TaxTMI 
TaxTMI 
1978 (7) TMI 82
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....ermany between IIP represented by its managing director, Sri N. Krishnan, and VDO providing for a collaboration for the purpose of manufacturing dashboard instruments and tachometers at the factory of IIP in Bangalore in accordance with the licence granted by the VDO. The relevant parts of the agreement read as follows: "WHEREAS VDO are manufacturers of measuring instruments for road vehicles, including their respective driving parts and accessories (hereinafter referred to as 'licensed articles') : AND WHEREAS VDO has, at the request of the guarantor abovenamed, agreed to grant the licensee company a manufacturing licence of the aforesaid licensed articles for the territory of Union of India (hereinafter referred to as the ' licensed territory') : (Note: IIP is the licensee-company and Sri N. Krishnan is the guarantor). It is hereby mutually agreed as follows: I. VDO agrees to grant the licensee-company a manufacturing licence for the licensed territory entitling it to make the licensed articles described above. This manufacturing licence embraces: (a) The transfer of all ideas and the disclosure of all experiences obtained in the field of the licensed articles, to w....
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....ilable or produced in the licensed territory. (e) Designation of trademark During the continuance of this agreement, the licensee-company is entitled to use the protected trade-mark 'VDO' for the licensed articles, but only as part of the following combination: 'Yenkay License VDO ' (f) Standard of quality The licensee-company undertakes to achieve and maintain for all the licensed articles manufactured by it a standard of quality comparable to that of VDO. (g) Research by the licensee-company In case the licensee-company carries on any research and development resulting in any experiences, improvements and innovations made and discovered in the field of the licensed articles, the licensee-company undertakes to keep VDO regularly informed in respect of the same. If any part of the know-how resulting from research thus developed is intended to be used by VDO for the purpose of its manufacture in Germany or for being passed on for exploitation to their other licensees elsewhere, VDO shall be entitled to do so. The VDO shall in such cases pay as a contribution to the research and development cost of the icensee-company an amount which, unless agreed to otherwise, shall....
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....e licensed territory except with the licensee-company's consent. V. Payment of licence fees and other charges In consideration of the grant of the manufacturing licence and other rights, facilities and assistance under this agreement, the licensee-company agrees to make the following payment to VDO : (a) An amount of DM. 250,000 for surrender of technical data and know-how, such as cost of drawings, cost of designs, project reports, working process and construction data, required for the manufacture of licensed articles. The licensee-company has assured VDO that this payment is free of tax under the Indian laws and in case any tax became payable for this payment, the licensee-company shall reimburse VDO to that extent. (b) Licence fee to VDO amounting to three per cent. (free of tax) of the total turnover of the licensed articles. (c) Licence fee to Instek Zurich amounting to one per cent. (free of tax) of the total turnover of the licensed articles. VDO has assured the licensee-company that this licence fee is in respect of payment to be made by VDO to Instek Zurich for the licence held by the VDO from the said company. (d) An amount equal to two per cent. of the total....
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....eceived in India in such year by or on behalf of such person ; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year." The case of the department throughout has been that in the instant case the income which is liable to tax either in the hands of VDO or in the hands of Instek is income which is deemed to have accrued or arisen in India. Section 9 of the Act explains the expression "income deemed to accrue or arise in India". The relevant part of s. 9 as it stood during the assessment years 1962-63 to 1970-71, with which we are concerned, was as follows: "9(1). The following incomes shall be deemed to accrue or arise in 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 or from any money lent at interest and brought into India in cash or in kind, or through the transfer of a capital asset situate in India. Explanation.- For the purposes of this clause- (a) in the case of a business of which all the operations are not carried out in India, the income of....
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....ble under the Act as it had not accrued or could not be deemed to accrue in India and in any event the licence fee of one per cent. payable to Instek under cl. (c) of art. V of the agreement could not be treated as VDO's taxable income. During the pendency of those appeals, the Commissioner of Income-tax took action under s. 263 of the Act proposing to revise the orders of "nil" assessment passed in the case of Instek in respect of the assessment years 1963-64, 1964-65 and 1965-66, as he was of the opinion that the orders in question were erroneous and prejudicial to the interests of the revenue. After hearing IIP, the agent of Instek, he set aside the said orders and directed the ITO to assess the licence fee of one per cent. payable under cl. (c) of art. V in the hands of Instek represented by IIP. Aggrieved by the said orders, Instek preferred appeals before the Tribunal. These appeals were dismissed by the Tribunal by its order dated February 8, 1974. At the instance of Instek a common question is referred to us in I.T.R.C. Nos. 69, 70 and 71 of 1975, in regard to the correctness or otherwise of the Commissioner's orders. Pursuant to the orders of the Commissioner under s. 26....
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.... "1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the entire 3% of the turnover of International Instruments Private Ltd., which was payable by it to its foreign collaborator, M/s. VDO Tachometer Werke, was income of the foreign collaborator liable to be taxed in India? (2) Whether the Tribunal was right in holding that the sum of 1% on the value of the turnover of International Instruments Private Ltd. was not the income of VDO Tachometer Werke, West Germany, and, therefore, the question of allowing the payment of the same to M/s. Instek, Zurich, did not arise ?" I.T.R.C. Nos. 36 to 42 of 1975: "Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that 1% of the turnover which was payable under clause 5(c) of the agreement dated 30th September, 1959, was not part of the income of M/s. VDO Tachometer Werke, West Germany, assessable to tax in India ?" I.T.R.C. Nos. 69, 70 and 71 of 1975: "Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the Commissioner was justified in invoking the provisions of section 263 of the Income-ta....
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....ed by the appellant under its contract with the Indian company. 13. In my opinion, it is possible to accept all the facts urged by Sri Swaminathan and yet hold that the technical fees should be deemed to have accrued in the taxable territories. The place where a contract is agreed upon may be material where the obligations under the contract have also been finally fulfilled and determined in the place. Otherwise, it becomes merely a place where the parties to the contract meet and put their signature to signify their consent whereas the whole series of operations in terms of the contract take place elsewhere. This contract was essentially an agreement to exploit an asset--the owner of the asset getting both a liquidity sum as well as specified share continuously in the yield that springs up by exploiting such assets without any serious detriment to it. Such exploitation constitutes a definite source of income as mostly the services have been in the taxable territories and nowhere else. The appellant is an invisible partner in the manufacture and sale of measuring instruments by the Indian company and if the Indian company is to cease production, the appellant would not get anythi....
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....defined in s. 9 of the Act did not arise for consideration. In so far as the decision of the Madras High Court is concerned, it has to be stated that the said decision has been reversed by the Supreme Court in Carborandum Company v. CIT [1977] 108 ITR 335. It is clear from the findings recorded by the Tribunal that VDO did not carry on any operations through IIP and that it had not participated in the business of the IIP in India and no income accrued on the basis of any such participation. Sri S. R. Rajasekharamurthy, learned counsel for the department, argued that the existence of the agreement itself was sufficient in the eye of law to establish business connection between VDO and the IIP and the production of the licensed articles by IIP must be deemed to have been the result of the operations carried on by VDO in India. He further relied upon the clause in the agreement which authorised VDO to provide the services of technical personnel to IIP as supporting the case of the department that there was participation of VDO in the business of IIP. It has to be stated here that in order that an income of a non-resident received from an Indian resident can be considered as 'deemed' ....
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....yees of the Indian company solely subject to its control and authority. Such services were in pursuance of a contract between the technical personnel and the Indian company and had no connection with the services to be rendered by the appellant under its contract with the Indian company. This part of the finding of the AAC remains undisturbed and it has to be held that no employee of VDO carried on any business operation in India on its behalf. It follows that VDO has not carried out any business operations in India and has not derived any income which is attributable to any such operation. We are of opinion that in the facts and circumstances of the case it is not possible to agree with the contention of the department that any part of the licence fee payable under cls. (b) and (c) of art. V of the agreement can be deemed to have accrued or arisen in India in view of the decision of the Supreme Court in the case of Carborandum Company [1977] 108 ITR 335, the relevant part of which reads as follows : "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 t....
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....ence that any operations are carried on by VDO in India in view of the above decision of the Supreme Court where also the foreign company was receiving three per cent. of the net sale proceeds of the products manufactured in India. Merely because certain goods are manufactured in India by an Indian company with the aid of technical know-how obtained by it abroad from a non-resident company, it cannot be said that the non-resident company has been carrying on business operations in India, in the absence of any other material which points to the contrary. At this stage it may be appropriate to refer to certain subsequent amendments made to s. 9(1) of the Act by adding cls. (vi) and (vii) by Finance Act, 1976, and Finance (No. 2) Act, 1977, with effect from April 1, 1977. Clauses (vi)(b) and (vii)(b) are relevant for the present case. They read as follows : (vi) 'income by way of royalty payable by . ...... (b) a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any incom....
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....he licensed articles has to be paid to VDO because VDO has undertaken to pay that sum for the licence held by it from Instek. Instek is not a party to the agreement. There is no privity of contract established between IIP on the one hand and Instek on the other. Under the agreement VDO has not acted as the agent of Instek. In the circumstances, it cannot be said that Instek had any business connection with IIP much less can it be said that any amount was paid by IIP within the taxable territory to Instek. In these circumstances, s. 9 of the Act would not be applicable at all to the case of Instek and whatever income it may have derived from VDO on account of VDO entering into agreement with IIP. Hence, assessments made on Instek are wholly without jurisdiction. In so far as VDO is concerned, it has to be held that, even though under the agreement four per cent. is payable by IIP to VDO, the net income derivable by VDO is only three per cent. as it has undertaken to pay one per cent. out of the four per cent. receivable by it in lieu of the licence held by VDO from Instek. The amounts payable under cls. (b) and (c) cannot be attributed to any operation carried out by VDO in India. ....