1973 (5) TMI 5 - HC - Income Tax

Assessee a foreign company entered into an agreement with an Indian company Whether the technical service fee in excess of 5 per cent. received by the assessee-company from the Indian company during the account year relevant to the assessment year 1957-58 has accrued or arisen in India - the entire receipts by the assessee-company has to be taken to have accrued or arisen in India as a result of its business connection and therefore taxable. The apportionment made by the Commissioner or the one made by the Income-tax Officer cannot therefore be sustained for the assessee cannot be said to have carried on business in India in the context of the definition of business and therefore there is no question of any apportionment. But having regard to the fact that the Commissioner has directed the assessment of only 75 per cent. of the technical fee received by the assessee as income accrued in India and it is only that order which was appealed before the Tribunal the assessment can be made only in relation to the said 75 per cent - question is answered in the affirmative and against the assessee.

Summary

Issues Involved:
1. Whether the technical service fee received by the assessee-company from the Indian company during the relevant assessment year has accrued or arisen in India.
2. The applicability of Section 42(1) of the Indian Income-tax Act, 1922, concerning business connection and income accrual.
3. The nature of the technical service fee-whether it constitutes a royalty or payment for services rendered.
4. The extent to which the technical service fee is attributable to services rendered in India.

Issue-wise Detailed Analysis:

1. Accrual or Arising of Technical Service Fee in India:
The primary issue is whether the technical service fee received by the assessee-company, a foreign entity, from the Indian company has accrued or arisen in India. The assessee argued that the entire fee was earned outside the taxable territories, while the Income-tax Officer initially determined that 5% of the fee was earned in India. The Commissioner later contended that 75% of the fee should be considered as earned in India, leading to a dispute that reached the Appellate Tribunal. The Tribunal found that the services rendered by the assessee were mostly outside India, including the examination of factory design and layout, sending advice by post, and supplying technical bulletins. The Tribunal disagreed with the Commissioner's view that the fee was for the use of information in India and held that the service fee was payable irrespective of the use of the information in India.

2. Applicability of Section 42(1) - Business Connection:
The revenue argued that the agreement between the assessee and the Indian company established a business connection in India, making the technical fee taxable under Section 4(1)(c) read with Section 42 of the Income-tax Act. The Tribunal, however, did not consider the business connection argument, leading to the High Court's examination of whether the technical fee accrued through a business connection in India. The court examined various precedents and the comprehensive nature of the term "business connection," concluding that the relationship and continuous dealings between the assessee and the Indian company constituted a business connection.

3. Nature of Technical Service Fee - Royalty or Service Payment:
The Commissioner initially viewed the technical fee as akin to royalty, which would imply income accruing in India. However, the Tribunal disagreed, stating that the fee was not dependent on the use of information in India and was payable regardless of such use. The High Court did not explicitly address the royalty argument but focused on the broader issue of business connection and service rendering.

4. Attribution of Technical Service Fee to Services Rendered in India:
The High Court analyzed the services rendered by the assessee, including the provision of foreign technical personnel to the Indian company and the training of Indian personnel. The Tribunal had held that these services were not attributable to the assessee, as the foreign personnel were employees of the Indian company. The High Court disagreed, stating that the assessee's obligation to send foreign technicians to India and train Indian personnel constituted services rendered in India. Consequently, the court found that a portion of the technical fee was attributable to these services, leading to the conclusion that the technical fee accrued through the assessee's business connection in India.

Conclusion:
The High Court concluded that the technical service fee received by the assessee had accrued or arisen in India due to the business connection established through the agreement with the Indian company. The court held that the entire technical fee should be considered as income accrued in India, but since the Commissioner had directed the assessment of only 75% of the fee, the assessment would be limited to that extent. The question was answered in the affirmative, against the assessee, with costs awarded to the revenue.