AMARESWARI J. - M/s. Bharat Heavy Plate and Vessels Ltd., Visakhapatnam, the assessee in the present case, is a Government of India undertaking and was incorporated as a company in 1966. M/s. Skoda Export, hereinafter referred to as the 'non-resident', is a foreign trade corporation having its registered office in Praha, Czechoslovakia. The Government of India and the Government of Czechoslovakia entered into two agreements in 1959 and 1965 for establishment of a Plate and Vessels Plant in India. On August 2, 1968, an agreement was entered into between the assessee and the non-resident company for the delivery of machinery, equipment, instruments and spare parts and for rendering technical co-operation at the erection of the Plate and Vessels Plant at Visakhapatnam. On February 27, 1968, another agreement was entered into between the assessee and the non-resident company for rendering technical co-operation during the construction of Plate and Vessels Plant at Visakhapatnam. These agreements provided for training selected personnel of the assessee in CSSR, for rendering consultancy services and technical assistance in the construction of the plant to the extent mentioned in the several articles of the agreement, for preparation and supply of technical documentation, for production of operating tools, for production of non-standard equipment, for rendering personnel technical assistance and consultancy services for the starting and in the initial run of the production. In the various articles of the agreement there were common stipulations concerning respective duties of the non-resident and the assessee in regard to the training of the assessees selected personnel. For the purpose of carrying out the consultancy activities it is provided that the non-resident shall depute to India a group of designing experts. The non-resident and the assessee have the right to change the composition and number of experts during the course of performance of the consulting activity after mutual agreement. For the purpose of carrying out the consultancy activities and for progressing the production of the plant, the non-resident shall send out to India its expects at the appropriate time and for the necessary duration. The price in respect of technical documentation was fixed at Rs. 30,00,000 and the fee for consultation activity was fixed at Rs. 11,91,735. Under the later agreement of August 2, 1968, the non-resident company had to deliver machinery, equipment and instruments and spare parts and accessories accompanying documentation for the production purpose of the plant to render technical co-operation at the erection of the machinery and equipment. The total purchase price of the machinery, equipment and instruments was fixed at Rs. 2,02,27,994.
On a consideration of the terms and conditions of the two agreements, the ITO took the view that the non-resident company had received taxable income through the assessee, which company he held was the agent of the non-resident company under s. 163(1) of the I. T. Act, 1961. The assessee preferred an appeal to the AAC. Before the AAC, it was practically conceded by the department that the income received by the non-resident company was not assessable on receipt or accrual basis in the hands of the assessee under s. 5(2) of the I. T. Act, 1961. However, the AAC considered the terms and conditions of the two agreements in extenso and opined that the non-resident company had business connection with the assessee-company thereby attracting the provisions of s. 9(1)(i) and s. 163(1) of the I. T. Act, 1961. The contention of the assessee that there was no business rejected by the AAC. On further appeal to the Income-tax Appellate Tribunal, the order of the AAC that the non-resident company had business connection with the assessee within the meaning of s. 163(1) and s. 9(1)(i) of the I. T. Act, 1961, was confirmed. Thereupon, an application was made by the assessee to the Appellate Tribunal to state a case and refer two questions of law for the decision of the High Court. On such application, the Tribunal stated a case and referred to us for our decision the following, questions :
'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the applicant was an agent of M/s. Skoda Export, Praha, Czechoslovakia, a non-resident, within the meaning of section 163(1) of the Income-tax Act, 1961, for each of the assessment years 1969-70, 1970-71, 1971-72 and 1972-7 ?
(2) Whether, on the facts and in the circumstances of the case, there is any material or evidence to establish that M/s. Skoda Export, Praha, had business connection in the taxable territories through the applicant, during the previous years relevant to the assessment years 1969-70 and 1970-7 ?'
The relevant provisions of the I. T. Act bearing on the question may be extracted :
Section 9(1)(i) is as follows :
'(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.'
Section 160(1)(i) and s. 160(2) are as follows :
'160. (1) For the purposes of this Act, 'representative assessee' means -
(i) in respect of the income of a non-resident specified in clause (i) of sub-section (1) of section 9, the agent of the non-resident, including a person who is treated as an agent under section 163(1), ......
(2) Every representative assessee shall be deemed to be an assessee for the purposes of this Act.'
Section 163(1) is as follows :
163. (1) For the purposes of this Act, agent, in relation to a non-resident, includes any person in India-......
(b) who has any business connection with the non-resident...'
It is seen that the expression business connection' occurs in s. 9(1)(i) and s. 163(1). The expression 'business connection' is not defined in the I. T. Act, though the word 'business' is defined. We cannot depend upon the definition of the word 'business' in construing the expression 'business connection'. The problem presents no difficulty as the expression 'business connection' has been considered in several cases.
In CIT v. Remington Typewriter Co. (Bombay) Ltd., a question arose whether there was a business connection between the assessee-company and the foreign company. The facts were that the assessee purchased the goodwill of its business in certain territory in India and towards consideration of the same allotted 60,000 shares to the non-resident company in the assessee-company. The capital of the assessee was divided into 60,000 shares only and by allotment of 60,000 shares to the non-resident company, the non-resident company became the owner of all the shares. It was held that the ultimate and complete control of the assessee was vested in the foreign company which owned all its shares and hence a business connection existed between the assessee and the non-resident company.
In CIT v. Currimbhoy Ebrahim & Sons Ltd.  3 ITR 395 it was observed that the phrase 'business connection' was different from, though doubtless not unrelated to, the word 'business' of which there was a definition in the Act.
A Full Bench of the Rangoon High Court observed in CIT v. Visalakshi Achi  5 ITR 448 that the expression 'business connection' must denote a connection which produces, by itself, all profits or gains and not a mere state or condition which was favourable to the making of profits.
In Bangalore Woollen, Cotton and Silk Mills Co. Ltd. v. CIT : 18ITR423(Mad) the Madras High Court, construing the word 'business connection', observed as follows (p. 433) :
'In order to constitute a business connection there must be some continuity of relationship between a person in British India who makes profits and the non-resident who receives them...... A business connection, therefore, may arise by reason of the existence of a branch of the non-resident company or organisation in British India or by the existence of a factory or even by the existence of an agent...... The business connection may be even a connection arising out of financial relations. The non-resident business and the resident business may be two separate legal entities and they may be closely connected or associated either by reason of some common control or by reason of the non-resident company or firm financing the resident company or firm. The goods of a non-resident company may be sold by a broker or commission agent residing in British India or the person resident may render various services to the non-resident or conduct business activities. These are some of the factors which result in a business connection within the meaning of the section.'
The Supreme Court had occasion to consider the expression 'business connection' in Anglo-French Textile Company Ltd. v. CIT (No. 2) : 23ITR101(SC) and it was observed as follows (p. 108) :
'An isolated transaction between a non-resident and a resident in British India without any course of dealings such as might fairly be described as a business connection does not attract the application of section 42, but when there is a continuity of business relationship between the person in British India who helps to make the profits and the person outside British India who receives or realise the profits, such relationship does constitute a business connection.'
In CIT v. R. D. Aggarwal & Co. : 56ITR20(SC) the scope of the expression 'business connection' was considered by the Supreme Court and it was observed as follows (pp. 24 & 28) :
'The expression business is defined in the Act as any trade, commerce, manufacture or any adventure or concern in the nature of trade, commerce or manufacture, but the Act contains no definition of the expression business connection and its precise connotation is vague and indefinite. The expression business connection undoubtedly means something more than business. A business connection in section 42 involves a relation between a business carried on by a non-resident which yields profits or gains and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits or gains. It predicates an element of continuity between the business of the non-resident and the activity in the taxable territories : a stray or isolated transaction is normally not to be regarded as a business connection. Business connection may take several forms : it may include carrying on a part of the main business or activity incidental to the main business of the non-resident through an agent, or it may merely be a relation between the business of the non-resident and the activity in the taxable territories, which facilitates or assists the carrying on of that business. In each case, the question whether there is a business connection from or through which income, profits or gains arise or accrue to a non-resident must be determined upon the facts and circumstances of the case.
A relation to be a business connection must be real and intimate, and through or from which income must accrue or arise whether directly or indirectly to the non-resident. But it must in all cases be remembered that by section 42 income, profit or gain which accrues or arises to a non-resident outside the taxable territories is sought to be brought within the net of the income-tax law, and not income, profit or gain which accrues or arises or is deemed to accrue or arise within the taxable territories. Income received or deemed to be received, or accruing or arising or deemed to be accruing or arising within the taxable territories in the previous year is taxable by section 4(1) (a) and (c) of the Act, whether the person earning is a resident or non-resident. If the agent of a non-resident receives that income or is entitled to receive that income, it may be taxed in the hands of the agent by the machinery provision enacted in section 40(2). Income not taxable under section 4 of the act of a non-resident becomes taxable under section 42(1) if there subsists a connection between the activity in the taxable territories and the business of the non-resident, and if through or from that connection income directly or indirectly arises..........
The expression business connection postulates a real and intimate relation between trading activity carried on outside the taxable territories and trading activity within the territories, the relation between the two contributing to the earning of income by the non-resident in his trading activity'.
In CIT v. Hindustan Shipyard Ltd. : 109ITR158(AP) a Division Bench of this court had construed the word 'business connection'. The non-resident company supplied diesel engines with accessories. The terms of the sale were that 90% of the value must be paid against the original set of documents to be submitted duly to the State Bank of India within fifteen days and the balance within six months. The net price included 5% commission payable to the non-resident company at Bombay. The property was to pass to the purchaser on delivery on board. The engine was agreed to be erected by the staff of the purchaser under the supervision of the erector and a supervision engineer was placed at the disposal of the purchaser by the non-resident company. It was held that 'business connection' can be said to be established when 'the thread of mutual interest runs through the fabric of the trading activities carried on outside and inside the taxable territory and there must be real and intimate connection between the two. The commonness of interest may be by way of management control or financial control or by way of sharing profits'.
Having regard to the facts of the said case, the learned judges held that there was no business connection between the assessee and the non-resident company as the services rendered by the non-resident company were connected with the effective fulfilment of the contract of sale and were merely incidental to the contract.
Bearing in mind all the principles stated above, we will examine the facts of the present case as found by the revenue authorities. The non-resident rendered consultancy services for the construction of the plant. For the purpose of carrying out the consultancy activities, the non-resident company deputed to India a group of designing experts. The non-resident and the assessee had the right to charge the composition and number of experts during the course of performance of consulting activity after mutual agreement. The non-resident had to assign to the assessee, the production rights that are simultaneously possessed by the partners of the non-resident as well as the general and assembly drawings, technical information and other documentation. These rights were assigned by the non-resident company to the assessee up to December 31, 1968. The price for technical documentation was fixed at Rs. 30,00,000 and the fee for consulting activity was fixed at Rs. 11,91,735. Both parties had to continually inform each other of the progress of deliveries and all facts necessary for the fulfilment of the obligations and they have to mutually co-operate and render assistance to each other. The non-resident company had to deliver machinery, equipment and instruments inclusive of standard accessories and spare parts and special accessories accompanying documentation for the production purposes of the plant. The total purchase price of the machinery was mentioned as Rs. 2,02,27,994. It is not a mere purchase of machinery as contended by the learned counsel for the assessee. The non-resident company had agreed to supply necessary personnel and also to train the personnel and to supply the requisite machinery for purposes of plate and vessels by erecting the machinery and equipment at Visakhapatnam. It is not as though these personnel were employed by the assessee-company on agreements being entered into with them or were paid by the assessee-company. These personnel are not the employees of the assessee-company but continued to be the employees of the non-resident company. It is conceded by the counsel for the assessee that the personnel sent by the non-resident company to render technical assistance are not paid by the assessee-company for the services rendered by them. They are not employed by the assessee-company. The fee for the services rendered by them was to be paid to the non-resident company.
We are of the opinion that the activities referred to in both the agreements satisfy the expression 'business connection'. There is an element of continuity between the business of both the companies. It is not a case of a mere stray or isolated transaction as contended by the counsel for the assessee. The non-resident company having agreed to render technical co-operation for the construction of the Plate and Vessels Plant at Visakhapatnam had also supplied the machinery, equipment and instruments and rendered technical co-operation in the erection of the Plate and Vessels Plant at Visakhapatnam. As stated earlier, the price payable for the documentation was Rs. 30,00,000 and for consulting activity, Rs. 11,91,735. It is no doubt true that, so far as the machinery, equipment and instruments, etc., are concerned, the sales took place outside the territory of India. It is clearly mentioned in the agreement that the delivery of machinery, equipment and instruments, etc., shall be completed f. o. b. European Port, and the time of fulfilment of delivery is the date of the bills of lading. These make it clear that the goods were sold on 'f. o. b. European Port' basis. Hence so far as machinery is concerned the sale took place outside the territory of India. But on a combined reading of both the agreements there is a business connection between the non-resident and the assessee. There is a real and intimate connection between the trading activity within the taxable territories and this relation amounts to a business connection through or from which income accrued or arose to the non-resident. The learned counsel for the assessee placed strong reliance upon a decision of the Supreme Court in Carborundum Co. v. CIT : 108ITR335(SC) and contended that, in identical circumstances, the Supreme Court had held that there was no business connection between the non-resident company and the assessee. It is, therefore, necessary for us to consider the facts of the said case in detail. In the said case, the agreement between the non-resident company and the Indian company related to certain technical and know-how services, namely :-
(1) furnishing of technical information and know-how with respect to the manufacture of bonded abrasive and coated abrasive products; (2) providing technical management including factory design and lay-out, plant and equipment production, purchase of materials, manufacturing specifications and quality of product; (3) furnishing comprehensive technical information of all developments in the manufacture of the special products; (4) providing the Indian company with a resident factory manager for starting the plant and superintending its operations during its initial production stages, as also other technical personnel necessary for the operation of the plant; and (5) training Indian personnel to replace the foreign technical personnel as quickly as possible.
Having regard to the terms and conditions of the agreement, the Income-tax Appellate Tribunal in that case had found that the services of the foreign personnel available to the Indian company was outside the taxable territory, that the Indian company took them as employees, paid their salary and they worked under the direct control of the Indian company. The services rendered by the American company in that connection was wholly and solely rendered in the foreign territory. On the basis of those findings, the Supreme Court held that the High Court was in error in holding that there was a business connection between the two companies and that any part of the activity or operation could be said to have been carried on by the American company in India. In the circumstances of the said case, the Supreme Court had held that the technical services fee received by the non-resident company from the Indian company did not accrue or arise in India nor could it be deemed to have accrued or arisen in India. But the facts in the present case are different. The non-resident company had made the services of the foreign personnel available to the assessee-company within the taxable territory. The assessee did not take the foreign personnel as their employees nor were they paid any salary by the assessee. The personnel worked not merely under the control of the assessee-company and the terms of the agreement would clearly show that both the assessee and the non-resident company had control over the personnel. Both the companies had the authority to change the composition and the number. Hence, the said decision relied upon by the counsel for the assessee is easily distinguishable.
Mr. Parvatha Rao, the learned counsel for the assessee, has invited our attention to the Boards circular dated July 23, 1969, and contended that where the transactions of sale between the two parties are on a principal to principal basis no liability will arise on accrual basis to the non-resident on the profits made by him. Particular emphasis was laid on sub-cl. (c) of cl. (3) which says that where the non-resident exercise no control over the business of the resident and sales are made by the latter on his own account it can be inferred that the transactions are on the basis of principal to principal. As stated above whether a non-resident has a business connection in India from or through which income or profits can be said to accrue or arise within the meaning of s. 9 of the I. T. Act has to be determined on the facts of each case. Having regard to the various activities of the non-resident company as stated by us earlier, we fail to see how this circular is of any help to the assessee. In the circumstances of the present case, we hold that there was a business connection between the non-resident company and the assessee which would justify the assessee-company being treated as the agent of the non-resident company within the meaning of s. 163(1) of the I. T. Act.
We answer both the questions referred to us in the affirmative and in favour of the revenue. There will be no order as to costs. Advocates fee Rs. 250.