TMI Blog1986 (6) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... ed September 12, 1961, was a technical collaboration agreement. Hindusthan Steel Ltd. intended to establish a plant in India for manufacture of special types of steel, viz., tool alloy stainless steel and heat resisting steel. Atlas Steel Co. Ltd. was carrying on the business of manufacture of such steel and in connection with such business owned and used inventions, patents, applications for patents and had both secret knowledge and know-how relating to the manufacture of such steel contained, inter alia, in formulae, standards, processes, technical and other data owned by it. Under the said agreement dated September 12, 1961, Atlas Steel Co. Ltd. agreed to make available to Hindusthan Steel Ltd., such secret knowledge and know-how and grant to the latter leave and licence to use such knowledge and know-how including inventions, patents and applications for patents on payment of a stipulated consideration. Under the said agreement, Hindusthan Steel Ltd. also appointed the assessee as its production adviser during the term of the agreement for the operation of the plant proposed to be set up by Hindusthan Steel Ltd., in India and the training of the personnel of Hindusthan St ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ars ($ 350,000), the first of such instalments shall be payable four and one-half years after the date of execution of this agreement and the other five such instalments will be payable on the first, second, third, fourth and fifth anniversaries, respectively, of the date on which the first such instalment is payable ; (g) The company hereby appoints Atlas as production adviser during the term of this agreement for the purpose of advising the company during that term with respect to the operation of the plant and the training of the company's personnel as hereinafter provided ; (h) Subject to the overall responsibility of the company's consulting engineers, Atlas shall in the performance of its duties review the following matters and report to the company with respect thereto ; (i) The project report of the company's consulting engineers dated July, 1960, and consisting of four volumes; and (j) The commissioning and trial operations of the plant units. (k) Atlas agrees to give at its works at Welland, Ontario, Canada, theoretical and practical training in technical and plant operations to the company's personnel selected by the company ...... Atlas shall prepare t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actual production for that year. The term of this agreement shall be the period commencing on the date of execution of this agreement and terminating twelve years after the date of execution of this agreement or six years after the date of commencement of commercial production in the company's plant, whichever is the earlier. In terms of the aforesaid agreement, Hindusthan Steel Ltd., paid to the assessee towards the secret knowledge and know-how, a sum of 800,000 Canadian dollars in September, 1963, in Canada. A set of papers containing processing, heating and inspection standards was made over to the General Manager of Hindusthan Steel Ltd. in Canada. Delivery of further copies of the said set was made in July and August, 1962, inter alia, by post. In the assessment year 1964-65, the accounting period ending on December 12, 1963" the Income-tax Officer assessed the assessee to income-tax. He held that 20% of the said payment made in Canada could be attributed to other services to be rendered by the foreign collaborator outside India and the same having been received outside the taxable territory was not taxable in India. The balance 80% of the receipts was held to be att ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peration carried out by the assessee in India and, therefore, the said receipt was not taxable by reason of the Explanation under the said section 9(1)(i) of the Act. It was contended that the said amount was paid in part payment of the consideration of 3,400,000 Canadian dollars for supply of the know-how specified in clause 3 of the agreement. It was contended that no patents were supplied by the assessee to Hindusthan Steel Ltd. during the relevant year and the entire amount paid represented part consideration for obtaining technical know-how. It was contended that consideration for services to be rendered was separate and was covered by separate clauses of the agreement. A circular of the Central Board of Direct Taxes, viz., Circular No. 21 of 1969 dated July 9, 1969, was relied on by the assessee. It was laid down in the said circular that if an amount received by a foreign participant was a revenue receipt and the amount was received outside India, the further questions that would arise were whether the payment was for services rendered abroad or for services rendered in India and whether such payment was on account of royalty. If the amount received by the foreign partici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0,000 Canadian dollars received by the assessee from Hindusthan Steel Ltd. accrued or arose from any business connection in India and was, therefore, not includible in the total income of the assessee, a non-resident, under section 5(2) read with section 9(1) of the Income-tax Act 1961 " ? At the hearing before us, the learned advocate for the Revenue drew our attention to the relevant sections of the Income-tax Act, 1961, the material portions whereof are noted as follows: Section 5. (2) " Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which (a) is received or is deemed to be received in India in such year by or on behalf of such person ; or (b) accrues or arises or is deemed to accrue or rise to him in India during such year; ...... Explanation 1.-Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance-sheet prepared in India. " Section 9. (1) " The following incomes shall be deemed to accrue or arise in India (i) all inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-tax Act, 1961), and the assessee could not be treated as the agent of the non-residents for the purpose of taxing the profits of the non-residents from their export. The Supreme Court observed that the business connection as contemplated under section 42 involved I relation between a business carried on by a non-resident and some activity in the taxable territories which contributed directly or indirectly to the earnings, profits or gains of such business. It predicated an element of continuity between the business of a non-resident and the activity in the taxable territory. An isolated or stray transaction would not normally be regarded as a business connection. The expression " business " postulated real and intimate relation between the trading activity carried on outside the taxable territory and the trading activity within the territory. The Supreme Court, however, observed that the question whether the income, profits or gains arose or accrued to a nonresident in India must be determined on facts and circumstances of each case. (b) Blue Star Engineering Co. (Bombay) (P) Ltd. v. CIT [1969] 73 ITR 283 (Bom). Here, a non-resident carrying on business in Holland used to imp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee, a foreign company, declared to be a company under section 2(5A) of the Indian Income-tax Act, 1922, had entered into an agreement with an Indian company whereby the former agreed to render technical services and know-how to the Indian company in India which consisted, inter alia, of furnishing technical information and know-how in respect of certain products; providing technical management including factory design, layout, plant and equipment, production, purchase of materials, manufacturing specifications and quality of product; furnishing comprehensive technical information of all developments in the manufacture of special products; providing the Indian company with resident factory manager and other technical personnel for starting the plant and superintending the operation during the initial production stage, training Indian personnel to replace foreign technical personnel. In lieu of the aforesaid services, the assessee was to receive from the Indian company a fee on the basis of a percentage, of the net sale proceeds of the products manufactured by the Indian company every year. It was found as a fact that technical information had been furnished by post and that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... half of a non-resident. After the hearing of the case, the barrister left India without making any arrangement regarding payment of income-tax in India on the fees earned by him. The Income-tax Officer initiated proceedings to treat the Indian solicitor on record as an agent of the English barrister for the purpose of taxing the latter's income earned in India. The solicitor concerned moved the High Court under article 226 of the Constitution challenging the proceedings. On a final appeal to the Supreme Court, it was held that there was a connection between the English barrister and the Indian solicitor which was intimate and not a casual one and the barrister concerned had earned his fees by arguing the case in India through such connection. Such fees could not be earned unless the, Indian solicitor allowed the barrister to argue the case and co-operated with him. Such connection between the Indian solicitor and the barrister was a business connection within the meaning of section 9 of the Income-tax Act, 1961. The word " business " was of wide amplitude and included a " profession". (g) CIT v. Usha Martin Black (Wire Ropes) Ltd. [1984] 148 ITR 236 (Cal). In this case, the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and obtained payment. In support of his contentions, the learned advocate for the assessee cited the following decisions : I (a) CIT v. R. D. Aggarwal Co. [1965] 56 ITR 20. This decision has been considered earlier. (b) Carborandum Co. v. CIT [1977] 108 ITR 335. This decision has also been considered earlier. (c) CIT v. Toshoku Ltd. [1980] 125 ITR 525 (SC). Here, in the relevant assessment year a dealer in tobacco in India purchased tobacco and exported it to Japan and France through nonresident sales agents who were, respectively a Japanese company and a French business house. Under the agreement, the Japanese company was appointed as the exclusive sales agent in Japan for tobacco exported by the dealer in India and was entitled to commission of 3% of the invoice amount. The sale price received oil the sale of tobacco in Japan was remitted to the dealer in India who debited his commission account and credited the amount of commission payable to the Japanese company in his books of account and later remitted the amount to the Japanese company. There was a similar agreement with the French business house. The question arose whether such commission earned by the non-residen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the foreign company which could give rise to any profits being earned in India. The three types of activities contemplated under the agreement did not result in any business connection in India. The types of activities were supply of machinery and spare parts which were on f.o.b. basis. No operation of the foreign company in India was contemplated. So far as deputation of foreign personnel for erection of machinery in India was concerned, the personnel became the employees of the Indian company and the foreign company was not responsible for the erection of the machinery as such. The Madras High Court held confirming the order of the Tribunal that there was no business connection of the foreign company in India as contemplated under section 9 of the Income-tax Act, 1961, on the basis of which the money received by the foreign company could be taxed in India. Lastly, the learned advocate for the assessee cited an unreported judgment of a Division Bench of this court in Appeal from Original Order No. 28 of 1976, institued ITO v. Shriram Bearings Limited dated July 3, 1980 (since reported in [1987] 164 ITR 419). In this case, an Indian company, the respondent in the appeal had ente ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Constitution. The said writ petition succeeded in the first court. On an appeal, the Division Bench of this court held, inter alia, that the agreement was a composite one but the two separate parts of the agreement covering two transactions, namely, sale of trade secrets and rendering of technical assistance and training of persons were not linked up or connected with each other. It was noted by the Division Bench that rendering of technical assistance and training of personnel had not been made a condition for the sale of trade secrets or vice versa. It was held that the only business operation or activity which was contemplated under the agreement was the rendering of technical assistance and training of personnel for remuneration for which provision was made in the agreement for payment of tax. It was held that the said part of the agreement had no connection with the payment to the Japanese company by way of consideration for the sale of trade secrets or know-how which had to be paid in Japan and wholly outside the taxable territory. In respect of the said sale, no activity or operation could be said to have been carried out by the non-resident company in India. The app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 (SC). business connection contemplated under section 42 of the Indian Income-tax Act, 1922 (corresponding to section 9 of the Income-tax Act, 1961, involved " a relation between a business carried on by a non-resident and some activity in the taxable territories which are attributable directly or indirectly to the earnings, profits or gains of such business" It was laid down by the Supreme Court that there must be trading activity both outside and within the taxable territory. In the facts of this, case, for the supply of inventions, patents, application for patents, secret knowledge and know-how, no trading activity had been or was required to be carried on by the assessee within the taxable territory. Further, on a consideration of the agreement, it cannot be said that the trading activity which was intended to be carried on by the assessee as production adviser of Hindustan Steel Ltd., in future was relatable to or connected with the past supply of the said know-how and other items. The decision of a Division Bench of this court in Sriram Bearings Ltd.'s case [1987] 164 ITR 419 is binding on us and in any event we do not see any reason to take a contrary view. For the reas ..... X X X X Extracts X X X X X X X X Extracts X X X X
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