Citation Codes

Equivalent Citations

citation codes

Case Number

Income-tax Reference No. 487 of 1979

Judges

T.K Basu
A.C.J
Suhas Chandra Sen, J.

Acts

provisions of section 9 of the I.T Act, 1961,
s. 256(1) of the I.T Act, 1961:1.
s. 163(1)(b) of the I.T Act.
s. 256(1) of the I.T Act

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Smart Summary

Case Summary — Reference under s. 256(1) of the Income-tax Act, 1961

Factual and Procedural Background

The Tribunal referred two questions of law under s. 256(1) of the Income-tax Act, 1961 concerning whether Martin Black & Company (Wire Ropes) Ltd. (U.K.) had a "business connection" in India and, if so, whether royalty paid to it was assessable in India under s. 9(1)(i).

The factual matrix in the statement of case: the assessee-company (Usha Martin Black (Wire Ropes) Ltd.) entered into an agreement dated July 2, 1973 with Martin Black (U.K.) for marketing consultancy services in respect of exportation of products (steel wire, steel wire ropes and related products). The assessee applied under s. 195 for a certificate that the royalty payable to Martin Black was not taxable in India. The ITO issued an order under s. 195(2) on October 8, 1974 holding that the payments were in the nature of royalty and taxable under s. 9, on the basis that the non-resident had established a business connection through control over the manner of use of supplied information and documents.

The assessee appealed. The AAC allowed the appeal, finding services and payments were rendered/received outside India and emphasising absence of personnel of Martin Black in India; the ITO appealed to the Tribunal. The Tribunal held that Martin Black rendered services outside India, there was no business connection in India, and the royalty was not taxable under s. 9(1)(i). The CIT aggrieved applied to refer questions of law to this Court under s. 256(1); two questions were referred as set out above.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, and on a proper construction of the terms of the agreement dated July 2, 1973, the Tribunal misdirected itself in law in holding that there was no "business connection" of Martin Black & Company (Wire Ropes) Ltd. (U.K.) in India or whether the said finding of the Tribunal was perverse.
If the answer to question No. (1) is in the affirmative, whether the Tribunal was right in holding that the amount of royalty paid by the assessee-company to Martin Black & Company (Wire Ropes) Ltd. (U.K.) was not assessable to tax in India under s. 9(1)(i) of the Income-tax Act, 1961.

Arguments of the Parties

Assessee's Arguments

The services (reports, statistics, patterns of demand and consumption and other allied advice) were rendered outside India and all particulars/documents would be delivered outside India; payments would be received outside India.
Because the services and delivery took place outside India, the royalty payments did not fall within the purview of the Indian Income-tax Act.
The transaction in supplying technical know-how by means of documents and reports should be treated as an outright sale, so the receipts would not be royalty taxable in India.

Revenue's (ITO / CIT) Arguments

Martin Black had a business connection in India because practical know-how and other documents were sold for exploitation in India and the non-resident retained control over the manner of use of the supplied material.
Clauses 4, 5 and 6 of the agreement showed that the non-resident could control use and impose restrictions (including approval of sublicences and confidentiality), which, in substance, established a business connection in India and rendered the payments taxable under s. 9.
Relied on clause 4 (royalty rates) and argued contractual provision that payments were "subject to Indian taxes" showed the parties contemplated taxability in India.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Carborundum Co. v. CIT, [1977] 108 ITR 335 (SC)	Where services/technical know-how are rendered by a non-resident, to tax the non-resident it must be shown that some business operations were carried out in India; absent operations in India, the income cannot be taxed here.	The Court relied on this authority to hold that, on the facts of the present case (as found by the Tribunal), nothing established any business operation by the non-resident in India and therefore the receipts could not be assessed under s. 9(1)(i).
Bharat Heavy Plate & Vessels Ltd. v. Addl. CIT, [1979] 119 ITR 986 (AP)	Where a non-resident deputes personnel to India, renders consultancy involving continuous cooperation and assigns production/technical documentation with significant ongoing activity in India, a business connection may exist (s. 163(1)(b) cited in that decision).	The Court distinguished this authority on the facts: in that case the non-resident had personnel and carried out operations in India; in the present case the Tribunal found all services were rendered outside India and there was no clause requiring the non-resident to carry out business operations in India.

Court's Reasoning and Analysis

The Court's analysis proceeded by construing the agreement and applying statutory tests under s. 9(1)(i) of the Income-tax Act, 1961 and relevant authorities:

Clause construction and the tax clause (cl. 4): The Court observed clause 4's language that payments were "subject to Indian taxes" merely acknowledged that tax would be paid if payable under law; an agreement cannot create a statutory liability. Liability to pay income-tax in India depends upon the provisions of the I.T. Act, not contractual stipulation.
Business connection requires business operations in India: The Court emphasised that to bring a non-resident's receipts within s. 9(1)(i) it must be shown that some business activity or operation was carried out by the non-resident in India. If all operations were outside India, there is no basis under s. 9 to deem the income to arise in India.
Factual findings of Tribunal and character of services: The Tribunal had found that (a) the agreement was entered into outside India, (b) Martin Black was to render services outside India, (c) payments were to be remitted to the U.K., and (d) documents and papers relating to marketing intelligence would be delivered outside India. The Court treated these findings as determinative and concluded they were not shown to be perverse or legally unsupportable.
Effect of clauses 5 and 6 (confidentiality, sublicence approval, property of documents): The Court analysed clause 6, which made documents and papers the property of the Indian company, and clause 5, which required Martin Black's approval for sublicensing and confidentiality. The Court held these clauses created only limited restrictions (principally to prevent sharing with third parties) and did not demonstrate that Martin Black continued to carry on business activities in India or retained property preventing the Indian company from using the data. Thus these clauses did not, by themselves, establish a business connection in India.
Reliance on precedent and distinction of adverse authority: The Court relied on Carborundum Co. v. CIT to underline that absent operations in India, income of a non-resident cannot be taxed here. The Court accepted that the Andhra Pradesh High Court decision in Bharat Heavy Plate & Vessels Ltd. involved materially different facts (e.g., deputation of personnel to India, continuous cooperation and assignment of production rights) and therefore was distinguishable.
Application to the two referred questions: Having considered the agreement, the Tribunal's factual findings and the legal tests, the Court concluded (as stated in the opinion) that both referred questions should be answered in the affirmative and in favour of the assessee.

Holding and Implications

Holding: The Court concluded that, on the facts found by the Tribunal and in law, the two referred questions are answered in the affirmative and in favour of the assessee. The practical effect of this conclusion (as the opinion reasons) is that the royalty payments to Martin Black & Company (Wire Ropes) Ltd. (U.K.) were not assessable to tax in India under s. 9(1)(i) on the facts of this case.

Implications:

The direct consequence for the parties is that the Tribunal's finding that Martin Black had no business connection in India is sustained in substance by this Court's reasoning, and the royalty receipts were not taxable in India under s. 9(1)(i) on these facts.
The Court distinguished and relied upon prior authorities (notably Carborundum) rather than creating any new legal principle; the opinion does not state that it is laying down an expanded rule beyond applying established principles to the facts. No change to statutory tests for business connection or taxability was announced beyond the Court's application of those tests to the agreement and found facts.
The Court ordered that there will be no order as to costs.

Note: All content in this summary is based exclusively on the material contained in the provided opinion. No facts, arguments, or outcomes beyond those stated in the opinion have been added or inferred.

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Commissioner Of Income-Tax v. Usha Martin Black (Wire Ropes) Ltd.

Suhas Chandra Sen, J.:— The Tribunal has referred the following two questions of law under s. 256(1) of the I.T 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 July 2, 1973, the Tribunal misdirected itself in law in holding that there was no ‘business connection’ of Martin Black & Company (Wire Ropes) Ltd. (U.K) in India or whether the said finding of the Tribunal was perverse?

2. If the answer to question No. (1) is in the affirmative, then whether the Tribunal was right in holding that the amount of royalty paid by the assessee-company to Martin Black & Company (Wire Ropes) Ltd. (U.K) was not assessable to tax in India under s. 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 s. 195 dated May 24, 1974, to the ITO, ‘B’ Ward, Companies Dist. VI, Calcutta, requesting issue of a certificate under the aforesaid section certifying that the royalty payable to M/s. Martin Black & Company (Wire Ropes) Ltd. in terms of the agreement dated July 2, 1973 (between M/s. Usha Martin Black (Wire Ropes) Ltd. (hereinafter to be referred to as “the company”) and M/s. Martin Black Company (Wire Ropes) Ltd. (U.K) (hereinafter to be called “Martin Black”) was not taxable. According to the assessee's counsel, the ITO was not agreeable to the proposal put forward by the company which again submitted an application dated October 7, 1974, for issuance of a certificate on the basis of the ITO's decision that a portion of the royalty payable to Martin Black was taxable under the Indian I.T laws.

3. In pursuance of the application dated October 7, 1974, the ITO passed an order under s. 195(2) of the Act on October 8, 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 ITO referred to cls. 3, 4, 5, 6 and 7 of the agreement. It was contended before us 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 I.T 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 I.T The ITO, 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.”

4. The assessee preferred an appeal against the assessment order. The AAC held that the services, viz., reports, statistics, patterns of demand and consumption and other allied services were rendered outside India. Payment were also received outside India. He further held that the restrictive clauses in the agreement referred to by the ITO did not alter the character of the services required to be rendered by the non-resident party. The AAC referred to a circular issued by the C.B.D.T No. 7A/33/68-II(A)-II, dated July 23, 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 AAC emphasised that no personnel of Martin Black visited India and the entire services were fully rendered outside. The AAC, therefore, allowed the appeal of the assessee.

5. The ITO appealed to the Tribunal. The Tribunal, after referring to the agreement and considering the facts of the case, held that the ITO 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 be 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 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 s. 9(1)(i) of the I.T Act.

6. The CIT being aggrieved by the order of the Tribunal applied for referring some questions of law arising out of the order of the Tribunal under s. 256(1) of the I.T Act and the two questions of law which we have set out hereinbefore were referred by the Tribunal to this court.

7. The main contention on behalf of the Revenue before us is that there was some business connection between the assessee and the non-resident company, M/s. Martin Black & 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 cls. 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 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 1½% 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) Damaged and/or returned products;

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-licence 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’.”

8. Mr. Bagchi submits that by cl. 4 the parties had agreed that the nonresident 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 I.T Act.

9. In order to make a non-resident company liable for payment of tax, some business activity in India on the part 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 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.

10. Mr. Bagchi, on behalf of the Revenue, strongly relied on cls. 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 assessee-company in India and, therefore, the business activity of the non-resident company in India was established thereby.

11. 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 6 the documents and papers supplied by the non-resident has to be treated as confidential. The Indian company has to keep all such information and data supplied by the nonresident secret and confidential and if the assessee wanted to allow anybody also to use such information and data, prior approval from the nonresident 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 this 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.

12. There is no statutory provision under which the income of the nonresident, in a case like this, can be brought within the net of assessment in India. The relevant section is s. 9 of the I.T Act which is 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 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 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.”

13. 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 s. 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.

14. The Supreme Court in the case of Carborundum Co. v. CIT, [1977] 108 ITR 335 (SC), 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 a 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 nonresident it must be shown by the Department that some of the business operations were carried out in India in respect of which the income is sought to be assessed.

15. 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 finding of the Tribunal is that no business operation has been carried out by the non-resident in India.

16. Reliance is also placed on behalf of the Revenue on a decision of the Andhra Pradesh High Court in the case of Bharat Heavy Plate & Vessels Ltd. v. Addl. CIT, [1979] 119 ITR 986 (AP). In that case also, the facts were entirely different. It was found by the Tribunal that the nonresident rendered consultancy services for the construction of a 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 the right to change the composition and the number of the personnel. The nonresident 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 lakhs 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. On these facts the Division Bench of the Andhra Pradesh High Court held that there was business connection between the assessee-company and the non-resident within the meaning of s. 163(1)(b) of the I.T Act. But the facts of the case before us are entirely 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 Carborundum Co. v. CIT, [1977] 108 ITR 335 (SC), both the questions are answered in the affirmative and in favour of the assessee.

17. There will be no order as to costs.

Commissioner Of Income-Tax v. Usha Martin Black (Wire Ropes) Ltd.

Case Summary — Reference under s. 256(1) of the Income-tax Act, 1961

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Assessee's Arguments

Revenue's (ITO / CIT) Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Commissioner Of Income-Tax v. Usha Martin Black (Wire Ropes) Ltd.

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