TMI Blog1973 (5) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in the affirmative and against the assessee. - - - - - Dated:- 4-5-1973 - Judge(s) : G. RAMANUJAM., V. RAMASWAMY. JUDGMENT The judgment of the court was delivered by RAMANUJAM J.-The assessee, a foreign company having its registered office in America, has been declared as a company by the Central Board of Revenue under section 2(5A) of the Indian Income-tax Act, 1922. The assessee-company specialised in the manufacture of bonded and coated abrasive products. As part of its business the assessee continuously carries on research with a view to find new methods for the manufacture of these products and to improve their quality. The fruits of this research are incorporated in pamphlets which are made available not only to its own technicians but also to such other persons, firms or companies with whom the assessee has entered into agreement and who are engaged in the manufacture of these products. The assessee entered into an agreement, dated June 22, 1955, with an Indian company, Messrs. Carborundum Universal Ltd., having its registered office at Madras. According to the terms of the said agreement the assessee was to receive from the Indian company an annual service fe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time to time where technical training was imparted to them by the assessee. The assessee also sent by post technical bulletins, instructional films, etc., from time to time to the Indian company containing information which was necessary for the manufacture of the products by the Indian company. The assessee also gave advice from time to time to the officers of the Indian company with regard to the manufacture of the products. During the accounting year relevant to the assessment year 1957-58, the assessee had received a sum of Rs. 95,762 from the Indian company as its service fee under the terms of the agreement referred to above, being equal to 3 per cent. of the net sales of the products manufactured by the Indian company in the year of account. In respect of this sum, the income-tax and super-tax were deducted by the Indian company at the prescribed rates. The assessee, thereafter, applied for refund of the entire income-tax and, super-tax so deducted at source on the ground that the entire technical fee was earned by the assessee outside the taxable territories. The Income-tax Officer took the view that at least 5 per cent. of the technical fee should be taken to have be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services rendered by the foreign technical personnel including the training imparted to the Indian personnel at the factory were governed by the agreement entered into between the Indian company and such personnel, they cannot be taken to be the services rendered by the assessee under the agreement. As regards training imparted to the Indian personnel by the assessee in foreign countries, the Tribunal held that such training having been admittedly imparted outside India, the services of the assessee in this respect cannot be said to have been rendered in India. On these findings, the Appellate Tribunal disagreed with the view of the Commissioner that the technical fee paid was for the use of the information by the Indian company according to the volume and extent of such use and held that the agreement itself did not, make the service fee of 3 per cent. payable by the assessee dependent upon the use of the information in India or on the volume and the extent of such use, that on the other hand the service fee was payable to the assessee, whether or not the Indian company made use of the information supplied by the assessee and irrespective of the volume and extent of such use. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom the Indian company has accrued or arisen in India, and, in considering that question, one cannot but consider the scope of section 42 which practically defines as to what is accrual. Therefore, we proceed to consider the question arising in this case in the light of sections 3, 4(1) and 42(1) of the Income-tax Act. Section 3 brings to charge the total income of the previous year of every individual, Hindu undivided family, and company, local authority or firm and other association of persons. Section 4 states that the total income of any previous year of any person would include all income, profits and gains from whatever source derived, which, if such person is not resident in India during the year, accrue or arise or are deemed to accrue or arise to him in India during such year. The assessee in this case is a non-resident company, and if any portion of its income has accrued or arisen in India during the year, such portion of the income is liable to be charged to income-tax under section 3 read with section 4. Section 4, in turn, attracts section 42(1) and that provision, so far as it is relevant, is as follows : " All income, profits or gains accruing or arising, whethe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for all cases. One can only take the particular facts and circumstances and decide whether the case falls within the words of section 42(1) or outside them. " In that case the assessee, a factory in Mysore State, purchased raw materials, through its managing agents in Madras State and the question was whether such purchase of raw materials constituted " business connection " within the meaning of section 42(1). The court held that the transactions constituted a " business connection " within the Madras State. In Commissioner of Income-tax v. Little's Oriental Balm and Pharmaceuticals Ltd. this court had expressed the view that : " The expression 'deemed to have received or accrued in British India' is explained in section 42, which has really to be read with section 4 on which it is a commentary. Section 4 is the charging section and section 42 gives the definition of the expression 'deemed to accrue and arise' or 'deemed to have been received in British India' in section 4. " The Supreme Court has also expressed the view in Commissioner of Income-tax v. Ahmedbhai Umarbhai and Co. : " Strictly speaking, the word 'accrue' is not synonymous with 'arise', the former connot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the important cases which have arisen before the courts for the purpose of finding out as to what relation between the non-resident and the activity in the taxable territories which contributes to the earning of income may or may not be regarded as business connection, said that the expression " business connection " postulates a real and intimate relation between the trading activity carried on outside the taxable territories and trading activity within the territories, the relation between the two contributing to the earning of income by the non-resident in his trading activity and that it must in all cases be remembered that by section 42, income, profits or gains which accrues or arises to a non-resident outside the taxable territories is sought to be brought within the net of income-tax law, and not income, profits or gains which accrues or arises or is deemed to accrue or arise within the taxable territories, that income received or deemed to be received, or accruing or arising or deemed to be accruing or arising within the taxable territories in the previous year, is taxable by section 4(1)(a) and (c) of the Act, whether the person earning is a resident or non-resident, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... makes it clear that at least 5 per cent. of the technical service fee is earned by the assessee in India and that the same is liable to be assessed under the Income-tax Act. The Commissioner, however, held that having regard to the obligations undertaken by the assessee under the agreement, 75 per cent. of the technical fee received by the assessee should be taken on a reasonable basis as income accruing or arising in India. The Tribunal took the extreme view that no portion of the technical fee can be said to have accrued or arisen in India. The question is whether the Tribunal's view could be sustained. In the context of the question to be considered it is necessary to find out as to what are the services rendered by the assessee in pursuance of the agreement and whether such services were rendered in India or outside. The nature of the services to be rendered by the assessee under the agreement has already been referred to. Some of the services rendered by the assessee to the Indian company consisted of examination and approval in the U.S.A. of the factory, design and lay-out which were prepared by the Indian company in India and advice sent by the assessee to the Indian compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee had nothing to do with the day-to-day work of the said foreign technicians. It also held that the training imparted by its technicians to the Indian personnel in India was as part of the work which they have to do under the Indian company and that, therefore, the training of the Indian personnel by the foreign technicians cannot be taken to be services rendered by the assessee in India. On a due consideration of the matter, we are of the view that the Tribunal did not have a proper perspective of the said services rendered by the assessee. The question is not whether foreign technicians were under the employ of the assessee or the Indian company and whether they received the salary from the assessee or from the Indian company for the services rendered by them in India. Here the relevant question is whether the assessee has sent the foreign technicians to India to help the Indian company in the starting, supervision and operation of the plant for the manufacture of the products in India, and to train suitably the Indian technicians. Under the contract the assessee is obliged to send foreign technicians to work in India, and if really foreign technicians were sent to India by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business connection in India, that, therefore, the entire technical fee should be taken to have accrued or arisen in India and that in such case section 42(3) for apportionment of the income cannot come into play. Thelearned counsel for the assessee would contend that providing foreign technicians to work in India is a very insignificant part of the assessee's services and, therefore, the Income-tax Officer's view that 5 per cent. of the technical fee received by the assessee should represent the services rendered by the assessee has to be accepted as reasonable. He also contends that the theory of business connection. will not arise in the case of " know-how " agreements and relies on the following passage occurring under the head " receipts from know-how " or " secret process " in Sampath Iyengar's Income-tax, 6th edition, volume 1, at page 168 : " Manufacturing houses and business institutions evolve at great cost by experience and research over long periods of time, process of manufacture which are held by them secret, only a small part of which is capable of being patented. The technical knowledge not so patented is known in commercial circles as " know-how ". This " know-h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Denning expressed : " What, then, is the position of " know-how " for tax purposes? It is undoubtedly a revenue producing asset. The possessor can use it to make things for sale, or he can teach it to others for reward. But he cannot sell it outright. It is rather like the 'know-how' of a professional man. He can use it to earn fees from his clients, or he can teach it to pupils for reward, and so produce revenue. But he cannot sell it as a capital asset for a capital sum. He cannot sell his brains. So with a company which has special manufacturing skill and experience but has no secret processes. Its 'know-how' is inseparable from the 'know-how' of its staff and servants. It cannot prevent them using it any more than it can prevent them using their own brains : See Herbert Morris Ltd. v. Saxelby . It cannot sell it as a capital asset. It can only use it or teach it. Even with a company which owns secret processes, the supply of 'know-how' is not like the sale of goodwill or a secret process, for such a sale imports that the seller cannot thereafter avail himself of the special knowledge with which he has parted : See Trego v. Hunt ; and it may then rightly be regarded as the sal ..... X X X X Extracts X X X X X X X X Extracts X X X X
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