Case: Carborandum Co Vs. Commissioner of Income Tax, Madras

business, either all or a part, are carried out in the taxable territories. If all such operations are carried out in the taxable territories, sub-section (1) would apply and the entire income accruing or arising outside the taxable territories but as a result of the operations in connection with the business giving rise to the income would be deemed to accrue or arise in the taxable territories. If, however, all the operations are not carried out in the taxable territories the profits and gains of the business deemed to accrue or arise in the taxable territories shall be only such profits and gains as are reasonably attributable to that part of the operations carried out in the taxable territories. Thus comes in the question of apportionment under sub-section (3) of section 42. In Commissioner of Income-tax v. R. D. Aggarwal and Co. [1965] 56 ITR 20 (SC), Shah J., as he then was, speaking for this court, said at page 24: 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 which facilitates or assists the carrying on of that business. In each case the question whether there is a business connection from or through which income, profits or gains arise or accrue to a non-resident must be determined upon the facts and circumstances of the case. 12. The learned judge says further: A relation to be a business connection must be real and intimate, and through or from which income must accrue or arise whether directly or indirectly to the non-resident. But it must in all cases be remembered that by section 42 income, profit or gain which accrues or arises to a non-resident outside the taxable territories is sought to be brought within the net of the income-tax law, and not income, profit or gain which accrues or arises or is deemed to accrue or arise within the taxable territories. 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. If the agent of a non-resident receives that income or is entitled to receive that income, it may be taxed in the hands of the agent by the machinery provision enacted in section 40(2). Income not taxable under section 4 of the Act 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. 13. The High Court was wrong in its view that activities of the foreign personnel lent or deputed by the American company amounted to a business activity carried on by that company in the taxable territory. The finding of the Tribunal in that regard was specific and clear and was unassailable in the reference in question. The American company had made the services of the foreign personnel available to the Indian company outside the taxable territory. The latter took them as their employees, paid their salary and they worked under the direct control of the Indian company. The service rendered by the American company in that connection was wholly and solely rendered in the foreign territory. Even assuming however, that there was any business connection between the earning of the income in the shape of the technical fee by the American company and the affairs of the Indian company, yet no part of the activity or operation could be said to have been carried on by the American company in India. And in the absence of such a sustainable finding by the High Court the provisions of section 42, either of sub-section (1) or of sub-section (3), were not attracted at all. The judgment of the High Court under appeal in Commissioner of Income-tax v. Carborandum Company [1973] 92 ITR 411 (Mad) is not correct. It has rightly been pointed out by the Bombay High Court in Commissioner of Income-tax v. Tata Chemicals Ltd. [1974] 94 ITR 85 (Bom) with reference to the similar or almost identical provisions in section 9(1) of the Income-tax Act, 1961, that in order to rope in the income of a non-resident under the deeming provision it must be shown by the department that some of the operations were carried out in India in respect of which the income is sought to be assessed. The finding of fact recorded by the Tribunal being against the department in that connection the Bombay High Court refused to call for a referenceFor the reasons stated above we hold that, on the facts and in the circumstances of the case, the technical service fee received by the assessee-company from the Indian company during the accounting year relevant to the assessment year 1957-58 did not accrue or arise in India nor could it be deemed to have accrued or arisen in India. But since 5% of the technical service fee was brought to tax by the Income-tax Officer and no appeal was filed against it on behalf of the assessee-company, we cannot interfere with the addition of this 5% but it must be held that the technical fee in excess of 5% was not taxable. 14.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]The income assessable to income-tax, therefore, is of two kinds, viz., (i) accruing or arising in the taxable territories; and (ii) deemed to accrue or arise to the non-resident in the taxable territory. The concept of actual accrual or arising of income in the taxable territories, although not dependent upon the receipt of the income in the taxable territories, is quite distinct and apart from the notion of deemed accrual or arising of the income. The High Court does not appear to have kept this distinction in view and mixed the one with the other while deciding the reference in question. Section 42 of the Act concerns itself with a deemed accrual or arising of the income within the taxable territories. Under sub-section (1)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, and in the latter case such agent shall be deemed to be, for all the purposes of this Act, the assessee in respect of such income-taxThe High Court, therefore, was wrong in entertaining this new point at the reference stage on the basis of the allegedly general and compendious nature of the question referred to it by the Tribunal. But we do not propose to rest our judgment only on this technical aspect of the matter as we find that even on merits the assessee-company has a good case to succeed before usThe High Court agreed with the Tribunal that the technical information furnished by the assessee-company by post was a service which could not be said to have been rendered in India; putting it to use in India is not relevant as opined by the Commissioner. But in regard to the fact of the foreign technicians having been employed by the Indian company on payment of salary in India, it took the view that the service was rendered in India as foreign technicians were deputed by the assessee-company. In the opinion of the High Court it did amount to some activity or service in IndiaEven though, according to the High Court, the finding aforesaid was sufficient to rope in the entire receipts of the assessee-company as income, having accrued or arisen in India as a result of its business connection, it felt obliged to make the apportionment to the extent of 75% because of the apportionment so made by the Commissioner. In our judgment the High Court went wrong in its approach to the question raised before it and did not quite correctly appreciate the scope and applicability of section 42 of the ActOn a plain reading of sub-sections (1) and (3) of section 42 it would appear that income accruing or arising from any business connection in the taxable territories-even though the income may accrue or arise outside the taxable territories-will be deemed to be income accruing or arising in such territory provided operations in connection with such business, either all or a part, are carried out in the taxable territories. If all such operations are carried out in the taxable territories, sub-section (1) would apply and the entire income accruing or arising outside the taxable territories but as a result of the operations in connection with the business giving rise to the income would be deemed to accrue or arise in the taxable territories. If, however, all the operations are not carried out in the taxable territories the profits and gains of the business deemed to accrue or arise in the taxable territories shall be only such profits and gains as are reasonably attributable to that part of the operations carried out in the taxable territories. Thus comes in the question of apportionment under sub-section (3) of section 42The High Court was wrong in its view that activities of the foreign personnel lent or deputed by the American company amounted to a business activity carried on by that company in the taxable territory. The finding of the Tribunal in that regard was specific and clear and was unassailable in the reference in question. The American company had made the services of the foreign personnel available to the Indian company outside the taxable territory. The latter took them as their employees, paid their salary and they worked under the direct control of the Indian company. The service rendered by the American company in that connection was wholly and solely rendered in the foreign territory. Even assuming however, that there was any business connection between the earning of the income in the shape of the technical fee by the American company and the affairs of the Indian company, yet no part of the activity or operation could be said to have been carried on by the American company in India. And in the absence of such a sustainable finding by the High Court the provisions of section 42, either of sub-section (1) or of sub-section (3), were not attracted at all. The judgment of the High Court under appeal in Commissioner of Income-tax v. Carborandum Company [1973] 92 ITR 411 (Mad)  is not correct. It has rightly been pointed out by the Bombay High Court in Commissioner of Income-tax v. Tata Chemicals Ltd. [1974] 94 ITR 85 (Bom)  with reference to the similar or almost identical provisions in section 9(1) ofthe Income-tax Act, 1961, that in order to rope in the income of a non-resident under the deeming provision it must be shown by the department that some of the operations were carried out in India in respect of which the income is sought to be assessed. The finding of fact recorded by the Tribunal being against the department in that connection the Bombay High Court refused to call for a referenceFor the reasons stated above we hold that, on the facts and in the circumstances of the case, the technical service fee received by the assessee-company from the Indian company during the accounting year relevant to the assessment year 1957-58 did not accrue or arise in India nor could it be deemed to have accrued or arisen in India. But since 5% of the technical service fee was brought to tax by the Income-tax Officer and no appeal was filed against it on behalf of the assessee-company, we cannot interfere with the addition of this 5% but it must be held that the technical fee in excess of 5% was not taxableThe High Court, therefore, was wrong in entertaining this new point at the reference stage on the basis of the allegedly general and compendious nature of the question referred to it by the Tribunal. But we do not propose to rest our judgment only on this technical aspect of the matter as we find that even on merits they has a good case to succeed before usThe High Court agreed with the Tribunal that the technical information furnished by they by post was a service which could not be said to have been rendered in India; putting it to use in India is not relevant as opined by the Commissioner. But in regard to the fact of the foreign technicians having been employed by the Indian company on payment of salary in India, it took the view that the service was rendered in India as foreign technicians were deputed by the. In the opinion of the High Court it did amount to some activity or service inThen the High Court proceeds to