THE COMMISSIONER OE INCOME-TAX WEST BENGAL-II, CALCUTTA Versus MESSRS USHA MARTIN BLACK (WIRE ROPES)/CALCUTTA
ORDER
SUHAS CHANDRA SEN, J .-- The Tribunal has referred the following two questions of law under section 256(1) of the Income-tax Act, 1961.
"(1) Whether, on the facts and in the circumstances of the case and on a proper construction of the terms of the agreement, dated the 2nd July, 1973, the Tribunal misdirected itself in law in holding that there was no 'business connection' of Messrs Martin Black and Company (Wire Ropes) Ltd. (U.K.) in India or whether the said finding of the Tribunal was perverse?"
"(2) If the answer to question (1) is in the affirmative, then whether the Tribunal was right in holding that the amount of royalty paid by the assessee company to Messrs Martin Black and Company (Wire Ropes) Ltd. (U.K.) was not assessable to tax in India under section 9(1)(i) of the Income-tax Act, 1961?"
2. The relevant facts have been set out in the statement of case which are as follows:-
The assessee company submitted an application under section 195, dated 24th May, 1974 to the Income-tax Officer, 'B' Ward, Companies District VI, Calcutta requesting to issue a certificate under the aforesaid section certifying that the royalty payable to Messrs Martin Black and Company (Wire Ropes) Ltd. In terms of the agreement, dated 2nd July, 1973 between Messrs Usha Martin Black (Wire Ropes) Ltd. (hereinafter to be referred to as the company) and the Messrs Martin Black and Company (Wire Ropes) Ltd. ( U. K. ) (hereinafter to be called Martin Black) was not taxable. According to the assessee's counsel, the Income-tax Officer was not agreeable to the proposal put forward by the company which again submitted an application, dated 7th October, 1974 for issuance of a certificate on the basis of the Income-tax Officer's decision that a portion of the royalty payable to Martin Black was taxable to Indian Income-tax.
3. In pursuance of the application, dated 7th October, 1974 the Income-tax Officer passed an order under section 195(2) of the Act on 8th October, 1974. A copy of the agreement was placed before him and it was found therefrom that the agreement was entered into for the purpose of obtaining the services of Martin Black as a marketing consultant to the company in respect of exportation of its products, namely, Steel Wire, Steel Wire Ropes and Steel Rope Products. The Income-tax Officer referred to clauses 3, 4, 5, 6 and 7 of the agreement. It was contended before him on behalf of the company that since the services, namely, reports statistics, patterns of demand and consumption and other advices allied to such services were rendered outside India and all such particulars and documents would be delivered outside India and payment would be received outside India such services did not come under the purview of the Income-tax Act, 1961 so far as the payment of royalty was concerned. It was further submitted that the entire transactions in the shape of supply of technical know-how by means of statistics, patterns, documents, reports etc. should be viewed as a transaction of outright sale and, therefore, the receipt of royalty would remain beyond the mischief of levy of Indian Income-tax.
4. The Income-tax Officers however, held: -
"It is now clear from the aforesaid clauses that the transaction relating to the supply of information and data has not ended merely with the delivery of the same. The resident party has certain obligation to carry out and the non-resident party is also keeping control over the manner of use of the relevant document so that the transaction cannot be said to be a transaction of outright sale. The knowledge that the non-resident party has acquired has been supplied to the resident party for their use in the manner specified and not in a manner in which the resident party likes. By these the non-resident party has established a sort of business connection through which they are in receipt of income, the statistics patterns and other reports and asset or property in the rent of the non-resident party which have not been sold but are being used in India for earning income. The payment which it receives can only be said to be in the nature of something for use of their asset. I, therefore, hold that the payment of royalty in the circumstances already detailed attracts tax liability by virtue of the provisions of section 9 of the I.-T. Act, 1961 to the effect that the income from any business connection in India or through or from any property or asset in India is an income deemed to accrue in India."
5. The assessee preferred an appeal against the assessment order. The Appellate Assistant Commissioner held that the services, viz., reports statistics, patterns of demand and consumption and other allied services were rendered outside India: Payments were also received outside India. He further held that the restrictive clauses in the agreement referred to by the Income-tax Officer did not alter the character of the services required to be rendered by the non-resident party. The Appellate Assistant Commissioner referred tea circular issued by the Central Board of Direct Tax No. 7A/3HI68/-II(A)-I1, dated 23rd July, 1969 in which it had been clarified that to constitute a business connection, some continuity of relationship between the person in India and the person outside India who receives or realises the profit was necessary. The Appellate Assistant Commissioner emphasized that no personnel of Martin Black visited India and the entire services were fully rendered outside. The Appellate Assistant Commissioner therefore, allowed the appeal of the assessee.
6. The Income-tax Officer appealed to the Tribunal. The Tribunal after referring to the agreement and considering the facts of the case held that the Income-tax Officer had failed to establish any business connection of Martin Black in India because it rendered all its services outside India and sent documents and papers incorporating instruction to the company in India in exportation of the company's product to the territories specified in the agreement. The Tribunal was of the opinion that it would lie wrong to lay too much emphasis on the location of the documents and papers or the restrictions imposed as to the use of those documents and papers in deciding the point in issue. The Tribunal found that the Martin Black had rendered services to the Indian Company outside India and, therefore, the Tribunal held that the amount of royalty could not be taxed in India under section 9(1)(i) of the Income-tax Act.
7. The Commissioner of Income-tax being aggrieved by the order of the Tribunal applied for referring some questions of law arising out of the order of the Tribunal under section 256(1) of the Income-tax Act and the two questions of law which we have set out hereinbefore were referred by the Tribunal to this Court.
8. The main contention e n behalf of the revenue before us is that there was some business connection between the assessee and non-resident company Messrs Martin Black and Company (Wire Ropes) Ltd. (U.K.). It has been pointed out that practical know-how and some other documents were sold by the non-resident company to the Indian company for exploitation in India. Strong reliance has been placed on clauses 4, 5 and 6 of the agreement which have been set out in the order of the Tribunal and are as follows:-
"(4) In consideration of these services to be rendered by 'Martin Black' in the territory to the 'the company' hereunder 'the company' shall 'pay 'Martin Black' as royalty:-
(a) At the rate of 3% of the F.O.B. price received by the company in respect of the products exported by the company to the Dollar Area during the term of this agreement.
(b) At the rate of 3% of the F.O.B. Price received by the company In respect of the products exported by 'the company' to the Sterling Area during the said term;
(c) At the rate of 1 % of the F.O.B. price received by 'the company' in respect of the products exported by the company to the Rupee Area during the said term.
Payments mentioned against clauses (a), (b) and (c) are subject to Indian Taxes.
For the purpose of this clause, the F.O.B. Prices shall mean the prices actually received by the company less allowance for:
(a) Defective quality and/or shortage;
(b) Demaged and/or returned products;
(c) Charges and expenses for packing, freight and Insurance.
"(5) All information and data made available to 'the company' by 'Martin Black' under this Agreement and designated confidential shall be entitled to be sub-licensed by the company provided that the terms of such sub-license are approved by Martin Black the company and the Government of India and subject thereto all such information and data shall be kept secret and confidential by the company except for the purpose of this agreement.
(6) All documents and papers supplied by 'Martin Black' to the company under this agreement shall be and remain the property of the company."
9. Mr. Bagchi submits that by clause 4 the parties had agreed that the non-resident companies will have to pay tax in India. In our opinion, this clause merely provides that the non-resident will pay tax in India if such tax is payable in India in accordance with law. Moreover, the liability to pay income-tax in India cannot be created by an agreement between the parties. Whether the non-resident company is liable to pay tax in India or not will depend upon the provisions of the Income-tax Act.
10. In order to make a non-resident company liable for payment of tax, some business activity In India on the party of the non-resident company will have to be established. The finding of the Tribunal, which we have set out, earlier is that the agreement was entered into outside India. The non-resident company was to render services outside India and the payment was to be remitted to U.K. and the documents and is papers relating to marketing intelligence and market services of other products would be delivered outside India. In view of these findings of the Tribunal it is not possible to accept the contention that there was some business activities of the non-resident company in India.
11. Mr. Bagchi, on behalf of the Revenue, strongly relied on clauses 5 and 6 of the agreement and contended that the non-resident company was interested in the information and data that was supplied to the assessee and could control the business of the assesses company In India and, therefore, the business activity of the non-resident company in India was established thereby.
12. Clause 6 of the agreement makes it clear that all documents and papers supplied by the non-resident to the Indian company will be the property of the Indian company. Under clause 5 of the documents and papers supplied by the non-resident has to be treated as confidential. The Indian company has to keel, all such information and data supplied by the non-resident secret and confidential and if the assessee wanted to allow anybody else to use such Information and data, prior approval from the non-resident company was necessary. Although the expression 'sub-licensee' has been used, it cannot be inferred from that that the property in the information and data remained with the non-resident and the Indian company was using that property only under a licence. Clause 6 has categorically put this matter beyond any dispute. The Indian company was free to use the data and other information supplied by the non-resident company but the restriction was on sharing of the data and information with a third party. A limited restriction was imposed on the use of the data and information supplied by the non-resident. But that did not amount to doing of any business or carrying on any business activity by the non-resident company in India.
13. There is no statutory provision under which the income of the non-resident in a case like this can be brought within the net of assessment In India. The relevant section is section 9 of the Income-tax Act, which is as follows: -
"(9) (1) The following incomes shall be deemed to accrue or arise it India:-
(i) all income accruing or arising whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income In India or through the transfer of a capital asset situate in India;
Explanation.-- For the purpose of this clause (a) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India."
14. The non-resident company did not have any property or asset or source of income In India. The only question in this case is whether the non-resident company had earned any income 'from any business connection In India'. In the facts of this case, in order to bring the income of the non-resident within the mischief of section 9(1)(i), it has to be shown that there was some business operation carried out by the non-resident in India. If the entire business operation of the non-resident is carried out In India, then the income arising from such business operation will be wholly taxable. But in case of a business of which all the operations are not carried out in India the income has to be reasonably attributed to the operations carried out in India.
15. The Supreme Court in the case of Carborandum Co. v. Commissioner of Income-tax, Madras 108 1 T d 335 (1971 Tax G R 650) held on similar facts that even assuming that there was any business connection between the earning of the fee and the affairs of the Indian company, no part of the activity or operation could be said to have been carried on by the appellant in India. In that case the Supreme Court was dealing with a transaction between an Indian company and the non-resident company for rendering technical know-how and services to the Indian company. On facts which are similar to the facts in our case, the Supreme Court held that in order to rope in the income of a non-resident it must be shown by the department that some of the business operations were carried out in India in respect of the income sought to be assessed.
16. In the case before us nothing has been brought on record which would go to show that the non-resident had carried on any business activity in India. On the contrary the clear findings of the Tribunal is that no business operation has been carried out by the non-resident in India.
17. Reliance is also placed on behalf of the Revenue on a decision of Andhra Pradesh High Court in the case of Bharat Heavy Plate and Vessels v. Additional Commissioner of Income-tax A.P. 119 1 T R 986: (1979 Tax LR (NOC 40). In that case also the facts were entirely different. It was found by the Tribunal that the non-resident rendered consultancy services for the construction of the plant. For the said purpose the non-resident deputed its employees to India. The salaries of the foreign personnel were paid by the non-resident and not by the assessee. Fee for the services rendered, was to be paid by the assessee to the non-resident. Both the non-resident and the assessee had right to change the composition and 'the number of the personnel. The non-resident had to assign to the assessee the production rights as well as the general and assembly drawings, technical information and other documentation. The price for technical documentation was fixed at Rs.30 lac and fee for consultancy activity was fixed at Rs.11,91,735. Both parties had to continuously inform each other of the progress of deliveries and all the facts necessary for the fulfilment of the obligation and thus, mutually co-operate and render assistance to each other. In these facts the Division Bench of the Andhra High Court held that there was business connection between the assessee company and the non-resident within the meaning of section 163(1)(b) of the Income-tax Act.
18. But the facts of the case before us are different. The finding of the Tribunal is that all the business operations of the non-resident were to be carried out outside India. There is no clause in the agreement that has been produced before us which requires the non-resident to render any service or carry out any business operation in India. In view of the facts found by the Tribunal and having regard to the agreement and in the light of the principles laid down by the Supreme Court in the case of Carborandum Co. v. Commissioner of Income-tax Madras 108 1 T R 335: (1977 Tax L R 650), both the questions are answered in the affirmative and in favour of the assessee.
19. There will be no order as to costs..
T.K. BASU, J.-- I agree.
M, B. A. Answered in the affirmative.