Business connection and territorial operations under section 42 limit taxation of non-resident technical fees in India.

A fresh contention based on business connection could not be entertained at the reference stage because a question of law not raised before, or considered by, the Tribunal does not arise from its order. For non-resident income, section 42 applies only where income accrues through or from a business connection and some connected operations are carried out in the taxable territories. On the findings, the technical information, research material and personnel services were furnished outside India, and no relevant operations were performed in India, so the fee beyond the amount already taxed was neither actually nor deemed to accrue or arise in India. The 5% addition already brought to tax remained undisturbed.

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Issues: (i) Whether the new question based on business connection could be entertained at the reference stage. (ii) Whether the technical fee received by the non-resident assessee accrued or arose in India or was deemed to accrue or arise in India under the Act.

Issue (i): Whether the new question based on business connection could be entertained at the reference stage.

Analysis: A question of law not raised before the Tribunal or considered by it does not arise out of its order merely because it may be capable of being connected with the findings recorded. A fresh contention that the technical fee was taxable by reason of a business connection was therefore outside the proper scope of the reference.

Conclusion: The new point based on business connection ought not to have been entertained at the reference stage.

Issue (ii): Whether the technical fee received by the non-resident assessee accrued or arose in India or was deemed to accrue or arise in India under the Act.

Analysis: Income actually accruing or arising in the taxable territories is distinct from income deemed to accrue or arise there. Under section 42, deeming operates only where income accrues through or from a business connection and some operations connected with that business are carried out in the taxable territories. The Tribunal's findings showed that the technical information, research material and personnel services were furnished outside India, and the foreign technicians worked as employees of the Indian company under its control. No part of the assessee's operations was carried out in India, so neither sub-section (1) nor sub-section (3) of section 42 applied to the disputed fee. The amount already brought to tax at 5% was not open to interference because no appeal had been filed against that part.

Conclusion: The technical fee in excess of 5% did not accrue or arise in India and was not deemed to accrue or arise in India; the 5% already taxed remained undisturbed.

Final Conclusion: The High Court's view was set aside and the reference was answered for the assessee, leaving only the unchallenged 5% addition intact.

Ratio Decidendi: For a non-resident's income to be brought within section 42, there must be a real business connection and some part of the relevant operations must be carried out in the taxable territories; absent such territorial operations, the income is neither actually nor deemingly taxable there.

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