TMI Blog1989 (5) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... order dated December 23, 1986, declined to instruct the Income-tax Officer to issue it. The facts lie in a narrow compass. The petitioner entered into a memorandum of understanding with a Norwegian company at Paris, which was followed up by an agreement dated May 2, 1986, at Hyderabad. In terms of the said agreement, the Norwegian company is to provide technical know-how and technical services including facilities for training of personnel of ECIL in connection with the manufacture of computers in consideration of the Norwegian currency NOK 32 millions which is said to be approximately equal to ₹ 575 lakhs. 85 per cent. of the consideration is to be paid from credit provided by the Norwegian authorities and the balance 15 per cent. to be paid out of free foreign exchange made available by the State Bank of India, London Branch. It is not in dispute that the said agreement has been approved by the Reserve Bank of India as well as the Central Government. The petitioner approached the second respondent, the Income-tax Officer, for grant of a No objection certificate as contemplated by section 195(2) of the Income-tax Act, 1961, to enable it to make the remittance of the ins ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndian Legislature in exercise of its power conferred by the British Parliament under the Government of India Act 1915-1919, later replaced by the Government of India Act, 1935. Section 99(1) of the Government of India Act, 1935, which conferred the legislative power reads as follows : 99. Extent of Federal and Provincial laws.-(1) Subject to the provisions of this Act, the Federal Legislature may make laws for the whole or any part of British India or for any Federal State and a Provincial Legislature may make laws for the Province or for any part thereof. After the advent of Independence and the adoption of the Constitution, we are a sovereign Republic. The Constitution, in Chapter I of Part XI, deals with the legislative relations between the Union and the States. Article 246 provides for the subjects in three Lists regarding which the Union Parliament and the State Legislature can make laws. Article 245 which is relevant reads as follows: 245. (1) Subject to the provisions of this Constitution, Parliament may make laws for the whole or any part of the territory of India, and the Legislature of a State may make laws for the whole or any part of the State. (2) No la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before the 1st day of April, 1976, and approved by the Central Government. Explanation 1.- For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date. Explanation 2. -For the purposes of this clause, 'fees for technical services' means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head 'Salaries'. Then, reference has to be made to section 195 which provides for deduction of tax at source: 195(1) Any person responsible for paying to a non-resident, not being a company, or to a company which is neither an Indian company nor a company which has made the prescribed arrangements for the declaration and payment of divid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat of the Federal Court in A. H. Wadia v. CIT [1949] 17 ITR 63. Reference is also made to the judgment of the Supreme Court reported in Carborandum Co. v. CIT [1977] 108 ITR 335 and the opinion of the learned author and jurist, Sri N. A. Palkhivala, in his commentary in his book the Law and Practice of Income-tax, 7th Edition (Vol. I), at page 209. It is contended that as the petitioner was not obliged to deduct any amount towards advance tax, it is entitled to a certificate as contemplated by section 195(2) of the Act. Standing counsel for the Revenue has, on the other hand, supported the action of the Commissioner and contended that the petitioner is obliged to make a deduction of advance tax from any payments made to the Norwegian company towards fees for technical services as it is obliged to do so as contemplated by section 195(1) of the Income-tax Act. The undisputed facts are : The agreement was entered into between the petitioner and the foreign company at Hyderabad. Clauses 1.6, 1.7, 1.8 define technical know-how, technical services and training. Clause 1.11 defines manufacturing territory as India and clause 1.12 states territory as India and some other countries. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent Trading Taxation Act, 1926, fell for interpretation. The controversy was about the liability to tax of certain income accruing in British India of the Ruler of the native State of Gwalior (referred to as the Durbar) represented by his agent in Bombay. The Ruler of a native State was not a resident of British India. The competence of the Indian Legislature to enact the law for taxing persons who are not residing within British India without any business connection or territorial nexus was discussed while considering the provisions of the Indian Income-tax Act, 1922, and the Government Trading Taxation Act. But, no provision of the Act was held to be ultra vires. Certain observations in the opinions even go against some of the contentions of the petitioner now raised. In view of article 245(2) of the Constitution and the provisions of the Indian Income-tax Act with which we are now concerned, the observations in this case will not help the petitioner. In the Supreme Court case reported in Carborandum Co. v. CIT [1977] 108 ITR 335, the applicability and interpretation of the provisions of section 4(1)(c) read with section 42 of the Indian Income-tax Act, 1922, came up for consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n. It is well-known that our country had entered into agreements with several other nations providing for double taxation relief and if there is a real apprehension of deterrence to foreign collaboration, it will be expected that the Government will take suitable action. We are not able to agree with the contention of the petitioner that the impugned provisions are beyond the legislative competence of Parliament. One more aspect which has to be kept in view is that the writ petition has been filed at the stage of deduction of advance tax by the petitioner-company. Point No. 2 : As already pointed out, the Supreme Court decision in Carborandum Co.'s case [1977] 108 ITR 335 considered the provisions of section 4(1)(c) read with section 42 of the Indian Income-tax Act, 1922, and, on the language of the provisions, held that a business connection in India is necessary for taxing any income of a non-resident deemed to arise in India. The Income-tax Act, 1961, was amended by the Finance Act, 1976, by adding certain clauses in section 9(1) including clause (vii) (extracted above) by which the fees for technical services paid by an Indian to a non-resident and used in the Indian fir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The third contention of the petitioner is also rejected. As a result, the writ petition is dismissed. We, however, make no order as to costs. An oral application for leave to appeal to the Supreme Court is made by counsel for the petitioner under section 261 of the Income-tax Act. We do not think that any question of general importance requiring the consideration of the Supreme Court as contemplated by article 133 of the Constitution arises in this case. Leave is refused. The petitioner preferred petitions for special leave to the Supreme Court under article 136 of the Constitution of India to appeal against this judgment as well as the judgment dated July 1, 1987, in W. P. No. 8737 of 1987.]. N. A. Palkhivala, Senior Advocate (Ranganathachari, P. A. S. Rao, Miss Ruby Anand and D. N. Misra, Advocates of J. B. Dadachanji and Co, Advocates, with him), for the appellant. S. C. Manchanda, Senior Advocate (B. B. Ahuja and Miss A. Subhashini, Advocates, with him), for the respondents. JUDGMENT OF THE SUPREME COURT The judgment of the court was delivered by PATHAK C. J. I.- Special leave granted. These appeals by special leave are directed against the dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the case was governed by Carborandum Co. v. CIT [1977] 108 ITR 335 (SC). It was also urged that, after the introduction of the Explanation by the Finance (No. 2) Act of 1977, with effect from April 1, 1977, section 9(1)(vii) creates an invidious discrimination among companies which had entered into a foreign collaboration agreements prior to April 1, 1976, and those who have done so after that date, and that, therefore, article 14 was violated. The High Court repelled all the contentions of the appellant and dismissed the writ petition. A similar writ petition was filed by the appellant against an order of the Commissioner of Income-tax declining to direct the grant of a No objection certificate in relation to disbursement made under a licence agreement with Messrs. Control Data Indo-Asia Company, U. S. A., and the writ petition was dismissed by the High Court for the reasons which had found favour with it in the earlier case. It is contended by learned counsel for the appellant that section 9(1)(vii) of the Income-tax Act is ultra vires inasmuch as it enables the levy of income-tax on the Norwegian company in the one case and the American company in the other in circumstan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n. Therefore, a parliamentary statute having extra-territorial operation cannot be ruled out from contemplation. The operation of the law can extend to persons, things and acts outside the territory of India. The general principle, flowing from the sovereignty of States, is that laws made by one State can have no operation in another State. The apparent opposition between the two positions is reconciled by the statement found in British Columbia Electric Railway Co. Ltd. v. King [1946] AC 527, 542 (PC): A Legislature which passes a law having extra-territorial operation may find that what it has enacted cannot be directly enforced, but the Act is not invalid on that account, and the courts of its country must enforce the law with the machinery available to them. In other words, while the enforcement of the law cannot be contemplated in a foreign State, it can, none the less, be enforced by the courts of the enacting State to the degree that is permissible with the machinery available to them. They will not be regarded by such courts as invalid on the ground of such extra-territoriality. But the question is whether a nexus with something in India is necessary. It seems to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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