1. The appeal is by the revenue, The ITO made an assessment on Hindustan Aeronautics Ltd. (HAL) for the assessment year 1978-79 as agents of Dunlop Ltd. By an order under Section 163 of the Income-tax Act, 1961 ('the Act'), passed on 10-3-1981, the ITO held HAL were to be treated as agents of Dunlop Ltd., England. During the course of the proceedings under Section 163, HAL challenged the ITO's right to appoint them as agents of Dunlop Ltd. They urged that the payments made by them towards technical assistance fees and royalty were exempt from tax and do not come under the purview of the provisions of Section 9 of the Act. The ITO held that it was sufficient if the non-resident had received some income from or through the Indian company in order to attract the provisions of Section 163 and so long as this fact was not in dispute HAL cannot escape its liability to be treated as an agent of the non-resident. He also held that the question regarding the liability of the non-resident to be assessed in India was separate from the liability of HAL being treated as an agent of the nonresident. In other words, what he meant was that once Dunlop Ltd. receives income through HAL, the latter can be appointed as an agent of Dunlop Ltd. During the assessment proceedings, it could be determined whether the non-resident was assessable or not. There was no appeal against this order.
2. During the assessment proceedings, it was pleaded that as royalty income had arisen in India, it cannot be charged under Section 9(1) which deals with income deemed to accrue or arise in India. The ITO rejected this contention stating that Section 9 deals with not only income deemed to arise in India but also income actually arising in India through or from an agent.
3. The ITO then considered the taxability of the sum of 800 received by the non-resident from the Indian company for transfer of know-how which took place outside India. The agreement for the transfer of know-how was also entered into before 1-4-1976. He held as follows : ... The facts of the case are the assessee supplies technical know-how to the agent in the form of documents, drawings, etc., from outside India. These materials are made use of in India by the agent for his business purposes. Though the materials are prepared and posted outside India, it is not disputed that such material has been received in India and exploited in India in furtherance of the activities of the agent, which in turn raised the income for the assessee. In any event it is the exploitation of such material that has given rise to the income in the form of licence fee. I, therefore, hold that the licence fee arises in India and has to be included in the assessment.
Regarding the assessee's claim to deduct expenditure at a flat rate of 50 per cent of the receipts as relatable to the business, the ITO allowed only 20 per cent. He, accordingly, allowed expenses of Rs. 2,406 out of the technical assistance fees of Rs. 12,038 and taxed the assessee on Rs. 9,632 in addition to the royalty of Rs. 43,811.
4. In appeal, the assessee relied upon the decision of the Supreme Court in the case of Carborandum Co. v. CIT  108 ITR 335. It contended that the fees did not accrue or arise in India nor could it be deemed to accrue or arise in India. Reliance was also placed on the decision of the Karnataka High Court in the case of VDO Tachometer Werke v. CIT  117 ITR 804. The main argument on behalf of the assessee was that although the provisions of Section 9(1)(iv) applied to a case of this type, as the assessee received the fees for technical services by virtue of an agreement entered into before 1-4-1976, no income could be deemed to accrue or arise in India. It, thus, pleaded that the non-resident was not liable to be taxed through the agent. The Commissioner (Appeals) held as follows : I have considered the facts and circumstances of the case as seen from the licence agreement dated 18-2-1966 and perused the case law relied on by the appellant. In my view, the appellant is justified in its contention. In view of the proviso to Section 9(1)(vii), the law as laid down in the above cited decisions applies to the appellant's case even though the assessment year is 1978-79.
Consequently, I must hold that the income from the licence fees would not be liable for taxation in India either as having accrued or arisen in India or deemed to accrue or arise in India.
Since he held that no part of the income accrued or arose in India, it was unnecessary to consider the question of giving adequate allowance towards expenditure incurred in earning technical fees. The revenue is in appeal.
5. The learned departmental representative submitted that the decisions relied upon by the assessee before the Commissioner (Appeals) were not applicable in the instant case. Those are cases on businuss connection.
In the present case, the ITO did not deem that income accrued or arose to the assessee because of business connection. He held that there was a direct accrual of income in India to the non-resident. Technical know-how was the stock-in-trade of the non-resident. It was sold in India. The asset, viz., technical know-how possessed by the non-resident assessee was capable of continuously producing income and irrespective of the fact that the agreement was executed outside India, the asset was exploited in India. Thus, there was a direct accrual of income to the non-resident in India. He invited our attention to Clauses 1(3), 2(1) and 4(1) of the agreement which, according to him, amply demonstrated that income accrued to the assessee in India.
He also sought to meet the point raised on behalf of the assessee, viz., that an Indian company could be appointed as an agent of the nonresident under Section 163, only in the case of deemed income under Section 9(1). He relied on the observations at page 958 of Law and Practice of Income-tax by Kanga and Palkhivala, Vol. 1, 17th edn. If the income of the non-resident is of a nature specified in Section 9 then the agent can be assessed to tax in respect of the same even if the income actually accrues in India or is received in India. He submitted that the order of the Commissioner (Appeals) should be reversed.
6. We have heard the rival submissions. In our view, the Commissioner (Appeals) was not right in deciding the case on the basis of the decisions relied upon by him. We are not dealing with a case of business connection. The question here is whether the income accrued or arose to the nonresident assessee in India. The agreement between the non-resident assessee and the Indian company was with regard to the exploitation of the former's technical know-how. In Clause 1(3) the 'territory' has been defined as the Republic of India, Nepal, Bhutan and Sikkim. This means that the agreement for exploitation of the non-resident's technical know-how covered the taxable territories.
Clause 2(1) reads as follows : In respect of the licensed equipment for each type of such aircraft Dunlop shall furnish to the licensee in the territory within one hundred and twenty days of request all information and technical data in its possession relating to the development by it and its subsidiaries of the licensed equipment including all information relating to the processes [as defined in Clause 1(2)] which should enable the licensee to manufacture, assemble, modify, test, maintain, inspect, overhaul, dismantle and repair the licensed equipment. Such information and technical data (hereinafter collectively called 'The Technical Knowledge') shall include....
Here also it is clear that the exploitation of the assets, designs, etc., was to be within the territory of India. Clause 4(1) reads as follows : Dunlop hereby grants to the licensee the sole and the exclusive right to manufacture in the territory and to use or sell in the territory the licensed equipment so manufactured by the licensee.
The above clauses, therefore, should have been examined by the Commissioner (Appeals) to find out whether the revenue's case regarding the accrual of income in the territory was justified. He was in error in holding that the income could be deemed to accrue or arise to the non-resident under the amended provisions of Section 9 without examining the relevant agreement between the non-resident and the Indian company.
7. The revenue's argument that an agent under Section 163 could be appointed in all cases where the non-resident is in receipt of royalties and technical service charges is also justified.
The heading of Section 9(1) indicates that the section was for purposes of determining what types of income that could be deemed to accrue or arise in India. That section is also fairly clear that it covers royalties and income by way of fees for technical services. Section 160(1) of the Act states that a representative assessee means, in respect of the income of a non-resident specified in Sub-section (1) of Section 9, the agent of the non-resident including a person who is treated as an agent under Section 163. Therefore, the income of the non-resident being royalty and fees for technical services which are specified in Section 9, the agent of the non-resident is assessable with regard to those incomes. Therefore, the objection taken on behalf of the assessee to an assessment through an agent with regard to royalty and fees for technical services is not well founded.
8. If the conclusion reached on examination of the various clauses of the agreement is that income accrued or arose to the assessee in the taxable territories, the further question regarding allowability of expenses has to be considered. The Commissioner (Appeals) did not go into this question in the view he had taken viz., that the non-resident was not assessable to tax in India.
9. For these reasons, we set aside the order of the Commissioner (Appeals) and restore the appeal to him for a fresh decision according to law.
10. In the result, the revenue's appeal is treated as allowed for statistical purposes.