http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 10  

PETITIONER: M/S. CARBORANDUM CO.

       Vs.

RESPONDENT: C.I.T., MADRAS

DATE OF JUDGMENT11/04/1977

BENCH: UNTWALIA, N.L. BENCH: UNTWALIA, N.L. BHAGWATI, P.N. FAZALALI, SYED MURTAZA

CITATION:  1977 AIR 1259            1977 SCR  (3) 475  1977 SCC  (2) 862  CITATOR INFO :  R          1981 SC 148  (12)  RF         1989 SC1707  (5)

ACT:             Income-tax  Act, 1922---S. 4(1)(e)--Distinction  between         concept   of   actual   accrual   and   notion   on   deemed         accrual--Reference  under Income-tax Act, 1922--  New  facts         neither  raised  nor considered by the  Tribunal  cannot  be         entertained by the High Court at reference stage.              Income-tax Act, 1922--S. 42--Scope and applicablity  of         ’business connecttion’.

HEADNOTE:             The appellant a foreign company within the meaning of s.         2(5A)  of  Income Tax Act, entered into an  agreement   with         M/s.  Carborandum  Universal  Ltd.,  having  its  registered         office  at  Madras  on June 22, 1955  and  rendered  certain         technical  and knowhow services.  In view of the said  serv-         ices  it was to ’receive from the Indian company  an  annual         service fee equal to  3 per  centum of the net sale proceeds         of the products manufactured by the latter.             During  the year of account relevant to  the  assessment         year  1957-58  the appellant company received a sum  of  Rs.         95,762/- from the Indian company as its service fee.  A good         slab  of it was deducted at source on account  of  incometax         and  super-tax.  The appellant company fried its  return  of         income  for  the year in question with  an  application  for         refund of the entire tax deducted at source. The income  tax         officer took the view in his assessment order that 5% of the         technical fee paid to the American company was earned by  it         in  India and only that small amount was assessable  to  in-         come-tax and directed the refund of major portion of the tax         deducted at source to the assessee company.  The Commission-         er of Income-tax in exercise of his revisional powers  under         s.  33B  of the Act took the view that at least 75%  of  the         technical  fee  earned by the assessing company  during  the         year of account had accrued or .arisen in India even  though         the  technical  information  was supplied  by  the  assessee         company  from  outside  India and  the  technical  personnel         furnished  by  the assessee company to  the  Indian  company         although worked under the control of and was paid for by the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 10  

       latter inasmuch as the situs of the services so rendered was         in  India.   Treating  the technical fee in  the  nature  of         royalty  paid, it directed the Income-tax Officer to  revise         the  assessment on the basis that 75% of it should be  taken         as  income  accruing  or arising in India  to  the  assessee         company.   On appeal, the Appellate Tribunal set  aside  the         said order and restored that of the Income-tax Officer  even         though it was of the view that even 5% of the technical  fee         could not be taken as income of the assessee. company  taxa-         ble  under the Act.  The Tribunal held that the use  of  the         technical  assistance  and know-how given  by  the  American         Company and made use of by the Indian Company in the taxable         territory  could  not make the former liable to  payment  of         income tax on the amount of technical fee received by it nor         was  it any royalty.  It also rejected a new stand taken  by         the  Revenue that the assessee company must be deemed to  be         working in conjunction with the Indian Company in the  manu-         facture of its  products.  On reference under s. 66( 1 ). of         the  Act the Revenue. took another new plea that the  agree-         ment  clearly established a business connection between  the         two  companies  and as such technical fee  received  by  the         assessee  company  had accrued or arose from  such  business         connection  assessable to income-tax under s.  4(1)(c)  read         with  s.  42 of the Act.   The objection  of  the  assessee.         company to the entertainment of the new point at the  refer-         ence stage that it did not arise out of the Tribunal’s order         was  over-ruled by the High Court on the  ground  that   the         question referred to was in general terms and  comprehensive         enough to embrace within its ambit the point of applicabili-         ty  of s. 42(1) of the Act to the transactions in  question.         Upholding the stand taken on behalf-of the Revenue the  High         Court  answered  the question referred to it in  its  favour         against the assessee company.  On appeal by certificate  the         appellant contended:         476                           (1) That the High Court could not go  into                       the matter of business connection between  the                       two  companies when such a question was  never                       raised or in issue at any earlier stage;                           (2)  That  the  High Court  was  wrong  in                       rounding  the  tax liability of  the  assessee                       company  on the basis of the alleged  business                       connection. Its finding or view in that regard                       is wholly erroneous.                           (3) That even assuming that the High Court                       was  right in its view of basing the  tax  li-                       ability of the assessee company on the alleged                       business connection, it failed to examine  the                       question  of apportionment under s.  42(3)  of                       the Act.                          (4)  That apportionment under s. 42(3)  and                       determination  of  the tax  liability  of  the                       assessee  company in pursuance  thereof  could                       not  be more than the liability to pay tax  on                       5% of the total technical fee as found by  the                       Income-taxOfficer and upheld by the Tribunal,         HELD: (1) 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.  Since 5% of the technical service fee  was         brought to tax by the I.T.O. and no appeal was filed against         it on behalf of the assessee company, the  technical fee  in         excess of  5%  was  not  taxable. [484 B-D]             (2) The High Court did not keep in view the  distinction         between  the  concept of actual accrual and  the  notion  of

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 10  

       deemed accrual evidenced from s. 4(1) (c) & s. 42 but  mixed         the  one with the other while answering the  reference    in         question.  The income assessable to income tax u/s.  4(1)(c)         is of two kinds viz. (1) 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 depending 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. [481  A-         B].             (3)  The  High Court was wrong in  entertaining  at  the         reference  stage  on the basis of the  alleged  general  and         compendious  nature  of the question referred to it  by  the         Tribunal  the new point based upon the  theory  of  business         connection, which was neither raised before the Tribunal nor         considered  by it; nor did it arise on the findings of  fact         recorded by it. [481 F-G]             Commissioner  of  Income Tax, Bombay  v.  Scindia  Steam         Navigation Co. Ltd. 42 ITR 589, followed.             (4)  The  High Court went wrong in its approach  to  the         question raised before it and did not quite correctly appre-         ciate the scope and applicability of s. 42 of the Act.  On a         plain reading of sub-sections (1) and (3) of section 42,  it         would appear that income accruing or arising from any  busi-         ness  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  territory.  If all such operations are carried  out         in  the taxable territory, sub-section (1.) would apply  and         the  entire income accruing or arising outside  the  taxable         territory  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 terri-         tories,  the  profits and gains of the  business  deemed  to         accrue  or  arise in the taxable territories shall  be  only         such ’profits and gains are reasonably attributable to  that         part  of the operations carried out in the taxable  territo-         ries.   Thus  comes in the question of  apportionment  under         subsection (3) of s. 42. [482 C-F]         Commissioner  of Income Tax, Punjab v. R.D. Aggarwal  &  Co.         and Anr.56 ITR 20, referred to.           (5)  In the instant case the High Court was wrong  in  its         view that activities of the foreign personnel lent or deput-         ed  by the American company amounted to a business  activity         carried  on by that company in the taxable  territory.   The         service rendered by the American company in that  connection         was  wholly and         477         solely  rendered in the foreign territory.  No part  of  the         activity or operation could be said to have been carried  on         by  the  American company in India, even if  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.  In the absence of such a         sustainable finding, the provisions of s. 42 either of  sub-         section (1) or of sub-section (3):were not attracted at all.         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. [483 E-H]             Commissioner of Income Tax, Madras I v. Carborandum  Co.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 10  

       92 ITR 411 overruled.              C.I.T.  Bombay City IV. Tata Chemicals Ltd. 94 ITR  85,         approved.

JUDGMENT:              CIVIL  APPELLATE JURISDICTION: Civil Appeal No.  89  of         1975.             (From  the Judgment and Order dated the 4th May 1973  of         the  Madras High Court in Tax Case No. 183 of 1967).             N.A.  Palkhivala,  R. Balasubramanian,  LB.  Dadachanji,         A.C. Moneses, Mrs. A.K. Verma, C.R. Dun, Ravinder Narain and         O.C. Mathur, for the appellant.               R.M. Mehta, and R.N. Sachthey, for the respondent.                K.R. Ramamani and 1. Ramamurthi, for the Intervener.                The Judgment of the Court was delivered by             UNTWALIA,  J. This is an appeal by certificate from  the         decision  of the Madras High Court in a Reference   made  by         the Income-tax Appellate Tribunal under section 66(1) of the         Income Tax Act, 1922--hereinafter referred to as the Act.             M/s   Carborandum   Co..of   the   United   States    of         America--hereinafter  called  the American’ Company  or  the         Assessee  Company, is: the appellant.  The Central Board  of         Revenue has declared it a Company under section 2(5A) of the         Act.  It has specialized in the manufacture of bonded  abra-         sive and coated abrasive products.  For the improvement  and         advancement  in  the line of its manufacture, it has  a  Re-         search Wing also.  The results of the research are  incorpo-         rated in pamphlets prepared from time to time.             The  Assessee  Company entered into an  agreement  dated         June 22, 1955 with M/s Carborandum Universal Ltd.--hereinaf-         ter called the Indian company, having its registered  office         at  Madras.  As per the terms of the agreement the  American         Company  was to render and did render to the Indian  Company         certain  technical  and know-how services of  the  following         nature :-                           (i)  furnishing of  technical  information                       and know-how" with respect to the  manufacture                       of   bonded  abrasive  and   coated   abrasive                       products;                          (ii)   providing   technical     management                       including  factory design and lay  out,  plant                       and equipment production, purchase of..  mate-                       rials, manufacturing specifications and quali-                       ty of product;                       4--502 SCI/77                       478                            (iii) furnishing comprehensive  technical                       information of all developments in the   manu-                       facture 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) training Indian personnel to  replace                       the foreign technical personnel as quickly  as                       possible.         In lieu of all the services aforesaid, as per the agreement,         the American company was to receive from the Indian  company         an annual service fee equal to 3 per centum on the net  sale         proceeds  of  the products manufactured by the  latter  each         year.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 10  

            During  the year of account relevant to the  assessment         year  1957-58  the assessee company received a  sum  of  Rs.         95,762/- from the Indian company as its service fee.  A good         slab  of it was deducted at source by the Indian company  on         account  of  income-tax and super-tax payable .on  the  said         sum.  The American company filed a Return of income for  the         year  in  question  with an application for  refund  of  the         entire tax deducted at source.  The Income-tax Officer  took         the  view in his assessment order that 5% of  the  technical         fee  paid to the American company was earned by it in  India         and  Only  that small amount was assessable  to  income-tax.         Consequently,  he directed the refund of a major portion  of         the  tax  deducted at source to the assessee  company.   The         Commissioner  of Income-tax in exercise of his  power  under         section 338 of the Act revised the order of the   Income-tax         Officer and took the view that at least 75 % of the  techni-         cal  fee earned by the assessee company during the  year  of         account  had accured or arisen in India.  In the  main,  the         basis of his order was that even though the technical infor-         mation  was  supplied by the assessee company  from  outside         India,  the information received by the Indian  company  was         put  to use only in the taxable territory and the  technical         fee  paid  by  it was mainly on account of  such  use.   The         Commissioner was also of the view that the technical person-         nel furnished by the assessee company to the Indian  company         although worked under the control of and was paid for by the         latter, the situs of the services so rendered was in  India.         Treating the technical fee in the nature of royalty paid, it         directed the Income-tax Officer to revise the assessment  on         the basis that 75% of it should be taken as income  accruing         or arising in India to the assessee company.             The American company went up in appeal to the  Appellate         Tribunal from the revisional order of the Commissioner.  The         Tribunal  Set aside the said order and restored that of  the         Income-tax  Officer, even though it seems to be of the  view         that  even  5% of the technical fee could not  be  taken  as         income  of the assessee company taxable under the Act.   But         since the assessee  company had not gone .in appeal  because         of  the smallness of the amount of tax payable on the  basis         of 5%, the Tribunal was obliged to maintain the order of the         Income-tax Officer.         479                  The Tribunal took some new materials into consider-         ation at the appellate stage in order to ascertain the  true         nature  of the service rendered by the American  company  to         the Indian  company as per the term of the agreement and the         place of rendering such service. The findings of the  Tribu-         nal  are:                                (1)  The  American  company  rendered                       service to the Indian company for the starting                       of the factory in India in the shape of exami-                       nation  of  the  factory design  and  lay  out                       prepared by the latter and sending its  advice                       by  post.  These services were not  proved  to                       have been rendered in India.                                (2)   The  pamphlets  and   bulletins                       incorporating the results of research made  by                       the  American company were also  furnished  to                       the Indian company by post  and thus. the said                       service was also rendered outside India.                                (3) That the services of the .foreign                       technical personnel were made available to the                       Indian company by the American company outside                       the country.  The former employed such person-                       nel  in  India  on the basis  of  the  various

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 10  

                     agreements  of employment entered between  the                       Indian   company  and such   personnel.   They                       were the employees of the Indian company under                       its Control for their day-today working.                                (4)  The training of the Indian  per-                       sonnel directly by the employees of the asses-                       see  company was imparted outside India.               The  Tribunal  did  not agree with the  views  of  the         Commissioner that the payment of the teChniCal fee of 3% was         dependent  upon the use  of the information in India  or  on         the volume and extent of such use. The use of the  technical         assistance  and  knowhow given by the American  Company  and         made  use of by the Indian Company in the taxable  territory         could  not make the former liable-to payment of  income  tax         on the amount of technical fee received by it nor was it any         royalty. A new stand taken before the Tribunal on behalf  of         the  Revenue that the assessee company must be deemed to  be         working  in  conjunction   with the Indian  company  in  the         manufacture of the products in question was also rejected.               The Commissioner of Income-tax--the respondent in this         appeal, asked for a reference and the Tribunal referred  the         following question of law for the opinion of the High Court:                                  "Whether  on the facts and  in  the                       circumstances  of the case, the technical  fee                       in excess of 5 per cent received by the asses-                       see company from the Indian company during the                       account  year relevant to the assessment  year                       1957-58 has       accrued or arisen in India?"               Before  the  High Court on behalf of the  Revenue  the         point  of conjunction between the American company  and  the         Indian  company in the manufacture of abrasive products  was         put in the fore-front.         480         Finding  this stand unsustainable in face of  the  agreement         between the two companies and in absence of any other  mate-         rial  in support of it, the High Court rejected  this  stand         outright.  It, however, felt persuaded to permit the Revenue         to change its stand even at the reference stage and to  urge         that the agreement Clearly established a business connection         between the two companies; the technical fee received by the         assessee  company  had accrued or arose from  such  business         connection  and hence it was assessable to income tax  under         section  4(1  ) (c) read. with section 42 of the  Act.   The         objection  of the assessee company to the  entertainment  of         the  new point at the reference stage that it did not  arise         out of the Tribunal’s order was over-ruled by the High Court         on  the  ground that the question referred  was  in  general         terms  and comprehensive enough to embrace within its  ambit         the  point of applicability of section 42(1) of the  Act  to         the  ’transactions in question.1 Upholding this stand  taken         on  behalf of the Revenue the High Court answered the  ques-         tion referred to’ it in its favour and against the  assessee         company.  Hence this appeal.             Mr.  N.A. Palkhivala, learned counsel for the  appellant         company  urged the following four points in support of  this         appeal :--                           (1) That the High Court could not go  into                       the matter of business connection between  the                       two companies when .such a question was  never                       raised or in issue at any earlier stage.                       (2) That the High Court was wrong in  founding                       the  tax liability of the assessee company  on                       the basis of the alleged business  connection.                       Its  finding or view in that regard is  wholly                       erroneous.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 10  

                         (3) That even assuming that the High Court                       was  right in its view of basing the  tax  li-                       ability of the assessee company on the alleged                       business connection, it failed to examine  the                       question of apportionment under section  42(3)                       of the Act.                           (4) That apportionment under section 42(3)                       and determination of the tax liability of  the                       assessee  company in pursuance thereof   could                       not  be more than the liability to pay tax  on                       5% of the total technical fee as found by  the                       Income-tax Officer and upheld by the Tribunal.             Certain  other companies have intervened in this  appeal         and  some argument was advanced on their behalf too in  sup-         port of the main argument of Mr. Palkhivala,                        Section 4(1) of the Act provides :--                             "Subject to the provisions of this  Act,                       the  total income of any previous year of  any                       person includes all income, profits and  gains                       from whatever source derived which--                            ..................................                       (c)  if  such person is not  resident  in  the                       taxable  territories during such year,  accrue                       or arise or are deemed to. accrue or arise  to                       him in’ the  taxable  territories during  such                       year :"             481         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  inview  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  re-         spect  of  such income-tax :"  If the whole  of  the  deemed         income can be roped in for the levy of tax under section (1)         of section 42, no question of any apportionment arises.   If         not, sub-section ( 3 ) is attracted.  It says. :--        .                             "In  the case of business of  which  all                       the  operations  are not carried  out  in  the                       taxable territories, the profits. and gains of                       the  business  deemed under  this  section  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 territo-                       ries."           In  Commissioner of Income-Tax, Bombay v.  Scindia   Steam         Navigation  Co. Ltd.(1) it has been pointed out that when  a         question  of law was neither raised before the Tribunal  nor

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 10  

       considered  by it, it will not be a question arising out  of         its order notwithstanding that it may arise on the  findings         given  by  it.  In the  instant  case  the question  of  law         based  upon  the theory of business connection  was  neither         raised before the Tribunal nor considered by it, nor did  it         arise  on  the findings of fact recorded by  it.   The  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 us.             The High Court agreed with the Tribunal that the techni-         cal  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 l.employed by the         (1)42 I.T.R. 589.         482         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  India.  Then the High Court proceeds  to  say:"         Therefore,  we  are  of the view that  the  assessee  having         rendered at least some services in India which amounts to  a         business activity the technical fee should be taken to  have         accrued through or from its business Connection  in  India."         Even   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 applicablity of section 42 of  the         Act.               On  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 faxable territories. If all such  opera-         tions  are carried out in the taxable territories,  sub-sec-         tion  (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 accure 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-lax Punjab v. B.D.  Aggarwal         and  Co. and another,(1) Shall 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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 9 of 10  

                     on by a  non-resident  which yields profits or                       gains and some activity in the taxable  ferri-                       tories which contributes directly or indirect-                       ly  to the earning of these profits or  gains.                       It  predicates an element of  continuity.  be-                       tween 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  busi-                       ness or activity incidental to the main  busi-                       ness of the non-resident through an agent,  or                       it may merely be a relation between the  busi-                       ness  of the nonresident 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 (1) 56 I.T.R. ,20.                       483                       from  or  through which  income.,  profits  or                       gains arise or accrue to non-resident must  be                       determined upon the facts and circumstances of                       the case."                       The learned Judge says further                             "A  relation to be a  "business  connec-                       tion" must be real and intimate, and   through                       or  from  which  income must accrue  or  arise                       whether directly or  indirectly to the nonres-                       ident.   But it must in all cases.  be  remem-                       bered  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  enti-                       tled  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                       throug or from that connection income directly                       or indirectly arises."             The High Court was wrong in its view that activities. of         the foreign personnel lent or deputed by the American compa-         ny amounted to 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 has  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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 10 of 10  

       was  wholly  and solely rendered in the  foreign  territory.         Even assuming, however, that there was any business  connec-         tion  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 compa-         ny  in India.  And in absence of such a sustainable  finding         by  the High  Court the provision 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 reported in         Commissioner of Income-Tax, Madras-J, v. Carborandum  Compa-         ny(1)  is not correct.  It has rightly been pointed  out  by         the  Bombay High Court in Commissioner of Income-Tax  Bombay         City  I  v.  Tara Chemicals Ltd.(2) with  reference  to  the         similar or almost         ( 92 I.T.R. 411.          94 I.T.R. 85         484         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  Depart-         ment 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 reference.             For  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 if must be held that the technical  leo  in         excess  of  5 % was not taxable.  We accordingly  allow  the         appeal, set aside the judgment of the High Court and  answer         the  question  referred by .the  Tribunal in favour  of  the         assessee and against the Revenue.  The Commissioner will pay         the  costs  of the appeal as also of the  reference  to  the         assessee.         S.R.                                      Appeal allowed.         485