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TMI Blog1973 (5) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... ice at Madras. According to the terms of the said agreement the assessee was to receive from the Indian company an annual service fee equal to 3 per cent. of the net sales of the products manufactured by the Indian company each year. The services to be rendered by the assessee to the Indian company includes : (1) furnishing of technical information and know-how with respect to the manufacture of bonded and coated abrasive products by the Indian company, (2) furnishing to the Indian company technical management, including factory design and lay-out, plant and equipment, production, purchase of materials, manufacturing specifications and quality of product, (3) furnishing to the Indian company comprehensive technical information of all developments in the manufacture of the products, (4) providing the Indian company with a resident factory manager for starting the plant and superintending its operations during its initial production stages and other foreign technical personnel necessary for the operation of the plant of the Indian company, and (5) training here and abroad the Indian personnel to replace the foreign technical personnel as rapidly as possible. The salary and other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... territories. The Income-tax Officer took the view that at least 5 per cent. of the technical fee should be taken to have been earned by the assessee in India and that the assessee was liable to be taxed under the Income-tax Act to that extent. Deducting the tax payable on that part of the income, the income-tax Officer directed the refund of Rs. 56,606.75 to the assessee. The Commissioner of Income-tax, however, initiated proceedings under section 33B of the Indian Income-tax Act, 1922, as he was of the view that at least 75 per cent. of the technical fee earned by the assessee would have accrued or arisen in India. After issuing a show cause notice and after hearing the objections of the assessee, the Commissioner determined a sum of Rs. 71,822 as being assessable to income-tax and super-tax and directed the Income-tax Officer to revise the assessment accordingly. According to the Commissioner, though the technical information was supplied by the assessee-company from outside India, the information having been put to use in India, the technical fee should be taken to have been earned in India and although the foreign technical personnel were paid for by and the control over th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company made use of the information supplied by the assessee and irrespective of the volume and extent of such use. The Tribunal also disagreed with the Commissioner's view that the technical fee amounted to royalty. Ultimately, the Tribunal set aside the order of the Commissioner. At the instance of the Commissioner the following question has been referred to this court : " Whether, on the facts and in the circumstances of the case, 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 ? " Before us, firstly, it is contended by the revenue that the assessee must be deemed to be working in conjunction with the Indian company in the manufacture of abrasive products in India and therefore, the service fee received by the assessee should be taken to relate to the part played by the assessee in the manufacture of abrasive products in India. But, we are of the view that there is no material on record to support this contention. The relationship between the assessee and the Indian company is governed by the agreement dated June 22,1955, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat provision, so far as it is relevant, is as follows : " All income, profits or gains accruing or arising, whether directly or indirectly, through or from any business connection in the taxable territories ..... shall be deemed to be income accruing or arising within the taxable territories, and where the person entitled to the income, profits or gains is not resident in the taxable territories, shall be chargeable to income-tax either in his name or in the name of his agent, ..... . " According to the revenue, the technical fee received by the assessee from the Indian company has to be taken as having accrued or arisen in India in view of section 42(1), while the assessee would contend that section 42(1) cannot be invoked in the case of mere " know-how " agreements such as the agreement in question which does not contemplate any service being rendered in India. In Bangalore Woollen, Cotton and Silk Mills Co. Ltd. v. Commissioner of Income-tax , Satyanarayana Rao J., dealing with the scope of the words " business connection " occurring in section 42(1), expressed : " In order to elucidate the meaning of the expression ' business connection ' the learned counsel on both sides ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bhai and Co. : " Strictly speaking, the word 'accrue' is not synonymous with 'arise', the former connoting the idea of growth or accumulation and the latter of the growth or accumulation with a tangible shape so as to be receivable. There is a distinction in the dictionary meaning of these words, but throughout the Act they seem to denote the same idea or ideas very similar and the difference only lies in this that one is more appropriate when applied to a particular case. In the case of a composite business, i.e., in the case of a person who is carrying on a number of businesses, it is always difficult to decide as to the place of the accrual of profits and their apportionment inter se. " In Jethabhai Javeribhai v. Commissioner of Income-tax , the Nagpur High Court considered a case where a company in British India purchased raw materials for his beedi business in Baroda State through a non-resident to whom commission was paid, and the question for consideration was whether the commission paid to the non-resident in respect of the purchases made in Baroda State accrued or arose in India through or from a business connection within the meaning of section 42. It was held that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e by section 4(1)(a) and (c) of the Act, whether the person earning is a resident or non-resident, and that income not taxable under section 4 of a non-resident becomes taxable under section 42(1) if there subsists a connection between the activity in the taxable territories and the business of the non-resident, and if through or from that connection income directly or indirectly arises. The court expressed thus : " 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 relation between the business of the non-resident and the activity in the taxable territories, whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich were prepared by the Indian company in India and advice sent by the assessee to the Indian company by post as to the nature of the plant and equipment required for the factory as also as to the production data, etc. These services had been held to have been rendered by the assessee outside India as the entire correspondence was by post. Some of the other services to be rendered by the assessee to the Indian company is to send periodically technical bulletins, instructional films, etc. The Tribunal also finds that the correspondence between the assessee and the Indian company showed that these services were rendered by the assessee outside India. So far as these services are concerned, the Commissioner held that such technical information furnished by the assessee by post has been used in India and, therefore, the services can be said to have been rendered by the assessee in India. This view is not acceptable to the Tribunal. The Tribunal says that the use of the technical information by the Indian company without reference to the actual supply of this information by the assessee cannot be taken to be the criterion and that it is not possible to say that the services such as fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... end foreign technicians to work in India, and if really foreign technicians were sent to India by the assessee under that agreement, it cannot be said that the assessee has not rendered any service in India. The fact that those foreign technicians were paid by and were under the control of the Indian company will not affect the question. The requirement that the assessee has to send foreign technicians to India for-the purposes set out in the agreement leads to the inference that the assessee has undertaken to do some service or activity in India by sending its foreign technicians to work in India. The payment of salary and other emoluments to such foreign technicians is purely a matter of bargain between the assessee and the Indian company and they have agreed that the foreign technicians will be paid by the Indian company. But this will not affect the question whether the assessee is obliged to send foreign technicians to India to assist the Indian company. Similarly the obligation of the assessee to train the Indian personnel in India through their foreign technicians can also be said to be services rendered in India. Though the foreign technicians did train the Indian technicia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chnical knowledge not so patented is known in commercial circles as " know-how ". This " know-how " is not comparable with a fixed asset, such as, factory, office building, warehouse, plant and machinery, or even with such independent legal rights as patents, copy-rights or trade marks, or even with goodwill. It is not a balance-sheet item. It is not diminished by imparting it to outsiders. It has the peculiar quality that it can be communicated to, or shared with, others without in any sense destroying the value thereof to its owner. It is a product of the brain and just as a person cannot sell his brain, he cannot sell the 'know-how' outright." It is true the learned author proceeds on the basis that when the owner of a " know-how " undertakes to impart it for consideration, such consideration cannot be regarded as price for the property and, therefore, it is not a capital receipt but that in exceptional cases such remuneration may be of a capital character where the owner, in consequence of his imparting of the " know-how " to another person, has to discontinue his own manufacture or to give up a market which is open to him. But we are not concerned with the question as to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which he has parted : See Trego v. Hunt ; and it may then rightly be regarded as the sale of a capital asset : See Handley Page v. Butterworth . But the supplier of 'know-how' always remains entitled to use it himself. . . " In Jeffrey v. Rolls-Royce Ltd. it is observed that exploitation of " know-how " is one method of development of the owner's own trade, though it may not amount to a separate business. The assessee, therefore, is not right in its submission that in cases of " know-how " agreement there is no question of any business connection. As already stated, in this case the agreement is not only a " know-how " agreement but also an agreement to provide foreign technicians to work in India to assist the Indian company and also to train the Indian personnel in the manufacture of the products. Therefore, we are of the view that the assessee having rendered at least some services in India which amounts to a business activity, the technical fee should be taken to have accrued through or from its business connection in India. In that view 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, ..... 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