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Commissioner of Income-tax Vs. Carborundum Company - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case No. 183 of 1967 (Reference No. 67 of 1967)
Judge
Reported in[1973]92ITR411(Mad)
ActsIncome Tax Act, 1922 - Sections 2(5A), 4(1) and 42
AppellantCommissioner of Income-tax
RespondentCarborundum Company
Appellant AdvocateV. Balasubrahmanyan and ;J. Jayaraman, Advs.
Respondent AdvocateK. Srinivasan and ;K.C. Rajappa, Advs.
Cases ReferredIn Jeffrey v. Rolls
Excerpt:
direct taxation - application - sections 2 (5a), 4 (1) and 42 of income tax act, 1922 - whether technical service fee received by assessee company from indian company accrued or arose in india - agreement to provide foreign technicians to work in india to assist indian company and also to train indian personnel in manufacture of products - assessee rendered at least some services in india amounting to business activity - held, entire technical fee accrued through business connection in india and taxable under indian income tax act. - - 8. then, it is contended by the revenue that the said agreement between the assessee and the indian company clearly establishes a business connection between them, that the technical fee received, accrued or arose from such business connection in.....ramanujam, j.1. the assessee, a foreign company having its registered office in america, has been declared as a company by the central board of revenue under section 2(5a) of the indian income-tax act, 1922. the assessee-company specialised in the manufacture of bonded and coated abrasive products. as part of its business the assessee continuously carries on research with a view to find new methods for the manufacture of these products and to improve their quality. the fruits of this research are incorporated in pamphlets which are made available not only to its own technicians but also to such other persons, firms or companies with whom the assessee has entered into agreement and who are engaged in the manufacture of these products.2. the assessee entered into an agreement, dated june.....
Judgment:

Ramanujam, J.

1. The assessee, a foreign company having its registered office in America, has been declared as a company by the Central Board of Revenue under Section 2(5A) of the Indian Income-tax Act, 1922. The assessee-company specialised in the manufacture of bonded and coated abrasive products. As part of its business the assessee continuously carries on research with a view to find new methods for the manufacture of these products and to improve their quality. The fruits of this research are incorporated in pamphlets which are made available not only to its own technicians but also to such other persons, firms or companies with whom the assessee has entered into agreement and who are engaged in the manufacture of these products.

2. The assessee entered into an agreement, dated June 22, 1955, with an Indian company, Messrs. Carborundum Universal Ltd., having its registered office at Madras. According to the terms of the said agreement the assessee was to receive from the Indian company an annual service fee equal to 3 per cent. of the net sales of the products manufactured by the Indian company each year. The services to be rendered by the assessee to the Indian company includes :

(1) furnishing of technical information and know-how with respect to the manufacture of bonded and coated abrasive products by the Indian company,

(2) furnishing to the Indian company technical management, including factory design and lay-out, plant and equipment, production, purchase of materials, manufacturing specifications and quality of product,

(3) furnishing to the Indian company comprehensive technical information of all developments in the manufacture of the products,

(4) providing the Indian company with a resident factory manager for starting the plant and superintending its operations during its initial production stages and other foreign technical personnel necessary for the operation of the plant of the Indian company, and

(5) training here and abroad the Indian personnel to replace the foreign technical personnel as rapidly as possible. The salary and other emoluments of these foreign technical personnel were to be paid by the Indian company so long as they are in its service.

3. In pursuance of the said agreement, the Indian company set up a factory near Madras for the manufacture of bonded and coated abrasive products. According to the assessee, the factory design and lay-out were prepared by the Indian company in India and were sent to its office in the U.S.A. for examination and advice and the assessee examined it and sent its advice to the Indian company by post along with the information as to the nature of the plant and equipment required for the factory and also as regards the production data. It also lent the services of a number of foreign technical personnel to the Indian company for the purpose of helping the latter to start and run the factory. The terms of service of such personnel, however, were fixed by the Indian company under agreements entered into between such personnel and the company and the salaries and emoluments of such personnel were also paid by the Indian company. The said foreign technical personnel actually worked in the factory of the Indian company and, as part of their work, imparted training to the Indian personnel working in the factory. Some of the personnel of the Indian company were also sent to the foreign countries from time to time where technical training was imparted to them by the assessee. The assessee also sent by post technical bulletins, instructional films, etc., from time to time to the Indian company containing information which was necessary for the manufacture of the products by the Indian company. The assessee also gave advice from time to time to the officers of the Indian company with regard to the manufacture of the products.

4. During the accounting year relevant to the assessment year 1957-58, the assessee had received a sum of Rs. 95,762 from the Indian company as its service fee under the terms of the agreement referred to above, being equal to 3 per cent. of the net sales of the products manufactured by the Indian company in the year of account. In respect of this sum, the income-tax and super-tax were deducted by the Indian company at the prescribed rates. The assessee, thereafter, applied for refund of the entire income-tax and super-tax so deducted at source on the ground that the entire technical fee was earned by the assessee outside the taxable territories. The Income-tax Officer took the view that at least 5 per cent. of the technical fee should be taken to have been earned by the assessee in India and that the assessee was liable to be taxed under the Income-tax Act to that extent. Deducting the tax payable on that part of the income, the Income-tax Officer directed the refund of Rs. 56,606.75 to the assessee.

5. The Commissioner of Income-tax, however, initiated proceedings under Section 33B of the Indian Income-tax Act, 1922, as he was of the view that at least 75 per cent. of the technical fee earned by the assessee would have accrued or arisen in India. After issuing a show cause notice and after hearing the objections of the assessee, the Commissioner determined a sum of Rs. 71,822 as being assessable to income-tax and super-tax and directed the Income-tax Officer to revise the assessment accordingly. According to the Commissioner, though the technical information was supplied by the assessee-company from outside India, the information having been put to use in India, the technical fee should be taken to have been earned in India and although the foreign technical personnel were paid for by and the control over them vested with the Indian company, their services having been made available by the assessee in India, it should be taken that the technical fee was for providing such services in India. The Commissioner was also of the view that the technical fee paid to the assessee or at least a portion thereof was in the nature of royalty which has to be taken as income accruing in India.

6. Aggrieved against the order of the Commissioner, the assessee preferred an appeal to the Appellate Tribunal contending that no portion of the technical fee received from the Indian company could be assessed in India. The Tribunal, after referring to the several clauses in the agreement and the nature of the services rendered by the assessee to the Indian company for starting and running the factory in India, found that these services consisted mostly of examination of the factory design and the layout prepared by the Indian company and in sending advice by post regarding the nature of the plant and equipment required for the factory and in the supply of bulletin, etc., and that these services were not rendered in India. With regard to the foreign technical personnel supplied by the assessee to the Indian company, the Tribunal found that the assessee's responsibility ended with the provision of such technicians and that as the services rendered by the foreign technical personnel including the training imparted to the Indian personnel at the factory were governed by the agreement entered into between the Indian company and such personnel, they cannot be taken to be the services rendered by the assessee under the agreement. As regards training imparted to the Indian personnel by the assessee in foreign countries, the Tribunal held that such training having been admittedly imparted outside India, the services of the assessee in this respect cannot be said to have been rendered in India. On these findings, the Appellate Tribunal disagreed with the view of the Commissioner that the technical fee paid was for the use of the information by the Indian company according to the volume and extent of such use and held that the agreement itself did not make the service fee of 3 per cent. payable by the assessee dependent upon the use of the information in India or on the volume and the extent of suck use, that on the other hand the service fee was payable to the assessee, whether or not the Indian company made use of the information supplied by the assessee and irrespective of the volume and extent of such use. The Tribunal also disagreed with the Commissioner's view that the technical fee amounted to royalty. Ultimately, the Tribunal set aside the order of the Commissioner. At the instance of the Commissioner the following question has been referred to this court:

'Whether, on the facts and in the circumstances of the case, the technical service fee in excess of 5 per cent. received by the assessee-company from the Indian company during the account year relevant to the assessment year 1957-58 has accrued or arisen in India ?'

7. Before us, firstly, it is contended by the revenue that the assessee must be deemed to be working in conjunction with the Indian company in the manufacture of abrasive products' in India and, therefore, the service fee received by the assessee should be taken to relate to the part played by the assessee in the manufacture of abrasive products in India. But, we are of the view that there is no material on record to support this contention. The relationship between the assessee and the Indian company is governed by the agreement dated June 22, 1955, and the terms of the agreement do not indicate that the assessee worked in conjunction with the Indian company in the manufacture of abrasive products in India.

8. Then, it is contended by the revenue that the said agreement between the assessee and the Indian company clearly establishes a business connection between them, that the technical fee received, accrued or arose from such business connection in India, that, therefore, the technical fee received becomes taxable under Section 4(1)(c) read with Section 42 of the Income-tax Act, that the Tribunal has clearly overlooked this position when it held that the technical fee received by the assessee was not in relation to any service rendered in India and that the 'entire services of the assessee were rendered outside India. The learned counsel for the assessee would, however, contend that the plea based on 'business connection' was not put forward by the revenue at any time before and that, therefore, it should not be allowed to be raised at the stage of the reference. But we are of the view that the question referred to us is general in its terms and comprehends the question of applicability of Section 42(1) to the transactions in question. The question which we are asked to answer is whether the technical fee in question received by the assessee from the Indian company has accrued or arisen in India, and, in considering that question, one cannot but consider the scope of Section 42 which practically defines as to what is accrual. Therefore, we proceed to consider the question arising in this case in the light of Sections 3, 4(1) and 42(1) of the Income-tax Act.

9. Section 3 brings to charge the total income of the previous year of every individual, Hindu undivided family, and company, local authority or firm and other association of persons. Section 4 states that the total income of any previous year of any person would include all income, profits and gains from whatever source derived, which, if such person is not resident in India during the year, accrue or arise or are deemed to accrue or arise to him in India during such year. The assessee in this case is a non-resident company, and if any portion of its income has accrued or arisen in India during the year, such portion of the income is liable to be charged to income-tax under Section 3 read with Section 4. Section 4, in turn, attracts Section 42(1) and that provision, so far as it is relevant, is as follows :

'All income, profits or gains accruing or arising, whether directly or indirectly, through or from any business connection in the taxable territories, .... shall be deemed to be income accruing or arising within the taxable territories, and where the person entitled to the income, profits or gains is not resident in the taxable territories, shall be chargeable to income-tax either in his name or in the name of his agent, . . . . '

10. According to the revenue, the technical fee received by the assessee from the Indian company has to be taken as having accrued or arisen in India in view of Section 42(1), while the assessee would contend that Section 42(1) cannot be invoked in the case of mere 'know-how' agreements such as the agreement in question which does not contemplate any service being rendered in India.

11. In Bangalore Woollen, Cotton and Silk Mills Co. Ltd. v. Commissioner of Income-tax, : [1950]18ITR423(Mad) , Satyanarayana Rao J., dealing with the scope of the words 'business connection' occurring in Section 42(1), expressed :

'In order to elucidate the meaning of the expression 'business connection' the learned counsel on both sides drew our attention to several decisions which have considered the question. A detailed examination of these decisions, however, does not enable us to arrive at the exact meaning of the expression 'business connection' and define its scope and ambit. It is, however, clear that it is an expression of a very comprehensive nature and not necessarily confined to the definition of 'business' in Section 2(4) of the Act... 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. As observed by Rangnekar J. in Commissioner of Income-tax v. National Mutual Life Association of Australasia Ltd., : [1933]1ITR350(Bom) , the expression 'business connection' is a more comprehensive expression as including not only the kinds of things specifically described as being included in the term, but the kind of things which are specifically mentioned in the English Act.'

12. Viswanatha Sastri J. had expressed:

'There is no definition of the words 'business connection' and the legislature has deliberately chosen words of wide though uncertain import (see Hira Mill's case, : [1946]14ITR417(All) . It is difficult to extract from the language of Section 42 or from the decisions a comprehensive principle which would serve as a guide for all cases. One can only take the particular facts and circumstances and decide whether the case falls within the words of Section 42(1) or outside them.'

13. In that case the assessee, a factory in Mysore State, purchased raw materials through its managing agents in Madras State and the question was whether such purchase of raw materials constituted 'business connection' within the meaning of Section 42(1). The court held that the transactions constituted a 'business connection' within the Madras State. In Commissioner of Income-tax v. Little's Oriental Balm and Pharmaceuticals Ltd., : [1950]18ITR849(Mad) this court had expressed the view that:

'The expression ' deemed to have received or accrued in British India' is explained in Section 42, which has really to be read with Section 4 on which it is a commentary. Section 4 is the charging section and Section 42 gives the definition of the expression 'deemed to accrue and arise' or 'deemed to have been received in British India' in Section 4.'

14. The Supreme Court has also expressed the view in Commissioner of Income-tax v. Ahmedbhai Umarbhai and Co., : [1950]18ITR472(SC)

'Strictly speaking, the word 'accrue' is not synonymous with 'arise', the former connoting the idea of growth or accumulation and the latter of the growth or accumulation with a tangible shape so as to be receivable. There is a distinction in the dictionary meaning of these words, but throughout the Act they seem to denote the same idea or ideas very similar and the difference only lies in this that one is more appropriate when applied to a particular case. In the case of a composite business, i.e., in the case of a person who is carrying on a number of businesses, it is always difficult to decide as to the place of the accrual of profits and their apportionment inter se.'

15. In Jethabhai Javeribhai v. Commissioner of Income-tax, the Nagpur High Court considered a case where a company in British India purchased raw materials for his beedi business in Baroda State through a non-resident to whom commission was paid, and the question for consideration was whether the commission paid to the non-resident in respect of the purchases made in Baroda State accrued or arose in India through or from a business connection within the meaning of Section 42. It was held that the purchase and supply of raw materials to a resident-manufacturer by a non-resident would not render the commission earned by the latter liable to tax under Section 42(1) in the absence of anything to show that there was any course of dealing between the resident and the non-resident and the commission earned was made to depend on business done in British India, and that something more than mere rendering services out of British India for remuneration to a resident businessman is necessary to establish a business connection within the meaning of that expression in Section 42(1), In Commissioner of Income-tax v. R. D. Aggarwal and Co., : [1965]56ITR20(SC) , the assessee canvassed orders from dealers in Amritsar for the supply of goods and communicated them to certain non-resident exporters and the orders were ultimately accepted, the price was received by them and delivery was given outside the taxable territories. The assessee was entitled to certain commission on those sales. The question arose whether there was any business connection between the assessee and the non-resident and whether the assessee could not be treated as an agent of the non-resident for the purpose of taxing the profits that accrued to them from their export business. Dealing with that question the Supreme Court, after a review of all the important cases which have arisen before the courts for the purpose of finding out as to what relation between the non-resident and the activity in the taxable territories which contributes to the earning of income may or may not be regarded as business connection, said that the expression 'business connection' postulates a real and intimate relation between the 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 and that it must in all cases be remembered that by Section 42, income, profits or gains which accrues or arises to a non-resident outside the taxable territories is sought to be brought within the net of income-tax law, and not income, profits or gains which accrues or arises or is deemed to accrue or arise within the taxable territories, that 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, and that income not taxable under Section 4 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 court expressed thus:

'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.'

16. In the light of the principles laid down in the above cases as regards the scope of the expression 'business connection' we have to consider whether in this case the technical fee received by the assessee has accrued or arisen through or from business connection in India. According to the revenue the income in question has been received by the assessee, a nonresident, from some activity in India, that the activity is commercial in character and, therefore, the income is taxable under Section 4(1)(c) read with Section 42(1). The assessee would, however, state that no service has been rendered in India by the assessee, that all the services which the assessee had to render as per the terms of the agreement had been rendered outside India and that such rendering of services outside India to a person carrying on business in India would not amount to a 'business connection' in India. In this case the Income-tax Officer found that a perusal of the terms of the agreement between the assessee and the Indian company makes it clear that at least 5 per cent. of the technical service fee is earned by the assessee in India and that the same is liable to be assessed under the Income-tax Act. The Commissioner, however, held that having regard to the obligations undertaken by the assessee under the agreement, 75 per cent. of the technical fee received by the assessee should be taken on a reasonable basis as income accruing or arising in India. The Tribunal took the extreme view that no portion of the technical fee can be said to have accrued or arisen in India. The question is whether the Tribunal's view could be sustained.

17. In the context of the question to be considered it is necessary to find out as to what are the services rendered by the assessee in pursuance of the agreement and whether such services were rendered in India or outside. The nature of the services to be rendered by the assessee under the agreement has already been referred to. Some of the services rendered by the assessee to the Indian company consisted of examination and approval in the U.S.A. of the factory, design and lay-out which were prepared by the Indian company in India and advice sent by the assessee to the Indian company by post as to the nature of the plant and equipment required for the factory as also as to the production data, etc. These services had been held to have been rendered by the assessee outside India as the entire correspondence was by post. Some of the other services to be rendered by the assessee to the Indian company is to send periodically technical bulletins, instructional films, etc. The Tribunal also finds that the correspondence between the assessee and the Indian company showed that these services were rendered by the assessee outside India. So far as these services are concerned, the Commissioner held that such technical information furnished by the assessee by post has been used in India and, therefore, the services can be said to have been rendered by the assessee in India. This view is not acceptable to the Tribunal. The Tribunal says that the use of the technical information by the Indian company without reference to the actual supply of this information by the assessee cannot be taken to be the criterion and that it is not possible to say that the services such as furnishing of the technical information in the form of bulletins, etc., were rendered by the assessee in India. We are inclined to agree with the view taken by the Tribunal that in respect of the above services, it cannot be said that the assessee rendered those services in India.

18. But the assessee has also undertaken to provide the Indian company with foreign technical personnel for the starting, supervision and operation of the plant for the manufacture of the products by the Indian company in India and for the training of Indian personnel by such technical foreign personnel to assist the Indian company in the starting, supervision and operation of the plant for the manufacture of the products in India. The Commissioner took the view that the provision for providing by the assessee foreign technical personnel to work in India would suggest that the assessee is rendering some services in India in pursuance of the terms of the said agreement. The Tribunal, however, disagreed with the Commissioner and held that as these foreign technicians had worked as whole-time employees under the Indian company, they should be taken to be the employees of the Indian company and, therefore, the services rendered by the foreign technicians in India cannot be attributed to the assessee as the assessee had nothing to do with the day-to-day work of the said foreign technicians. It also held that the training imparted by its technicians to the Indian personnel in India was as part of the work which they have to do under the Indian company and that, therefore, the training of the Indian personnel by the foreign technicians cannot be taken to be services rendered by the assessee in India.

19. On a due consideration of the matter, we are of the view that the Tribunal did not have a proper perspective of the said services, rendered by the assessee. The question is not whether foreign technicians were under the employ of the assessee or the Indian company and whether they received the salary from the assessee or from the Indian company for the services rendered by them in India. Here the relevant question is whether the assessee has sent the foreign technicians to India to help the Indian company in the starting, supervision and operation of the plant for the manufacture of the products in India, and to train suitably the Indian technicians. Under the contract the assessee is obliged to send foreign technicians to work in India, and if really foreign technicians were sent to India by the assessee under that agreement, it cannot be said that the assessee has not rendered any service in India. The fact that those foreign technicians were paid by and were under the control of the Indian company will not affect the question. The requirement that the assessee has to send foreign technicians to India for the purposes set out in the agreement leads to the inference that the assessee has undertaken to do some service or activity in India by sending Its foreign technicians to work in India. The payment of salary and other emoluments to such foreign technicians is purely a matter of bargain between the assessee and the Indian company and they have agreed that the foreign technicians will be paid by the Indian company. But this will not affect the question whether the assessee is obliged to send foreign technicians to India to assist the Indian company. Similarly the obligation of the assessee to train the Indian personnel in India through their foreign technicians can also be said to be services rendered in India. Though the foreign technicians did train the Indian technicians in the course of their duties which they have to perform as employees of the Indian company, still the obligation to train Indian personnel is that of the assessee and, therefore, such training of Indian personnel in India through the assessee's foreign technicians can be said to be a service rendered by the assessee in India.

20. We cannot, therefore, agree with the view of the Tribunal that the assessee has not rendered any service in India. As already stated, the sending of foreign technicians to India to work under the Indian company and to assist the Indian company in the starting, supervision and operation of the plant for the manufacture of the products and also to train the Indian personnel working under the Indian company amounts to the assessee doing some activity or service in India and the technical fee received cannot be said to be only for the purpose of providing technical information through the form of bulletins, etc., and for the approval of the lay-out, plant and equipment, etc. Therefore, the question is as to what portion of the technical fee is attributable to the services rendered by the assessee in India.

21. The learned counsel for the revenue, however, would contend that the assessee should be taken to have received the technical fee through or from its business connection in India, that, therefore, the entire technical fee should be taken to have accrued or arisen in India and that in such cases Section 42(3) for apportionment of the income cannot come into play. The learned counsel for the assessee would contend that providing foreign technicians to work in India is a very insignificant part of the assessee's services and, therefore, the Income-tax Officer's view that 5 per cent. of the technical fee received by the assessee should represent the services rendered by the assessee has to be accepted as reasonable. He also contends that the theory of business connection will not arise in the case of 'know-how' agreements and relies on the following passage occurring under the head 'receipts from know-how' or 'secret process' in Sampath Iyengar's Income-tax, 6th edition, volume 1, at page 168 :

'Manufacturing houses and business institutions evolve at great cost by experience and research over long periods of time, process of manufacture which are held by them secret, only a small part of which is capable of being patented. The technical knowledge not so patented is known in commercial circles as 'know-how'. This 'know-how' is not comparable with a fixed asset, such as, factory, office building, warehouse, plant and machinery, or even with such independent legal rights as patents, copyrights or trade marks, or even with goodwill. It is not a balance-sheet item. It is not diminished by imparting it to outsiders. It has the peculiar quality that it can be communicated to, or shared with, others without in any sense destroying the value thereof to its owner. It is a product of the brain and just as a person cannot sell his brain, he cannot sell the 'know-how' outright.'

22. It is true the learned author proceeds on the basis that when the owner of a 'know-how' undertakes to impart it for consideration, such consideration cannot be regarded as price for the property and, therefore, it is not a capital receipt but that in exceptional cases such remuneration may be of a capital character where the owner, in consequence of his imparting of the 'know-how' to another person, has to discontinue his own manufacture or to give up a market which is open to him. But we are not concerned with the question as to whether the receipts by the sale of 'know-how' is capital or revenue. Besides, in this case, the agreement cannot merely be treated just a 'know-how' agreement, for, as already stated, the assessee has undertaken to send foreign technicians to work in India under the Indian company and to train the Indian technicians working in the Indian company. We are not inclined to agree with the submission of the learned counsel for the assessee that in all cases of 'know-how' agreements there will not be any business connection. Whether there is business connection or not has to be considered with reference to the facts and circumstances of each case. In this case the terms and conditions of the agreement between the assessee and the Indian company have to be looked into to find out whether there is any business connection instead of saying that the agreement in question is a 'know-how' agreement and in the case of 'know-how' agreements there cannot be any business connection. We are of the view that the whole agreement has to be read together and, if so done, we think that it is not exclusively for the provision of 'know-how', but also for the provision of some technical services. In Evans Medical Supplies Ltd. v. Moriarty, [1957] 37 T.C. 540 dealing with 'know-how' agreements, Lord Denning expressed :

'What, then, is the position of 'know-how' for tax purposes It is undoubtedly a revenue producing asset. The possessor can use it to make things for sale, or he can teach it to others for reward. But he cannot sell it outright. It is rather like the 'know-how' of a professional man. He can use it to earn fees from his clients, or he can teach it to pupils for reward, and so produce revenue. But he cannot sell it as a capital asset for a capital sum. He cannot sell his brains. So with a company which has special manufacturing skill and experience but has no secret processes. Its 'know-how' is inseparable from the 'know-how' of its staff and servants. It cannot prevent them using it any more than it can prevent them using their own brains ; See Herbert Morris Ltd. v. Saxelby, [1916] 1 A.C. 688 . It cannot sell it as a capital asset. It can only use it or teach it. Even with a company which owns secret processes, the supply of 'know-how' is not like the sale of goodwill or a secret process, for such a sale imports that the seller cannot thereafter avail himself of the special knowledge with which he has parted : See Trego v. Hunt, [1896] A.C. 7 ; and it may then rightly be regarded as the sale of a capital asset: See Handley Page v. Butterworth, [1935] 19 T.C. 328 But the supplier of 'know-how', always remains entitled to use it himself. . . .'

23. In Jeffrey v. Rolls-Royce Ltd., [1962] 40 T.C. 443, [1965] 56 I.T.R. 580 it is observed that exploitation of 'know-how' is one method of development of the owner's own trade, though it may not amount to a separate business. The assessee, therefore, is not right in its submission that in cases of 'know-how' agreement there is no question of any business connection. As already stated, in this case the agreement is not only a 'know-how' agreement but also an agreement to provide foreign technicians to work in India to assist the Indian company and also to train the Indian personnel in the manufacture of the products. Therefore, we are of the view that the assessee having rendered at least some services in India which amounts to a business activity, the technical fee should be taken to have accrued through or from its business connection in India. In that view the entire receipts by the assessee-company has to be taken to have accrued or arisen in India as a result of its business connection and, therefore, taxable. The apportionment made by the Commissioner or the one made by the Income-tax Officer cannot, therefore, be sustained for the assessee cannot be said to have carried on business in India in the context of the definition of 'business' and, therefore, there is no question of any apportionment. But, having regard to the fact that the Commissioner has directed the assessment of only 75 per cent. of the technical fee received by the assessee as income accrued in India and it is only that order which was appealed before the Tribunal, the assessment can be made only in relation to the said 75 per cent.

24. The result is, the question is answered in the affirmative and against the assessee. The assessee will pay the costs of this reference to the revenue. Counsel's fee Rs. 250.


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