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Decision of the Madras High Court in the case of Carborandum Co. - Income Tax - 1137/CBDTExtract INSTRUCTION NO. 1137/CBDT Dated : January 13, 1978 Section(s) Referred: 42(1) ,42(3) Statute: Income - Tax Act, 1961 Please refer to the instructions contained in Board's letter No. 495/2/74-FTD, dated 27-9-1975 (Instruction No. *885) and F.No. 495/1/76-FTD, dated 11-2-1976 (Instruction No. **920) issued in the context of the decision of the Madras High Court in the case of Carborandum Co. (92 ITR 411). 2. On appeal filed by the assessee company, the Supreme Court in its judgment dated 11-4-1977 (108 ITR 335) has reversed the decision of the Madras High Court and has held that :- "The High Court was wrong in its view that the activities of the foreign personnel lend or deputed by the American Company amounted to a business activity carried on by the company in the taxable territory. The finding of the Tribunal in that regard was specific and clear and was unassailable in the reference in question. The American company had made the services of the foreign personnel available to the Indian company outside the taxable territory. The latter took them as its employees, paid their salary and they worked under the direct control of the Indian company. The services rendered by the American company in that connection were wholly and solely rendered in a foreign territory. Even assuming, however, that there was any business connection between the earning of the income in the shape of the technical services fees by the American company and the affairs of the Indian company, yet no part of the activity or operation could be said to have been carried on by the American company in India and in the absence of such sustainable finding by the High Court, the provisions of section 42 either of sub-section (1) of sub-section (3) were not attracted at all. 3. The Hon'ble Court has further held that in order to rope in the income of a non-resident under the deeming provision it must be shown by the Department that some of the operations were carried out in India, in respect of which, the income is sought to be assessed. 4.1 In view of the above judgement of the Supreme Court the instructions contained in para 5(i) of the Board's letter No.495/2/74-FTD, dated 27.9.75 (Instruction No.885) should be deemed to have been withdrawn. 4.2. It has already been stated in para 5 (ii) of the aforesaid Instruction that the principle laid down by the Madras High Court decision that if a business connection exists and the assessee has rendered at least some services in India which amount to a business activity, the entire receipts must be taken to have accruced or arisen in India as a result of the business connection, should not be followed. It was also clarified in para 6 that the existing departmental practice of taxing the non-resident only on that portion of the profit which can reasonably be attributed to the operations carried out in India, should continue to be followed until revised instruction in this regard are issued by the Board. 5. The above instruction may please be brought to the notice of all officers under your charge. where assessments have been reopened on the basis of the Madras High Court's judgement, and appeals/reference/writ are pending against such reopening, these should be conceded. Appeals and reference filed by the Department may be withdrawn wherever necessary.
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