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Imperial Chemical Industries Ltd. v. Inspecting Asstt. Commissioner Of Income Tax
Comprehensive Summary of the Opinion — Imperial Chemical Industries Ltd. (Appeals on Assessments for 1968-69 to 1972-73)
Factual and Procedural Background
The assessee, Imperial Chemical Industries Ltd. (ICI), is a non-resident company with head office in the United Kingdom. The appeals relate to assessment years 1968-69 through 1972-73. ICI returned dividend income on the year ending 31 March and other income (interest, royalty, technical fees) on the year ending 31 December. Initial assessments under s.143(3) of the Income-tax Act, 1961 were completed on the basis of returns filed by ICI.
The assessing officer subsequently reopened the assessments under s.147(a) on the ground that income chargeable to tax had escaped assessment due to omission to disclose material facts. The officer relied on two agreements discovered on the records of M/s. Fertilisers and Chemicals, Travancore Ltd. (FACT): (i) an agreement dated 1-1-1964 between ICI and Power Gas Corporation (PGC) (a UK non-resident) under which ICI granted PGC rights to commercially exploit ICI's process worldwide and undertook to render services to PGC on request; and (ii) an agreement dated 24-4-1965 between PGC and FACT under which PGC would render services in India for designing and constructing Synthesis Gas Plants and, under clause 7 of that agreement, transmit a portion of fees to ICI.
The assessing officer held that read together the two agreements created a "business connection" between ICI and FACT within the meaning of s.9(1) of the Act and that fees payable to ICI must be deemed to accrue in India (also noting that clause 10 placed liability for Indian taxes on FACT). These amounts were included in ICI's income in reassessments under s.147 read with s.143(3).
ICI appealed to the Commissioner of Income-tax (Appeals) who rejected the plea that reassessment and s.9(1)(i) were inapplicable. ICI then appealed to the court (the five separate appeals were heard together and disposed of by a single order).
Legal Issues Presented
- Whether amounts payable to the non-resident assessee (ICI) under the agreement dated 1-1-1964 (concluded in the United Kingdom) can be deemed to have accrued in India by virtue of a purported business connection under s.9(1) of the Income-tax Act, 1961, arising from the subsequent agreement between PGC and FACT dated 24-4-1965.
- Whether the reopening of completed assessments under s.147(a) was valid on the ground that ICI omitted to disclose material facts in its original returns.
- Whether, even if a business connection existed, any portion of the income could be taxable in India in view of the Explanation to s.9(1) (i.e., whether any operation was carried out in India by the assessee such that income would be attributable to India).
Arguments of the Parties
Appellant's (ICI) Arguments
- The agreements show that ICI's 1-1-1964 contract with PGC was concluded in the United Kingdom and all sums thereunder were payable in London in sterling; none of the amounts were received in India.
- There was no contract or direct relation between ICI and FACT; ICI did not render any services to FACT in India in respect of the PGC–FACT contract because PGC did not request ICI to render services under the ICI–PGC agreement in relation to that project.
- ICI’s internal statements to the assessing officer (letter dated 28-10-1980) expressly said ICI received no representations from FACT, sent no written solutions, sent no experts, and had no direct or indirect correspondence with FACT in relation to the work—i.e., no services were provided in India.
- The fact that the PGC–FACT agreement identified a portion of payment to be transmitted to ICI was only a mode of quantifying and recording the fee payable to ICI by PGC and did not create a business connection between ICI and FACT; the mode of payment does not determine place of accrual.
- On reopening, ICI argued it did not omit material facts: the amounts were not taxable in India and therefore were not declared; additionally, if ICI had believed them to be taxable it would have disclosed them.
- McDowell (cited by revenue) is inapplicable because ICI did not set up a device to avoid tax or contravene the Act.
Respondent's (Revenue) Arguments
- The two agreements read together established a business connection between ICI and FACT under s.9(1), and the portion of fees specified to be transmitted to ICI must be deemed to accrue in India.
- Clause 7 of the PGC–FACT agreement specifying transmission to ICI shows diversion at source so that the income becomes that of ICI.
- Counsel relied on authority (Stanton and Stavely) for the meaning of "fee" and on various precedents to support the proposition that technical fees/royalty are taxable in India when the process/patent/know-how is commercially exploited in India.
- The reopening under s.147 was valid because ICI had not declared the amounts in its original returns and thus did not disclose material facts necessary for assessment.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For (as stated in the opinion) | Application by the Court (as stated in the opinion) |
|---|---|---|
| CIT v. Stanton and Stavely (Overseas) Ltd. (1983) 36 CTR (Cal) 224 : (1984) 146 ITR 405 (Cal) | The department relied on this case for the meaning of "fee" (as explained in that decision). | The case was cited by the revenue counsel; the court considered the authorities cited by revenue but found them distinguishable on facts and did not accept revenue's reading for the present facts. |
| Carborandum Co. v. CIT (1977) 108 ITR 335 (SC) | The opinion explains this decision as laying down the rule that income accrues where the services were rendered and not where those services were subsequently used; also that if there is a business connection but no operation carried out in India by the non-resident, no income can be deemed to accrue in India (reference to the Explanation to s.9(1)). | The court relied on Carborandum as an important precedent and applied its rule to hold that the services were rendered by ICI in the United Kingdom and not in India; consequently, no income accrued in India under s.9(1). |
| Bharat Heavy Plate & Vessels Ltd. v. Addl. CIT (1979) 119 ITR 986 (AP) | The opinion records this decision was cited by revenue; no specific rule from the case is stated in the text. | The court found the decisions relied upon by revenue (including this one) to be distinguishable on facts and not applicable to the present case. |
| Skoda Export v. Addl. CIT (1983) 143 ITR 45 (AP) | The opinion records this decision was cited by revenue; no specific rule from the case is stated in the text. | The court treated this among the authorities relied on by revenue and found the cited decisions distinguishable on the facts of the present case. |
| CIT v. Dunlop Rubber Co. Ltd. (1983) 142 ITR 493 (Cal) | Listed among authorities cited by revenue; the opinion does not specify the precise principle cited from this case. | The court considered it as one of the decisions cited by the department but held such decisions distinguishable on the facts before it. |
| CIT v. Toshoku Ltd. (1982) 125 ITR 525 (SC) | Listed among authorities cited by revenue; the opinion does not state a specific principle from this citation. | The Court regarded this as one of the decisions cited by revenue but found it distinguishable on the facts of the instant case. |
| Murray (Inspector of Taxes) v. Imperial Chemical Industries Ltd. (1969) 71 ITR 661 (CA) | Cited by revenue; the opinion does not extract a specific rule from this case within the text. | The court noted it among the cases cited by the department but concluded that the authorities relied upon were distinguishable on the facts here. |
| Rolles Royce Ltd. v. Jeffery (Inspector of Taxes) (1965) 56 ITR 580 (HL) | Cited by revenue; the opinion does not state a particular principle from this case in the text. | Included among decisions pointed out by the department; the court did not accept these as controlling for the instant facts and found the cited decisions distinguishable. |
| Caltex (India) Ltd. v. Commissioner of Income-Tax, Bombay City (1952) 21 ITR 278 (Bom) | Cited by revenue; the opinion does not specify the exact rule from this decision in the text. | The court treated this as one of several authorities cited by department counsel and found the cited authorities distinguishable on the facts before it. |
| E.D. Sassoon & Co. Ltd. v. CIT, Bombay (1954) 26 ITR 27 (SC) | Cited by revenue; the opinion does not state the particular principle invoked from this decision in the text. | The court listed it among the decisions relied upon by revenue and considered those decisions distinguishable on the facts of the present case. |
| McDowell & Co. Ltd. v. CTO (1985) 154 ITR 148 (SC) | The revenue cited this case for the proposition that courts should not approve devices set up to avoid tax. | The court held McDowell inapplicable to the facts here because it found no evidence that ICI contravened the Act or set up a device to avoid tax; thus McDowell did not support revenue's case. |
Court's Reasoning and Analysis
The court's analysis proceeded from the statutory framework and the facts on record. Section 5 of the Act (as read in the opinion) makes a non-resident liable to tax on incomes received or deemed to be received in India or which accrued or were deemed to accrue in India. The revenue's case rested solely on the contention that fees payable to ICI under the 1-1-1964 agreement (concluded in the UK) must be deemed to have accrued in India by virtue of s.9(1).
The court examined s.9(1) and the judicially explained concept of "business connection." It emphasised (relying on Carborandum Co. v. CIT as an authoritative statement) that the place where services are rendered is the place where income accrues, not the place where those services are subsequently used. The court specifically noted the rule from Carborandum: if there is a business connection but no operation carried out in India by the non-resident, then no income shall be deemed to accrue in India (per the Explanation to s.9(1)).
The court reviewed the two agreements. The 1-1-1964 agreement (ICI–PGC) passed rights and an obligation to render services on request to PGC in the United Kingdom; it was concluded there and payments were payable in London in sterling. The 24-4-1965 agreement (PGC–FACT) was between PGC and FACT in India and provided for PGC to render services in India; clause 7 recorded that a portion of the fees payable by FACT to PGC would be transmitted to ICI.
The court found on the facts that:
- ICI did not render any services in India in relation to the PGC–FACT contract; this factual position was not controverted by the revenue and was supported by ICI's answers to the assessing officer (no representations, solutions, experts, correspondence, or tours in relation to FACT).
- There was nothing on record to suggest the 1-1-1964 agreement was entered into with any knowledge of or intention concerning a later PGC–FACT agreement or that PGC was acting as a mere agent/stooge/conduit of ICI.
- The mere contractual provision in the PGC–FACT agreement quantifying a portion of the payment to be transmitted to ICI does not, by itself, create a business connection between ICI and FACT for purposes of s.9(1).
- The mode of payment or the fact that PGC chose to specify components of payment for bookkeeping or evidentiary purposes cannot determine the place of accrual of income; the place of accrual is where the services were rendered.
- Even assuming arguendo that there was a business connection, the Explanation to s.9(1) required that income be attributable to operations carried out in India by the assessee — which did not exist here; therefore no income could be deemed to accrue in India.
The court also reviewed the authorities cited by the department and concluded those decisions were distinguishable on their facts (principally because those cases involved a direct agreement between the non-resident and the Indian company, which is not the situation in the instant matter).
Holding and Implications
Holding: The court allowed the appeals. In its dispositive conclusion the court held that no income payable to ICI under the agreement dated 1-1-1964 can be deemed to have accrued in India and consequently the additions made by the assessing officer in the reassessments for the five assessment years were deleted.
Direct implications for the parties:
- The reassessments (additions of the amounts paid by FACT to PGC under clause 7 of the PGC–FACT agreement) were set aside and removed from ICI's total income for the five assessment years in question.
- Reopening under s.147: because the court concluded on the merits that the amounts were not taxable in India, the grounds relating to validity of reopening became infructuous and did not sustain the reassessments.
Wider precedent or policy: The opinion does not purport to establish a new legal principle beyond applying extant authorities (notably Carborandum) and emphasises that factual distinctions are critical; it did not articulate any additional, novel rule of general application.
Disposition
Result: The five appeals by the assessee were allowed; the additions from reassessments were deleted for the assessment years 1968-69 to 1972-73 (both inclusive).
S.N Rotho, A.M:— These five appeals filed by the same assessee raise a common point for decision. Hence, they are heard together and disposed of by this common order for the sake of convenience.
2. The assessee, Imperial Chemical Industries Ltd., London, is a non-resident company having its head office in the United Kingdom. In these appeals we are concerned with the asst. yrs. 1968-69 to 1972-73, both inclusive. The assessee follows the year ended 31st March as its previous year in respect of dividend income and the year ended 31st December as its previous year for other income. The other income returned by the assessee comprised of interest, royalty and technical fees assessable under the head ‘other sources’.
3. The assessments for the five years junder consideration were completed under s. 143(3) of the IT Act, 1961 on different dates on the basis of the returns filed by the assessee. Subsequently, these assessments were reopened under s. 147(a) of the Act on the ground that certain incomes chargeable to tax had escaped assessment due to the omission of the assessee to disclose fully and truly all the material facts necessary for its assessments. The assessing officer found from the file of M/s. Fertiliser and Chemicals, Travancore, an Indian Company (which is hereinafter referred to as FACT) that the said FACT had entered into an agreement on 24-44965 with M/s. Power Gas Corporation of United Kingdom (a non-resident company hereinafter referred to as PGC). Under this agreement PGC was to render certain services to FACT for designing and constructing Synthesis Gas Plants in consideration of certain fees. The services were to be rendered by PGC in order to design and erect the plants for FACT and FACT was to pay fees to PGC in consideration for the above services. It is stated in the agreement that PGC have the know-how for erection of the aforesaid plants based upon the process developed by the asses- see, i.e, imperial Chemical Industries (ICI). This agree- ment also stipulates that PGC will provide the services to FACT while erecting the; plants according to the ICI process. FACT was to pay to PGC a fee for tran- smission to ICI specified in cl. 7 of the agreement. Apart from the above, FACT was also to make certain other payments to PGC as per cl. 9 of the agreement. In other words, the fee payable by FACT has been divided into two components; a portion representing the amount that PGC was liable to pay to the assessee and another portion which was not to be so paid to the assessee. Clause 10 of the agreement states that taxes leviable under the Indian Tax Laws for the services rendered under this agreement would be borne by FACT and not by PGC. Apart from the above agreement dt. 24-4-1965 between the FACT and PGC, there was another agreement between PGC and the assessee. this agreement is dt. 1-1-1964. Under this agreement, the assessee allowed PGC to commercially exploit the process developed by the assessee throughout the world. The assessee has undertaken an obligation to solve any problem that may arise while PGC used the aforesaid process in course of design and erection of the plants. PGC was free to design and erect plants according to the other processes also and the assessee had nothing to do with such activity. According to the’ agreement, if PGC designs and erects a plant according to the process developed by the assessee, the assessee is obliged to render the aforesaid services to PGC on request’ and not otherwise. If in a particular contract entered into by PGC with a customer, no request for any services was, made to the assessee, then the assessee was not obliged to render any such services as are envisaged in this agreement. Nevertheless, the assessee would be entitled to its fee specified in this agreement if the plant designed and erected by PGC for any customer anywhere in the world is based upon the process developed by the assessee. This agreement dt. 1-1-1964 was entered into in the United Kingdom. All sums payable thereunder to the assessee were payable in London in sterling. The right to use the process developed by the assessee was thus passed on to PGC in the United Kingdom by virtue of this agreement dt. 1-1-1964 which was concluded in the United Kingdom. The case of the assessing officer was that these two agreement together spell out a business connection between the assessee and FACT within the meaning of s. 9(1) of the Act. Hence, the fees paid by PGC to the assessee under the aforesaid agreement dt. 1-1-1964 must be deemed to accrue in India. The assessing officer has also recorded that the fees must be deemed to have accrued in India because the services were rendered in India. According to him, only because the agreement for services was made through PGC in London, it cannot be said that no services were rendered in India by the assessee. Reliance was placed on cl. 7 of the agreement dt. 24-4-1965 which says that a part of the fees payable by FACT to PGC had to be transmitted by the latter to the assessee because of the prior agreement of PGC with the assessee. It is the case of the assessing officer that since a part of the fees received by PGC was to be transmitted to the assessee in London, the said fess must be deemed to accrue in India. The assessing officer observed that the agreement between PGC and FACT is dependant upon the agreement between PGC and ICI and secondly, the assessee has made available its technical information to FACT through PGC. Thirdly, the assessee has received certain payments from FACT through PGC for imparting indirectly its technical know-how. Fourthly, the assessee appears to be, though implicitly, a party to the agreement made between PGC and FACT. Fifthly, FACT has made payments both to ICI and PGC at different rates. On the basis of the above reasoning, the assessing officer held that the fees received by the assessee must be deemed to have accrued in India and so taxable in India. As the assessee had not shown these amounts in the original returns, these amounts had escaped tax. Hence, he made reassessments under s. 147(a) read with s. 143(3) of the Act by including the amounts paid by FACT to PGC under cl. 7 of the agreement dt. 24-4-1965 in the total income of the assessee.
4. The assessee appealed to the CIT(Appeals) and contended that the reassessment made by the assessing officer were not called for because the assessee had not omitted to disclose any material facts necessary for its assessments. Even on, merits, it was urged that the assessee did not render any services to FACT in India and so no portion of the fee earned by it under the agreement concluded in the United Kingdom on 1-1-1964 can be deemed to accrue in India. The CIT(A) did not agree with the above contentions of the assessee. He held that “as the fees accrued by virtue of the appe llant's business connection with the Indian Company and also as the appellant was the real beneficiary of the job done in India, the provisions of s. 9(1)(i) were rightly invoked by the IAC. Thus, the grounds relating to reopening, reassessment and applicability of s. 9(1)(i) are rejected”.
5. Aggrieved by the above common order dt. 25-3-1985 of the CIT(A) for the five years under consideration the assessee is in appeal before us. Shri N.A Palkhi-vala, the ld. counsel for the assessee, urged before us that the revenue authorities have grossly erred in their decision. According to him, the revenue authorities have acted on grounds which are not even statable. He took us through pages 50 to 95 of the compilation filed before us and pointed out that the undisputed facts of the case are that, firstly, no amount was received by the assessee in India and, secondly, the agreement dt. 1-1-1964 to which the assessee was a party was concluded in the United Kingdom and so the rights therein passed from the assesses to PGC in the United Kingdom. Thirdly, there was no relation whatsoever between the assessee and FACT as there has been no contract between them. The assessee did not, in fact, render any services to FACT in India in spite of the fact that it was obliged to render certain services in case PGC requests it to do so. In point of fact, no such request was made in respect of the contract between PGC and FACT and so none of the services envisaged under the agreement dt. 1-1-1964 was actually rendered while PGC was executing its contract dt. 24-4-1965 with FACT. He stated that when the agreement dt. 1-1-1964 was entered into by the assessee it was not even aware that PGC would, sometirne in future, enter into an agreement with a concern in India. In fact, PGC has entered into similar agreements with parties in several other countries, namely, Australia, Czechoslovakia, Finland, France, Japan, Malayasia, South Africa, Spain, USSR, South Korea and Qatar. In this connection, he drew our attention to the letter dt. 28-10-1980 from the assessee addressed to the assessing officer which reads thus—
“I am giving below the answers to the questions raised by you tomy representative during the hearing on 29-9-1980.
1. Whether ICI received any representation/letter from FACT regarding difficulties in utilising ICI techniques passed on through Power Gas?
Ans. No.
2. Whether ICI directly or indirectly sent any written solution to the problems?
Ans. No.
3. Whether ICI sent any experts to solve the problems?
Ans. No.
4. Details of correspondence between ICI and FACT directly or indirectly?
Ans. None.
5. Details of tours of ICI experts in connection with work of FACT?
Ans. None.
In this connection, I would like to emphasize that ICI's only commitment was to the UK Company i.e Power Gas Corporation Limited and ICI had no commitment under any agreement with Fertilizers and. Chemicals Travancore Ltd., whatsoever which required any of the actions outlined in your, above questions 1 to 5 to be undertaken by ICI.”
6. He urged that the aforesaid facts stated by the assessee before the assessing officer have not been found to be untrue. The assessing officer has merely proceeded on the assumption that the assessee must have rendered some services whereas in fact no such services were rendered by the assessee so far as the agreement of PGC with FACT was concerned. He clarified that he was not commenting on the liability of PCC to Indian income-tax. All that he was saying was that the assessee did not derive any income taxable in India from the agreement dt. 24-7-1965 as erroneously alleged by the revenue authorities. He stated that the only case of the revenue authorities against the assessee was that a business connection was established between the assessee and FACT by virtue of the aforesaid two agreements. He emphatically denied the existence of any such business connection as a result of the aforesaid agreements. In this connection, he posed the question that if ICI, in its turn, had to pay some amounts to another concern, then could that other concern be brought within the Indian tax net? According to him, it could not be because in that case one had to go on and on till one finds the inventor of the original process. If PGC was to pay any amount to ICI, then it was nothing but an expenditure incurred by PGC to earn the income from FACT. It may be an application of the income of PGC or an expenditure incurred by it just like other items of expenditure like salary, travelling, etc., By no stretch of imagination there could be a business connection of the assessee with FACT merely because the agreement between PCC and FACT states that a certain portion of the amount payable thereunder has to be passed on by PGC to the assessee. He explained that the real reason for stating that fact in the agreement dt. 24-4-1964 was to convince FACT that they were not being overcharged. In order to make that position clear, PGC had to reweal its prior agreement with the assessee under which a portion of the fees paid by FACT had to be parted with by PGC. Next, he stated that even if it is assumed for the sake of argument that there was a business connection between the assessee and FACT, yet no amount iis taxable in India because no operation was carried out by the assessee in India vide Explanation to s. 9(1)(i) of the Act.
7. Regarding reopening of the assessments, Shri N.A Palkhivala urged before us that the assessee did not omit to disclose any material facts necessary for its assessments. As the amounts under consideration were not taxable in India, the assessee did not think it obligatory to disclose them in the returns. According to him, only those items which are normally taxable under the IT Act but are exempt under some other provisions of the said Act has to be declared in Part III of the Return prescribed for the Companies under the IT Rules. In any case, he urged that this ground would become infructuous in view of his arguments on the merits of the case since the amounts are not taxable in India at all.
8. Shri B.K Bagchi, the ld. counsel for the department, on the other hand, supported the order of the CIT(A). He took us the various clauses of the agreements dt. 1-1-1964 and 24-4-1965. He relied on the following decisions in support of his argument that the amount under consideration has been rightly tax ed:
(1) CIT v. Stauton and Stavely (Overseas) Ltd. (1983) 36 CTR (Cal) 224 : (1984) 146 ITR 405 (Cal)
(2) Carborandum Co. v. CIT 1977 CTR (SC) 209 : (1977) 108 ITR 335 (SC)
(3) Bharat Heavy Plate & Vessels Ltd. v. Addl. CIT (1979) 9 CTR (AP) 4 : (1979) 119 ITR 986 (AP)
(4) Skoda Export v. Addl. CIT (1983) 37 CTR (AP) 77 : (1983) 143 ITR 45 (AP)
(5) CIT v. Dunlop Rubber Co. Ltd. (1982) 29 CTR (Cal) 25 : (1983) 142 ITR 493 (Cal).
(6) CIT v. Toshoku Ltd. (1980) 19 CTR (SC) 192 : (1982) 125 ITR 525 (SC)
(7) Murray (Inspector of Taxes) v. Imperial Chemical Industries Ltd. (1969) 71 ITR 661 (CA)
(8) Rolles Royce Ltd. v. Jeffery (Inspector of Taxes) (1965) 56 ITR 580 (HL)
(9) Caltex (India), Ltd.…Applicant; v. The Commissioner Of Income-Tax, Bombay City….* (1952) 21 ITR 278 (Bom)
(10) E.D Sassoon and Co. Ltd. v. CIT, Bombay (1954) 26 ITR 27 (SC) and
(11) McDowell and Co. Ltd. v. CTO (1985) 47 CTR (SC) 126 : (1985) 154 ITR 148 (SC).
9. Shri B.K Bagchi urged before us that the name of the assessee figures in many of the clauses in the agreement dt. 24-4-1965. Clause 7 thereof specifically states that a portion of the fees received by PGC was to be-trans-mitted to the assessee. According to him, this fact shows that the said income was diverted at source so that it became the income of the assessee. Next, he referred to the meaning of “fee” as explained in the case of Stanton and Stavely (supra). In this case, it has been held that the payment made by the Indian concern to the non-resident company between which there was a subsisting agreement amounted to royalty even though it is called “commission”. Then, he took us through the cases wherein it has been held that technical fees or royalty are taxable in India if the patent or the technical know-how is commercially exploited in India. Next, he referred to the older cases wherein it has been held that the real source of the income had to be looked into to decide its taxability. According to him the source of income of the assessee could not be said to be the agreement dt. 1-1-1964 but the source extended to the subsequent agreement dt. 24-4-1965. Finally, he referred to the decision in the case of McDowell and Co. (supra) for the proposition that the Court should not approve a device set up to avoid tax. According to him, both the agreements have to be read together and if it is so done then it was clear that the assessee had earned the income in India through the agency of PGC. Hence, he urged that the revenue is entitled to succeed on the merits of the case and so the reassessments, as affirmed by the CIT(A), deserved to be upheld.
10. Regarding the validity of reopening of the assessments Shri B.K Bagchi stated that the reopening was validly done as the assessee did not disclose all the material facts necessary for its assessments inasmuch as the amounts under consideration were not declared in the original returns.
11. Shri N.A Palkhivala replied that when the assessee entered into an agreement on 1-1-1964 with PGC it had absolutely no idea as to how and where and when PGC will put to use the rights obtained by the latter under the said agreement. When the assessee was not even aware of the income to be received from FACT by PGC in future, it could not be said that the two agreements constituted a device for avoiding any tax. On the contrary, he pointed out that in the agreement dt. 24-4-1965, tax, if any, payable under that agreement was duly taken note of and agreed to be paid by FACT. The case of McDowell and Co. (supra) does not apply to the facts of this case because the assessee did not, in any way, contravene the provisions of the Indian IT Act with a view to avoid the payment of legitimate tax payable under that Act.
12. We have carefully considered the contentions of both the parties, the facts on record, the agreements dt. 1-1-1964 and 24-4-1965 as well as the compilations filed by both the ld. counsels. We have gone through the provisions of s. 5 of the IT Act, 1961. It says that a non-resident is liable to tax on all incomes which are received or deemed to be received in India or which accrued or deemed to accrue in India. Admittedly, the amounts under consideration were not received nor deemed to be received nor accrued in India. The case of the revenue is based solely on the contention that the amounts received by the assessee under the agreement dt. 1-1-1964 concluded in the United Kingdom must be deemed to have accrued in India. Now, s. 9(1) of the Act lays down as to what are the incomes which shall be deemed to accrue in India. One such income is the income arising directly or indirectly through or from any business connection in India. ‘Business Connection’ has not been defined in the Act but its connotation has been explained in various judicial decisions from time to time. For example, if a non-resident maintains a branch in India or comes to India for doing business or sends its employees to India for carrying out a commercial assignment, etc., then, it has been held to be a business connection within the meaning of the aforesaid section. The Explanation to s. 9(1) says that even if there is a business connection, then the income arising therefrom shall be taxable only to the extent to which it could be attributable to the operations carried out in India. In other words, in a case where there is a clear business connection but no operation whatsoever is carried out in India, then no income shall be deemed to accrue under s. 9(1) read with the Explanation thereto vide the decision in the case of Carborandum Co. (supra). In this case, there was a direct agreement between a non-resident and an Indian Company under which the foreign company lent some personnel for carrying out the business activities of the Indian company in India and the question was as to at which place the services were rendered by the non-resident company so that that place would become the place of accrual of the income. It was held that the activities of the foreign personnel lent by the foreign company did not amount to a business activity by the foreign company carried out in India. The foreign company had made the services of the foreign personnel available to the Indian company outside India. The decision, thus, lays down the important rule that income accrues where the services were rendered and not where those services were subsequently used. A particular income can accrue to a person only once. If it has already accrued to him outside India, it can no longer accrue again within India. In that reported case, it was also held that even assuming that there was a 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 nonresident in India and so no part of the fee could be deemed to accrue in India.
13. We have considered the various decisions cited before us by the ld. Counsel for the department. We find that those decisions are distinguishable on facts from the case before us. Those were the cases where there was a direct agreement between the non-resident and the Indian company which is not true in the instant case. We find nothing on record to suggest that the agreement dt. 1-1-1964 was entered into by the assessee keeping an eye on the subsequent agreement dt. 24-4-1965 to be entered into in future by PGC and another party. On 1-1-1964 the assessee was not aware of the future places of activity of PGC. Nor is there anything on record to suggest that PGC was a mere agent or stooge or conduit-pipe acting for or on behalf of the assessee; or that the agreement dt. 24-4-1965 was a mere eye-wash. Whatever might be the obligations of the assessee envisaged under the agreement dt. 1-1-1964, in point of fact, the assessee has not rendered any services whatsoever in India and this fact has not been controverted by the revenue. Hence, the case of McDowell (supra) is not applicable to the fact of the present case. Whatever the assessee parted with under the agreement dt. 1-1-1964 was parted with at the time when and at the place where the agreement dt. 1-1-1964 was concluded. This was admittedly outside India. The right to use the ICI process anywhere in the world was passed on by that agreement to PGC for a fee. The transaction was completed outside India. The assessee did not do anything further in India in respect of the contract, dt. 24-4-1965. Hence, we do not see any business connection between the assessee and FACT so far as the agreement dt. 24-4-1965 is concerned. It is true that the latter agreement refers to transmission of a portion of the fees, received by PGC to the assessee; but, in our opinion, that was done merely to keep the fees payable by PGC to the assessee separately quantified and recorded for the purposes best known to PGC. Instead of stating the fees as a consolidated sum (which could have been very well done) PGC (and not the assessee) chose to state it under the two clauses. In our opinion, the above fact alone cannot create a business connection between the assessee and FACT. That fact has no bearing on the taxability of those sums in the hands of the assessee under the provisions of the Act. Looking at the matter from another angle, let us assume that the assessee had sold outright the rights which it parted with under the agreement dt. 24-4-1965 for a consolidated lump sum fee to be paid once for all. In that case, the assessee would have been totally unconcerned with the amounts earned by PGC thereafter anywhere else in the world and would have been outside the Indian tax net. Merely because the mode of payment under the agreement dt. 1-1-1964. was related for the purpose of quantification to the subsequent earnings of PGC, it cannot be said that a business connection was established between the assessee and the country in which PGC used the rights it had purchased long after the purchase was made. Evidently, the mode of payment cannot decide the place of accrual. The place of accrual is the place where the services are rendered. These services have been rendered by the assessee in the United Kingdom and not in India. Consequently, there is no business connection and no income can be deemed to have accrued in India to the assessee under either of the aforesaid two agreements. Even assuming, for the sake of argument, that there is a business connection, there has been no operation carried out by the assessee in India in connection with the execution of the agreement dt. 24-4-1965 and so by virtue of Explanation to s. 9(1)(i) of the Act, nothing can be deemed to have accrued to the assessee in India. For the above reasons, we come to the conclusion that no income out of the payments made by FACT to PGC can be deemed to have accrued to the assessee in India and so no portion thereof was taxable in India. Hence, we agree with the ld. counsel for the assessee that on merits these appeals are bound to succeed. In view of the above conclusion of ours, the grounds taken against the validity of the reopening of the assessments have indeed become inf-ructuous as rightly contended by him. Consequently, we delete the additions made to the total income in the reassessments for the five assessment years under consideration.
14. In the result, the five appeals are allowed.
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