M/S. Carborandum Co. Vs. C.I.T.,
Madras [1977] INSC 109 (11 April 1977)
UNTWALIA, N.L.
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 connection'.
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
services 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 income tax 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 income-tax and
directed the refund of major portion of the tax deducted at source to the
assessee company. The Commissioner 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 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 taxable 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 manufacture of its products. On reference under s. 66( 1 ). of
the Act the Revenue took another new plea that the agreement 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 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 to was in
general terms and comprehensive enough to embrace within its ambit the point of
applicability 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 liability 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 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 nonresident 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 AB].
(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 appreciate 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 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 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
territories, 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 territories.
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 deputed 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 subsection (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. 92 ITR 411 overruled.
C.I.T. Bombay City IV. Tata Chemicals Ltd. 94
ITR 85, approved.
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 abrasive
and coated abrasive products. For the improvement and advancement in the line
of its manufacture, it has a Research Wing also. The results of the research
are incorporated in pamphlets prepared from time to time.
The Assessee Company entered into an
agreement dated June 22, 1955 with M/s Carborandum Universal Ltd.--hereinafter
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 layout, plant and equipment production, purchase of.. materials,
manufacturing specifications and quality of product;
4--502 SCI/77 478 (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) 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.
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 technical 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 information 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 personnel furnished by the assessee company to the Indian company
although worked under the control of and was paid for by the latter, the sit us
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
consideration 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 Tribunal are:
(1) The American company rendered service to
the Indian company for the starting of the factory in India in the shape of
examination of the factory design and layout 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 personnel in India on the
basis of the various 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 personnel
directly by the employees of the assessee 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 assessee 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 material
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
question 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.
(3) That even assuming that the High Court
was right in its view of basing the tax liability 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 support 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 respect 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 territories."
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 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 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 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 applicability 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 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 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 on by a non-resident which yields
profits or gains and some activity in the taxable ferritories which contributes
directly or indirectly to the earning of these 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 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 connection" must be real and intimate, and
through or from which income must accrue or arise whether directly or
indirectly to the nonresident. 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." The High Court was wrong in its view that
activities. of the foreign personnel lent or deputed by the American company
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 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 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
Company(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 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 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.
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