Payments made under a collaboration agreement for the transfer of technical know-how and the grant of a non-exclusive licence to use the know-how in the design of contract articles for manufacture in India do not constitute income accruing or arising in India within the meaning of Sec. 5(2)(b) of the Income-tax Act, 1961.

Aftab Alam, J.

1. In this set of seven connected cases relating to the assessment years 1975-76 to 1980-81, a common question of law has been referred to this court by the Income-tax Appellate Tribunal under Sec. 256(2) of the Income-tax Act, 1961, on a direction given by the Supreme Court at the instance of the assessee. The question of law on which decision is to be given by this court was framed by the Supreme Court in the following terms :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the income mentioned in article III(a) of the collaboration agreement accrued or arose in India to Wean United within the meaning of Sec. 5(2)fb) of the Income-tax Act, 1961 ?"

Hindustan Steel Limited, a Government of India undertaking (which was in existence at that time), entered into an agreement with United Engineering and Foundry Company, U.S.A., for acquisition of technical know-how for the design and manufacturing of rolling mills and auxiliary equipment. The "collaboration agreement" being the subject-matter of this reference was executed in India on February 11, 1969, on behalf of Hindustan Steel Limited. It came into effect on April 1, 1969, and continued in operation for a period of ten years from that date. While the agreement was subsisting Hindustan Steel Limited was succeeded by Metallurgical and Engineering Consultants Limited ("MECON" for short), the assessee presently before this court. The other party to the agreement, namely, United Engineering and Foundry Company, was similarly taken over and succeeded by Wean United Incorporated. Payments continued to be made by the assessee (Mecon) to Wean United under different provisions of the agreement. The parties to the reference are in dispute over the taxability of the annual payments made to the U. S. company under article III(a) of the agreement. Presently, it would be required to examine the agreement in greater detail but suffice it to note here that the agreement provided in detail (vide article II) the manner in which technical know-how was to be furnished by the U. S. company to the Indian company. It similarly provided (vide article III) the different kinds of payments and the manner in which those payments were to be made by the Indian company to the U. S. company. Article III(a) provided for Hindustan Steel Limited for making payment of one hundred thousand U. S. dollar ($1,00,000) to the U. S. company on the execution of the agreement and to make payment of an equal amount on each anniversary date of the exe-cution till the ninth anniversary of the agreement.

2. The payment of the first instalment of $1,00,000 was made by Hindustan Steel Limited, with due sanction of the Reserve Bank of India on March 31, 1969. At that time, no question was raised regarding the taxability of the amount paid to the U.S. company. However, at the time of the payment of the second instalment in March-April, 1970, the Reserve Bank of India asked for a certificate from the income-tax authorities concerning the taxability of the payment of "compensation" under the agreement before allowing the remittance. According to the case of the assessee, Hindustan Steel Limited made an application under Sec. 195(2} of the Income-tax Act, 1961, before the Income-tax Officer for an order declaring that the payments made by Hindustan Steel Limited under the agreement to the U.S. company were not income chargeable in India under the provisions of the Act. It is further the case of the assessee that as there was some delay in an order being passed by the Income-tax Officer, Hindustan Steel Limited communicated directly to the Chairman, Central Board of Direct Taxes, by letter dated June 15, 1970, seeking his ruling, on the tax liabilities on payments to be made to the U.S. company under articles III(a), (b) and (c) of the agreement under the relevant provisions of the Indian Income-tax Act for the purpose of deduction of tax at source. In reply i