it follows that the reliance placed by the ITO on the definition of the term ''royalty'' occurring in Explanation 2 to section 9(1)(vi)(c) was illegal and unwarranted.

In my view of the entire discussion of the ITO based on the technical know-how literature of the United National Industrial Development Organisation Filed guidelines for Evaluation of Transfer of Technology Agreements (United Nations, New York, 1979) was wholly irrelevant to decide the nature of receipts. The nature of the receipts had to be determined on the very terms of the agreement of the intention of the parties and the provisions of the Act and not with reference to the literature referred to and relied on by him.

Shri Subbarao has next contended that the receipts from technical assistance fee by the assessee was not taxable under the terms of the agreement dated 25-3-1960 (Annexure A) and the DTA. In support of his contention, Shri Subbarao has strongly relied on the ruling of the Supreme Court in Carborandum Co. Vs. Commissioner of Income Tax, Madras, and of this Court in Vdo Tachometer Werke, West Germany Vs. Commissioner of Income Tax, Kanataka-I,

Shri Srinivasan has sought to support the reasoning and conclusion of the ITO.

Briefly stated that the ITO has held that the receipts from technical -assistance fee by the assessee was royalty, and that the same would not attract article X(k) of the DTA but would attract article X(e) of the DTA and was, therefore, chargeable to income tax under the Act.

On the very terms of the agreement dated 25-3-1960 that treats the technical assistance fee as a separate fee from royalty and for the very reasons stated in dealing with the receipts from documentation fee, it would be wrong to hold that the receipts from technical assistance fee was royalty.

In his orders the ITO has held that the receipts from technical assistance fee had been received by the assessee outside India. On this very finding which is also the case of the petitioner, the receipts were outside the taxable territory of India and was not chargeable to income tax under the Act. On this short ground also, the petitioner is entitled to succeed on the receipts from technical assistance fee.

In one cryptic sentence and without any discussion and reasons, the ITO has held that the receipt from technical assistance fee was governed by the principles enunciated by the Supreme Court in Performing Right Society Ltd. and Another Vs. Commissioner of Income Tax and Others, But the principles enunciated in that case that turned on the question as to whether the receipts had accrued or deemed to have accrued in India, had hardly any application to the question that arises for determination in these cases. In VDO Taco meter''s cast (supra) a Division Bench of this Court has also distinguished that case on this very ground (vide page 816).

While examining the case of the petitioner on documentation fee, I have found there was no justification for the ITO to reject the affidavit of Amitha. For that very reason, I hold that there was no justification for the ITO to reject the statements made by Amitha on oath on receipts from technical assistance fee and also the same requires to be accepted and acted upon.

The Board declared the petitioner as a company under the Act. The petitioner has carried all its business operations from outside India. On these facts and on the application of the principles enunciated by the Supreme Court in Carborundum Co.''s case (supra) and of this Court in VDO Tachometer''s case (supra), the receipts from documentation and technical assistance fees were not chargeable to income- tax under the Act.

Without any discussion, the ITO has held that the receipts from documentation fee and technical assistance fee do not attract article X(k) of the DTA but would attract article X(e). Even the Board has held that those receipts would attract article X(e) and not article X(k) of the DTA and was, therefore, chargeable to income tax under the Act.

As seen earlier, the DTA duly ratified by Governments of India and Japan providing for avoidance of double taxation come into force on the day mentioned in article 16 of that agreement. The agreement was entered into by the Government of India u/s 49A of the 1922 Act corresponding to section 90 of the 1961 Act. The DTA continues to be in force as if made under the 1961 Act [ vide section 297(2) of the Act]. Hence, as found by the Board and the ITO, the DTA applies to the receipts from the petitioner.

Article X(k) of the DTA that is relevant reads thus:

(k) Fees for technical services payable to an enterprise shall be treated as income from sources within the Contracting State in which are rendered the services for which such fees are paid.

Earlier I have held that the technical assistance fee was not ''royalty''. The technical assistance fee was separate fee and was not royalty or a similar payments dealt in article X(e) of the DTA. From this it followed that the payments made by the HMT for technical assistance fee attracts article X(k) of the DTA and not article X(e) and was, therefore, exempt from payment of income tax under the Act.

The liabilities of the petitioner for taxes should be ascertained with a reference to the provisions of the Act only and that no question of promissory estoppel arises, can hardly be doubted. But, still in construing the nature of payments and the liabilities to taxes, we must bear in mind that one of the contracting parties was the Government of India itself that administers the Act and was well aware of its legal rights and obligations and was not an ordinary contracting party anxious to avoid the taxes due to the State.

On an examination of all the facts and the circumstances and the law bearing the point, it is clear that the case of the petitioner that the receipts from documentation and technical assistance fees were not chargeable to income tax under the Act, was well founded and should have been allowed by the ITO. But, the ITO in rejecting the same has committed manifest illegalities apparent on the face of the record and the same, therefore, calls for interference of this Court. From this, as also to give effect to the order of the Commissioner, it follows that the impugned demand notices also require to be quashed.

In the light of my above discussion, I make the following orders:

I quash the letter/order No. F. 484/4/80 FTD, dated 26-5-1981 (Annexure M) of the Central Board of Direct Taxes, New Delhi-Respondent No. 4.

I quash the impugned order dated 30-3-1981 (Annexures H1 to H7) of the IAC, Respondent No. 1 insofar as they relate to assessment of income tax on documentation fee and technical assistance fee and the demand notice issued by him thereto (Annexures J1 to J7) in their entirety.

I direct the IAC, respondent No. 1 to make a computation or recomputation of the income and the income tax payable thereon by the petitioner for the assessment years 1964-65 to 1970-71 in conformity with this order and the order of the Commissioner (Appeals) in IT Appeal No. 77 to 83/00/CII/(A-I) of 1981-82, dated 16-2-1982 (Annexure R1) and issue fresh demand notices for the aforesaid assessment years in accordance with law.

Rule issued is made absolute. But in the circumstances of the case, I direct the parties to bear their own costs.