TMI Blog1980 (7) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... he first part, N. S. K. agreed to sell to the respondent company its trade secrets which means all N. S. K. know-how relating to the products and relating to the manufacturing technique which are considered sufficient enough for the production of products of a quality comparable to the quality of N. S. K.'s products. The trade secrets or technical know-how, inter alia, include the right of using patent rights and advice of plant layout and installation. The price for the sale of trade secrets by N. S. K. to the respondent company has been fixed at a total sum of 1,65,000 U.S. dollars payable in four instalments. It is further stipulated that the payment of the said sum that would be made by the respondent company to N. S. K. will be free from Indian income-tax. It maybe stated here that the transaction of sale and purchase of trade secrets and the payment of the said total sum of 1,65,000 U. S. dollars have been agreed to take place in Japan. The second part of the agreement relates to the rendering of technical assistance and training of personnel by N. S. K. It is provided that N. S. K. will train, from time to time, at its own plants in Japan employees or representatives of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, 1961. By the said order, the Income-tax Officer held that the income of the non-resident, that is, N.S.K., had accrued in India as a result of supply of technical know-how, designs, etc., and since delivered outside India were exploited in India and, as such, the income was taxable. Proceeding on that basis, the Income-tax Officer estimated the net income under section 195(2) of the Act in the hands of the non-resident at the rate of 66 2/3% of the payment to be remitted. The Income-tax Officer held that the respondent company, being the resident party, was required to deduct taxes at the appropriate rate before such remittances. Being aggrieved by the said order of the Income-tax Officer, the respondent company made a revisional application under section 264 of the Income-tax Act, 1961, before the Commissioner of Income-tax, West Bengal, Calcutta. The said revisional application was disposed of by respondent No. 2, the Additional Commissioner of Income-tax, West Bengal-II, Calcutta, by his order dated January 11, 1977. By the said order, the Additional Commissioner held as follows: " The arguments so advanced by the assessee apparently appear to be logically sound but at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt company commenced manufacture. In that view of the matter, the learned judge quashed the order of the Additional Commissioner of Income-tax and directed the Revenue to act in accordance with law. The rule was accordingly made absolute. Hence, this appeal at the instance of the Revenue. The only question that is involved in this appeal is whether the income of the said sum of 1,65,000 U.S. dollars can be said to have accrued to N.S.K. in India, so that the respondent company is required to deduct the amount of tax payable on the said sum before the same is remitted to the non-resident, that is, N.S.K., under section 195(2) of the Income-tax Act, 1961. Section 9 of the Act lays down the circumstances when income can be deemed to have accrued or arisen in India. Section 9(1) provides as follows : " 9.(1) The following incomes: shall be deemed to accrue or arise in India (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through or from any money lent at interest and brought into India in cash or in kind or t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng of technical assistance and training of personnel of the respondent company by N.S.K. As we read the agreement, although it is a composite one, it does not appear to us that the two transactions, namely, the sale of trade secrets and rendering of technical assistance and training of personnel are linked up or connected with each other. It is contended by Mr. Sen Gupta, learned counsel appearing on behalf of the appellants, that the agreement cannot be bifurcated. In other words, he submits that the agreement is indivisible and the two transactions are such that they cannot be separated from each other. We are, however, unable to accept this contention. Learned counsel has not been able to show to us from the terms of the agreement that the rendering of technical assistance and training of personnel have been made a condition for the sale of trade secrets or vice versa. The agreement does not provide that the respondent company is obliged to ask for the rendering of technical assistance and the training of its personnel by N.S.K. In our opinion, the test in such a case seems to be whether the sale of trade secrets or technical know-how is made subject to a compulsory business ope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e hands of N.S.K. in Japan under the law of that country. The question before us is a completely different one, namely, whether the income of N.S.K. can be said to have accrued or arisen in India, so that it may be chargeable to tax before the same is remitted to it by the respondent company. In the circumstances, the case of RollsRoyce Ltd. [1965] 56 ITR 580, has no manner of application to the facts and circumstances of the case before us. The next case on which reliance has been placed on behalf of the appellants is a decision of the Supreme Court in CIT v. Ciba of India Ltd. [1968] 69 ITR 692. The assessee (originally named Ciba Pharma Ltd.) was an Indian subsidiary of Ciba Ltd. of Basle, a Swiss Company, engaged in the development, manufacture and sale of medical and pharmaceutical preparations. The pharmaceutical section of the Swiss company in India was taken over by the assessee from January 1, 1948. Under an agreement dated December 17, 1949, the Swiss company undertook to deliver to the assessee all processes, formulas, scientific data, working rules and prescriptions pertaining to the manufacture or processing of products discovered and developed in the Swiss company's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e technical assistance for running the business, (c) the licence was granted to the assessee subject to rights actually granted or which may be granted after the date of the agreement to other persons, (d) the assessee was expressly prohibited from divulging confidential information to third parties without the consent of the Swiss company, (e) there was no transfer of the fruits of research once and for all; the Swiss company which was continuously carrying on research had agreed to make it available to the assessee ; and (f) the stipulated payment was recurrent dependent upon the sales and only for the period of the agreement. We have set out above facts of the case of Ciba of India Ltd. in extenso in order to show that they are different from those of the instant case. It is manifestly clear from the facts of that case that the Swiss company had retained control over the Indian company even after the sale of the technical know-how. Indeed, it has been observed by the Supreme Court that it cannot be said that the Swiss company had wholly parted with its Indian business. In the circumstances, that case is of no help to the appellants. Lastly, learned counsel for the appellants ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny help to the appellants. On the other hand, Dr. Debi Prosad Pal, learned counsel appearing on behalf of the respondent company, has placed strong reliance on a later decision of the Supreme Court in Carborandum Co. v. CIT [1977] 108 ITR 335. In that case, the appellant, a foreign company which had specialized in the manufacture of bonded abrasive and coated abrasive products, entered into an agreement with an Indian company for rendering technical and know-how services to the Indian company of the following nature: (i) furnishing of technical information and know-how with respect to manufacture of bonded abrasive and coated abrasive products, (ii) providing technical management including factory design and layout, 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 resident factory manager for starting the plant and superintending its operations during its initial production stages, as also other technical personnel necessary for the operation of the plant; (v) traini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany to N.S.K. on that account has been provided for in the agreement as chargeable to income-tax. It is, however, pointed out by learned counsel appearing on behalf of the appellants that one of the grounds that weighed with the Supreme Court in holding that there was no business activity of the foreign company in India was that the employees of the foreign company worked under the direct control of the Indian company. He submits that in the instant case, the fact that the employees of N.S.K. who would come over to India for rendering technical assistance to the respondent company would remain the employees of N.S.K. establishes beyond doubt that the sale of trade secrets and the rendering of technical assistance and the training of personnel are linked up with each other so as to hold that the said income of N.S.K. of 1,65,000 U.S. dollars accrued in India out of some business operation or activity. We are, however, unable to accept the contention. It is true that in the case before the Supreme Court, the Indian company had control over the employees of the foreign company, but that fact was not by itself decisive. That was one of the grounds relied on by the Supreme Court. At t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he commonness of the interest may be by way of management control or financial control or by way of sharing of profits. It may come into existence in some other manner but there must be something more than mere transaction of purchase and sale between principal and principal in order to bring the transaction within the purview of the expression " business connection " within the meaning of section 9(1)(i) of the Income-tax Act, 1961. Thus, it appears that the law on the point is fairly well settled. The question whether there is business connection or not will depend upon the facts and circumstances of each particular case. In the case before us, there can be no doubt that there has been a transaction of sale and purchase of trade secrets, but because there has been such a transaction, it cannot be held that there has been a business connection of the foreign company in India. The foreign company, that is, N.S.K., has no managing company and the only business operation that may be carried out by N.S.K. in India is rendering of assistance and training of personnel of the respondent company for remuneration which, as aforesaid, is liable to payment of income-tax. Such business operat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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