TMI Blog1977 (4) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... al Board of Revenue has declared it a company under section 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. The assessee-company entered into an agreement dated June 22, 1955, with Messrs. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal from the revisional order of the Commissioner. The Tribunal set aside the said order and restored that of the Income-tax Officer, even though it seems to be of the view that even 5% of the technical fee could not be taken as income of the assessee-company taxable under the Act. But, since the assessee-company had not gone in appeal because of the smallness of the amount of tax payable on the basis of 5%, the Tribunal was obliged to maintain the order of the Income-tax Officer. The Tribunal took some new materials into consideration at the appellate stage in order to ascertain the true nature of the service rendered by the American company to the Indian company as per the terms of the agreement and the place of rendering such service. The findings of the Tribunal are: (1) The American company rendered service to the Indian company for the starting of the factory in India in the shape of examination of the factory design and lay-out prepared by the latter and sending its advice by post. These services were not proved to have been rendered in India. (2) The pamphlets and bulletins incorporating the results of research made by the American company were also furnished ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose from such business connection and hence it was assessable to income-tax under section 4(1)(c) read with section 42 of the Act. The objection of the assessee-company to the entertainment of the new point at the reference stage that it did not arise out of the Tribunal's order was overruled by the High Court on the ground that the question referred was in general terms and comprehensive enough to embrace within its ambit the point of applicability of section 42(1) of the Act to the transactions in question. Upholding this stand taken on behalf of the revenue the High Court answered the question referred to it in its favour and against the assessee-company. Hence this appeal. Mr. N. A. Palkhivala, learned counsel for the appellant-company, urged the following four points in support of this appeal : (1) That the High Court could not go into the matter of business connection between the two companies when such a question was never raised or in issue at any earlier stage. (2) That the High Court was wrong in founding the tax-liability of the assessee-company on the basis of the alleged business connection. Its finding or view in that regard is wholly erroneous. (3) Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income can be roped in for the levy of tax under sub-section (1) of section 42, no question of any apportionment arises. If not, sub-section (3) is attracted. It says : In the case of a business of which all the operations are not carried out in the taxable territories, the profits and gains of the business deemed under this section to accrue or arise in the taxable territories shall be only such profits and gains as are reasonably attributable to that part of the operations carried out in the taxable territories. In Commissioner of Income-tax v. Scindia Steam Navigation Co. Ltd. [1961] 42 ITR 589 (SC) it has been pointed out that when a question of law was neither raised before the Tribunal nor considered by it, it will not be a question arising out of its order notwithstanding that it may arise on the findings given by it. In the instant case the question of law based upon the theory of business connection was neither raised before the Tribunal nor considered by it, nor did it arise on the findings of fact recorded by it. The High Court, therefore, was wrong in entertaining this new point at the reference stage on the basis of the allegedly general and compendious nature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons are not carried out in the taxable territories the profits and gains of the business deemed to accrue or arise in the taxable territories shall be only such profits and gains as are reasonably attributable to that part of the operations carried out in the taxable territories. Thus comes in the question of apportionment under sub-section (3) of section 42. In Commissioner of Income-tax v. R. D. Aggarwal and Co. [1965] 56 ITR 20 (SC), Shah J., as he then was, speaking for this court, said at page 24 : A business connection in section 42 involves a relation between a business carried on by a non-resident which yields profits or gains and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits, or gains. It predicates an element of continuity between the business of the non-resident and the activity in the taxable territories: a stray or isolated transaction is normally not to be regarded as a business connection. Business connection may take several forms: it may include carrying on a part of the main business or activity incidental to the main business of the non-resident through an agent, or it may merely be a relati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s any business connection between the earning of the income in the shape of the technical fee 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 a sustainable finding by the High Court the provisions of section 42, either of sub-section (1) or of sub-section (3), were not attracted at all. The judgment of the High Court under appeal in Commissioner of Income-tax v. Carborandum Company [1973] 92 ITR 411 (Mad) is not correct. It has rightly been pointed out by the Bombay High Court in Commissioner of Income-tax v. Tata Chemicals Ltd. [1974] 94 ITR 85 (Bom) with reference to the similar or almost identical provisions in section 9(1) of the Income-tax Act, 1961, 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. The finding of fact recorded by the Tribunal being against the department in that connection the Bombay High Court refused to call for a reference. Fo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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