Judgment

UNTWALIA, J.:- This is an appeal by certificate from the decision of the Madras High Court in a Reference made by the Income-tax Appellate Tribunal under S. 66 (1) of the Income-tax Act, 1922- hereinafter referred to as the Act.

2. M/s. Carborandum Co. of the United States of America - hereinafter called the American Company or the Assessee Company, is the appellant. The Central Board of Revenue has declared it a Company under S. 2 (5A) of the Act. It has specialized in the manufacture of bonded abrasive and coated abrasive products. For the improvement and advancement in the line of its manufacture, it has a Research Wing also. The results of the research are incorporated in pamphlets prepared from time to time.

3. The Assessee Company entered into an agreement dated June 22, 1955 with M/s. Carborandum Universal Ltd. - hereinafter called the Indian company, having its registered office at Madras. As per the terms of the agreement the American Company was to render and did render to the Indian Company certain technical and know-how services of the following nature:-

(i) furnishing of technical information and know-how with respect to the manufacture of bonded abrasive and coated abrasive products;

(ii) providing technical management including factory design and lay out, plant and equipment production, purchase of materials, manufacturing specifications and quality of product;

(iii) furnishing comprehensive technical information of all developments in the manufacture of the special products:

(iv) providing the Indian company with a resident factory manager for starting the plant and superintending its operations during its initial production stages, as also other technical personnel necessary for the operation of the plant;

(v) training Indian personnel to replace the foreign technical personnel as quickly as possible.

In lieu of all the services aforesaid, as per the agreement, the American company was to receive from the Indian company an annual service fee equal to 3 per centum on the net sale proceeds of the products manufactured by the latter each year.

4. During the year of account relevant to the assessment year 1957-58 the assessee company received a sum of Rs. 95,762/- from the Indian company as its service fee. A good slab of it was deducted at source by the Indian company on account of income-tax and super-tax payable on the said sum. The American company filed a Return of income for the year in question with an application for refund of the entire tax deducted at source. The Income-tax Officer took the view in his assessment order that 5% of the technical fee paid to the American company was earned by it in India and only that small amount was assessable to income-tax. Consequently, he directed the refund of a major portion of the tax deducted at source to the assessee company. The Commissioner of the Income-tax in exercise of his power under S. 33B of the Act revised the order of the Income-tax Officer and took the view that at least 75% of the technical fee earned by the assessee company during the year of account had accrued or arisen in India. In the main, the basis of his order was that even though the technical information was supplied by the assessee company from outside India, the information received by the Indian company was put to use only in the taxable territory and the technical fee paid by it was mainly on account of such use. The Commissioner was also of the view that the technical personnel furnished by the assessee company to the Indian company although worked under the control of and was paid for by the latter, the situs of the services so rendered was in India. Treating the technical fee in the nature of royalty paid, it directed the Income-tax Officer to revise the assessment on the basis that 75% of it should be taken as income accruing or arising in India to the assessee company.

5. The American company went up in appeal to the Appellate Tribunal from the revisional order of the Commissioner. T