TaxTMI 
TaxTMI 
1989 (5) TMI 3
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....lities for training of personnel of ECIL in connection with the manufacture of computers in consideration of the Norwegian currency NOK 32 millions which is said to be approximately equal to Rs. 575 lakhs. 85 per cent. of the consideration is to be paid from credit provided by the Norwegian authorities and the balance 15 per cent. to be paid out of free foreign exchange made available by the State Bank of India, London Branch. It is not in dispute that the said agreement has been approved by the Reserve Bank of India as well as the Central Government. The petitioner approached the second respondent, the Income-tax Officer, for grant of a "No objection certificate" as contemplated by section 195(2) of the Income-tax Act, 1961, to enable it to make the remittance of the instalments due without any obligation to deduct any income-tax at source. No formal application appears to have been filed before the Income-tax Officer, but, as he had expressed his inability to comply with the request, the company made a detailed application dated December 23, 1986, to the Commissioner of Income-tax. The Commissioner, after hearing counsel for the petitioner has, by his letter dated December 23, 19....
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....the whole or any part of British India or for any Federal State and a Provincial Legislature may make laws for the Province or for any part thereof." After the advent of Independence and the adoption of the Constitution, we are a sovereign Republic. The Constitution, in Chapter I of Part XI, deals with the legislative relations between the Union and the States. Article 246 provides for the subjects in three Lists regarding which the Union Parliament and the State Legislature can make laws. Article 245 which is relevant reads as follows: "245. (1) Subject to the provisions of this Constitution, Parliament may make laws for the whole or any part of the territory of India, and the Legislature of a State may make laws for the whole or any part of the State. (2) No law made by Parliament shall be deemed to be invalid on the ground that it would have extra-territorial operation." There was no provision corresponding to article 245(2) in the Government of India Acts. Our Parliament is the legislature of a sovereign nation, while the Indian Legislature created under the Acts of British Parliament was having its legislative competence only in respect of specified territories. Th....
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....technical services' means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head 'Salaries'." Then, reference has to be made to section 195 which provides for deduction of tax at source: "195(1) Any person responsible for paying to a non-resident, not being a company, or to a company which is neither an Indian company nor a company which has made the prescribed arrangements for the declaration and payment of dividends within India, any interest, not being 'interest on securities', or any other sum, not being dividends, chargeable under the provisions of this Act, shall, at the time of payment, unless he is himself liable to pay any income-tax thereon as an agent, deduct income-tax thereon at the rates in force : Provided that nothing in this sub-section shall apply to any payment made in the course of transactions in....
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....mount towards advance tax, it is entitled to a certificate as contemplated by section 195(2) of the Act. Standing counsel for the Revenue has, on the other hand, supported the action of the Commissioner and contended that the petitioner is obliged to make a deduction of advance tax from any payments made to the Norwegian company towards fees for technical services as it is obliged to do so as contemplated by section 195(1) of the Income-tax Act. The undisputed facts are : The agreement was entered into between the petitioner and the foreign company at Hyderabad. Clauses 1.6, 1.7, 1.8 define technical know-how, technical services and training. Clause 1.11 defines manufacturing territory as India and clause 1.12 states territory as India and some other countries. Clauses 14, 14.1 and 14.2 provide for consideration to be paid by the petitioner for rendering technical services, etc., by the Norwegian company. The technical know-how, technical services and technical personnel for imparting training to the employees of the petitioner-company and the other facilities are for the purpose of being utilised by the petitioner in its business of manufacture in India and its sales activit....
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....hin British India without any business connection or territorial nexus was discussed while considering the provisions of the Indian Income-tax Act, 1922, and the Government Trading Taxation Act. But, no provision of the Act was held to be ultra vires. Certain observations in the opinions even go against some of the contentions of the petitioner now raised. In view of article 245(2) of the Constitution and the provisions of the Indian Income-tax Act with which we are now concerned, the observations in this case will not help the petitioner. In the Supreme Court case reported in Carborandum Co. v. CIT [1977] 108 ITR 335, the applicability and interpretation of the provisions of section 4(1)(c) read with section 42 of the Indian Income-tax Act, 1922, came up for consideration. It was held that, in respect of a person who is not a resident in the taxable territories, income which is deemed to accrue or arise from a business carried on in India wholly or in part is liable to tax. It is pointed out that a business connection must be established before any such income of a non-resident is liable to tax under that provision. The validity of any statutory provision on the ground of legis....
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....ore aspect which has to be kept in view is that the writ petition has been filed at the stage of deduction of advance tax by the petitioner-company. Point No. 2 : As already pointed out, the Supreme Court decision in Carborandum Co.'s case [1977] 108 ITR 335 considered the provisions of section 4(1)(c) read with section 42 of the Indian Income-tax Act, 1922, and, on the language of the provisions, held that a business connection in India is necessary for taxing any income of a non-resident deemed to arise in India. The Income-tax Act, 1961, was amended by the Finance Act, 1976, by adding certain clauses in section 9(1) including clause (vii) (extracted above) by which the fees for technical services paid by an Indian to a non-resident and used in the Indian firm in India is deemed to be income arising in India. Section 9(1)(i) of the present Act is analogous to section 4(1)(c) of the 1922 Act. In view of the clear language of the new clause added in 1976, it cannot be said that the conditions of section 9(1)(i) alone make the income of a non-resident liable to tax. Counsel for the petitioner has referred to a decision of the Karnataka High Court reported in VDO Tachometer We....
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....33 of the Constitution arises in this case. Leave is refused. The petitioner preferred petitions for special leave to the Supreme Court under article 136 of the Constitution of India to appeal against this judgment as well as the judgment dated July 1, 1987, in W. P. No. 8737 of 1987.]. N. A. Palkhivala, Senior Advocate (Ranganathachari, P. A. S. Rao, Miss Ruby Anand and D. N. Misra, Advocates of J. B. Dadachanji and Co, Advocates, with him), for the appellant. S. C. Manchanda, Senior Advocate (B. B. Ahuja and Miss A. Subhashini, Advocates, with him), for the respondents. JUDGMENT OF THE SUPREME COURT The judgment of the court was delivered by PATHAK C. J. I.-Special leave granted. These appeals by special leave are directed against the dismissal by the Andhra Pradesh High Court of writ petitions filed by the appellant. The appellant, Messrs. Electronics Corporation of India Ltd., entered into a memorandum of understanding with a Norwegian company at Paris. This was followed by an agreement dated May 2, 1986, executed at Hyderabad. Under that agreement, the Norwegian company was to provide technical know-how and technical services, including facilities fo....
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....icle 14 was violated. The High Court repelled all the contentions of the appellant and dismissed the writ petition. A similar writ petition was filed by the appellant against an order of the Commissioner of Income-tax declining to direct the grant of a "No objection certificate" in relation to disbursement made under a licence agreement with Messrs. Control Data Indo-Asia Company, U. S. A., and the writ petition was dismissed by the High Court for the reasons which had found favour with it in the earlier case. It is contended by learned counsel for the appellant that section 9(1)(vii) of the Income-tax Act is ultra vires inasmuch as it enables the levy of income-tax on the Norwegian company in the one case and the American company in the other in circumstances which appear to show that the statute operates extra-territorially without the need for any nexus between anything done in India and the person sought to be taxed. Section 9(1)(vii) declares : "9. (1) The following incomes shall be deemed to accrue or arise in India-... (vii) income by way of fees for technical services payable by (a) the Government; or (b) a person who is a resident, except where the fees are pay....
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.... British Columbia Electric Railway Co. Ltd. v. King [1946] AC 527, 542 (PC): "A Legislature which passes a law having extra-territorial operation may find that what it has enacted cannot be directly enforced, but the Act is not invalid on that account, and the courts of its country must enforce the law with the machinery available to them." In other words, while the enforcement of the law cannot be contemplated in a foreign State, it can, none the less, be enforced by the courts of the enacting State to the degree that is permissible with the machinery available to them. They will not be regarded by such courts as invalid on the ground of such extra-territoriality. But the question is whether a nexus with something in India is necessary. It seems to us that, unless such nexus exists, Parliament will have no competence to make the law. It will be noted that article 245(1) empowers Parliament to enact laws for the whole or any part of the territory of India. The provocation for the law must be found within India itself. Such a law may have extra-territorial operation in order to subserve the object and that object must be related to something in India. It is inconceivable th....