TMI Blog1980 (5) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... pplied from Europe on f.o.b. terms, North Sea Port, suitably and securely packed for ocean shipment and subsequent movement by rail and on road in India and for tropical conditions. The foreign company was also to supply drawings and also to supervise the erection of the grey iron foundry. 100% of the contract price for the technical co-ordination in the supply of drawings was to be made in Germany and on receipt of the contract price, the foreign company undertook to deliver the drawings to the Indian company. The entire work connected with the technical co-ordination and supplies of drawings with reference to the materials to be procured in India was to be carried out by the contractor in West Germany. The obligation of the foreign company was to be discharged if the drawings were delivered to the Indian company's representative for onward despatch to it. The payments were to be arranged by letters of credit being opened. The erection of the machinery and equipment was to be done by the Indian company under its responsibility. The foreign company had only to depute the specialists to advise, guide and supervise the erection work. Any damage to the plants, equipments, etc., caused ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion as extracted above has been referred, at the instance of the Commissioner, who feel aggrieved by the order of the Tribunal. A perusal of the Tribunal's order would show that there is some confusion in its mind as to who the assessee is. In the case of a foreign or non-resident company, there are two courses open to the ITO. He can proceed against the non-resident company itself if he is able to get at it. This course would not be available when the non-resident company has no office in India. In such a case, he has got to make an assessment on the non-resident only through an agent. It is for this purpose that the I.T. Act. has provided for the appointment of an agent for the non-resident company and for the assessment being made in a representative capacity, on such agent. The agent is described in the Act itself as a " representative assessee ". Thus, the assessee would be the foreign company, and the agent, though he is technically proceeded against, is really acting in vicarious capacity. Therefore, it would be more proper to describe the foreign company as the assessee and the Indian company as the agent, though ultimately on the basis that the Indian company is liable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purchaser. The Indian company is certainly not taxed on the purchase of goods. The question is, what is the extent of activity of the foreigner and what are the operations of the foreigner in India, which will establish any business connection or bring about any liability to tax on the basis of income being deemed to accrue or arise in India. It is not necessary to labour on this point further. It is enough to point out that the assessee is a foreign company and that the Indian company is acting only in its representative capacity as the agent of the foreign company and consequently falls within the concept of the word assessee " as understood by the Act for the limited purpose of discharging the liability of the foreign company. Section 9 is the appropriate provision which is to be considered in connection with the assessments under consideration. Income is deemed to accrue or arise in India in certain cases, one of them being where it accrues or arises through or from any business connection in India. The term " business connection " has not been defined in the Act. It is referred to in decided cases as having a wide, though uncertain, meaning. It admits of no precise definiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation relating to (i) the manufacture of bonded abrasive and coated abrasive products; (ii) providing technical management including factory design and layout, etc.; (iii) furnishing comprehensive technical information in the manufacture of the special products ; (iv) providing the Indian company with resident-factory manager for starting the plant and superintending its operation during its initial production stages; and (v) training Indian personnel to replace the foreign technical personnel as quickly as possible. With reference to these services, 3% on the net sale proceeds of the products manufactured by the Indian company was payable to the foreign company. The ITO held that 5% of the technical fee paid by the Indian company to the foreign company was earned by the foreign company in India and, therefore, was taxable. The Commissioner was of the view that at least 75% of the fee had accrued or arisen in India, as the information was applied in India and the fee was payable mainly on account of the use of technical know-how, or services rendered by the foreign personnel in India. The Appellate Tribunal restored the assessment and reversed the order of the Commissioner on the g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in CIT v. Gulf Oil (Great Britain) Ltd. [1977] 108 ITR 874 (Bom). In that case, the assessee who was a dealer of petroleum products and incorporated in U.K., had a wholly owned subsidiary in India. The non-resident received indents from time to time for the supply of the products from the Indian subsidiary and those orders were honoured by shipment. The prices charged were in c.i.f.terms. Once the goods were put on ship, there was no reservation of the right of disposal in the goods by the non-resident. On the question whether these transactions amounted, to business connection and whether any income was derived in India by the foreign company, it was held that the transaction between the non-resident company and the Indian subsidiary were on a principal to principal basis and that the Indian subsidiary could not be regarded as the agent of the non-resident company. Similarly, in CIT v. Hindustan Shipyard Ltd. [1977] 109 ITR 158, the Andhra Pradesh High Court dealt with a case where the Hindustan Shipyard Ltd. entered into an agreement for the purchase of diesel engines with accessories from a Polish company. The property in the goods was to pass to the purchaser immediately on d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat there must be some activity in India with reference to which the foreigner is concerned. The profits contributed by that activity would come in for taxation under s. 9 of the Act. It is in this context that we have to examine the agreement in the present case. The Tribunal had not annexed the entire agreement between the foreign company and the Indian company. Mr. Swaminathan, the learned counsel for the respondent, placed before us a full copy of the agreement, which is referred to in all the, orders of the income-tax authorities. We think it necessary to refer to those parts of the" agreement, which bear on the point now before us. Clause 1 of the agreement indicates that it is regarding the supply from Europe of equipment for a grey iron foundry, technical co-ordination and supply of drawings for Indian supplies and supervision of erection at Coimbatore. Clause 3 states: "In consideration of the price to be paid to him (foreign company) as stated hereunder the contractor (foreign company) shall supply the equipment from Europe, the technical co-ordination and supply of drawings for Indian supplies and supervise the erection of the grey iron foundry for spinning machine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount must be paid against submission of shipping documents proving that the goods were delivered as f.o.b. Supervision and erection is dealt with in cl. 12. The erection is to be done by the Indian company under its own responsibility. The foreign company has only to depute some specialists like one chief engineer, one specialised engineer and five chief erectors or fitters. The period during which these persons were to serve is also specified in the agreement. However, the actual period for which they would work would depend on the progress of the erection work at the site. The deputed personnel were to be paid at a specified rate per day. There are certain other allowances which are also payable to them. Clause 12(xi) provides: " The contractor cannot be held responsible for any damages including subsequent and/or consequential damages caused by the contractor's personnel, irrespective of the cause and nature of such damage. Contractor is only liable for the careful selection of the erection specialists ; in this respect he shall apply the same care as in the conduct of his own affairs." Clause 13 contemplates delegation to the Indian company of two engineers for the purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in such projects until the machinery is actually run and proves its performance, the responsibility of the foreigner would continue. But in the present case the contract cannot be equated to turnkey contract. The operations in India for the erection of the machinery are only the responsibility of the Indian company. It is only any defect in the machinery or any negligence in the performance of the foreign engineer, that may give rise to a claim for damages. But that is not the same as the foreign company performing any operation in pursuance of this contract in India. Whatever we have said above would apply also to deputation of foreign personnel for procuring Indian spare parts. It was obviously considered necessary to get foreign personnel from abroad for this purpose only because the type of spare parts required for the foreign machinery could be better picked up by these personnel, who have experience in running the machinery. It is merely an assistance provided to the Indian company, the foreign personnel being treated as the employees of the Indian company. Having gone through the terms of the agreement in full, we are satisfied that there are no operations in India attribut ..... X X X X Extracts X X X X X X X X Extracts X X X X
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