Suhas Chandra Sen, J.
1. The Tribunal has referred the following two questions of law under Section 256(1) of the I.T. Act, 1961 :
'1. Whether, on the facts and in the circumstances of the case, and on a proper construction of the terms of the agreement dated July 2, 1973, the Tribunal misdirected itself in law in holding that there was no 'business connection' of M/s. Martin Black & Company (Wire Ropes) Ltd. (U.K.) in India or whether the said finding of the Tribunal was perverse ?
2. If the answer to question No. (1) is in the affirmative, then whether the Tribunal was right in holding that the amount of royalty paid by the assessee-company to M/s. Martin Black & Company (Wire Ropes) Ltd. (U.K.) was not assessable to tax in India under s. 9(1)(i) of the Income-tax Act, 1961 ?'
2. The relevant facts have been set out in the statement of case which are as follows :
3. The assessee-company submitted an application under Section 195 dated May 24, 1974, to the ITO, ' B ' Ward, Companies Dist. VI, Calcutta, requesting issue of a certificate under the aforesaid section certifying that the royalty payable to M/s. Martin Black & Company (Wire Ropes) Ltd. in terms of the agreement dated July 2, 1973 (between M/s. Usha Martin Black (Wire Ropes) Ltd. (hereinafter to be referred to as 'the company') and M/s. Martin Black Company (Wire Ropes) Ltd. (U.K.) (hereinafter to be called 'Martin Black') was not taxable. According to the assessee's counsel, the ITO was not agreeable to the proposal put forward by the company which again submitted an application dated October 7, 1974, for issuance of a certificate on the basis of the ITO's decision that a portion of the royalty payable to Martin Black was taxable under the Indian I.T. laws.
4. In pursuance of the application dated October 7, 1974, the ITO passed an order under Section 195(2) of the Act on October 8, 1974. A copy of the agreement was placed before him and it was found therefrom that the agreement was entered into for the purpose of obtaining the services of Martin Black as a marketing consultant to the company in respect of exportation of its products, namely, steel wire, steel wire ropes and steel rope products. The ITO referred to Clauses 3, 4, 5, 6 and 7 of the agreement. It was contended before us on behalf of the company that since the services, namely, reports, statistics, patterns of demand and consumption and other advices allied to such services were rendered outside India and all such particulars and documents would be delivered outside India and payment would be received outside India, such services did not come under the purview of the I.T. Act, 1961, so far as the payment of royalty was concerned. It was further submitted that the entire transactions in the shape of supply of technical know-how by means of statistics, patterns, documents, reports, etc., should be viewed as a transaction of outright sale and, therefore, the receipt of royalty would remain beyond the mischief of levy of Indian I.T.
5. The ITO, however, held :
' It is now clear from the aforesaid clauses that the transaction relating to the supply of information and data has not ended merely with the delivery of the same. The resident party has certain obligation to carry out and the non-resident party is also keeping control over the manner of use of the relevant document so that the transaction cannot be said to be a transaction of outright sale. The knowledge that the non-resident party has acquired has been supplied to the resident party for their use in the manner specified and not in a manner in which the resident party likes. By these, the non-resident party has established a sort of business connection through which they are in receipt of income, the statistics, patterns and other reports and asset or property in the rent of the non-resident party which have not been sold but are being used in India for earning income. The payment which it receives can only be said to be in the nature of something for use of their asset. I, therefore, hold that the payment of royalty in the circumstances already detailed attracts tax liability by virtue of the provisions of Section 9 of the I.T. Act, 1961, to the effect that the income from any business connection in India or through or from any property or asset in India is an income deemed to accrue in India. '
6. The assessee preferred an appeal against the assessment order. The AAC held that the services, viz., reports, statistics, patterns of demand and consumption and other allied services were rendered outside India. Payment were also received outside India. He further held that the restrictive clauses in the agreement referred to by the ITO did not alter the character of the services required to be rendered by the non-resident party. The AAC referred to a circular issued by the C.B.D.T. No. 7A/33/68-II(A)-II, dated July 23, 1969, in which it had been clarified that to constitute a business connection, some continuity of relationship between the person in India and the person outside India who receives or realises the profit was necessary. The AAC emphasised that no personnel of Martin Black visited India and the entire services were fully rendered outside. The AAC, therefore, allowed the appeal of the assessee.
7. The ITO appealed to the Tribunal. The Tribunal, after referring to the agreement and considering the facts of the case, held that the ITO had failed to establish any business connection of Martin Black in India because it rendered all its services outside India and sent documents and papers incorporating instruction to the company in India in exportation of the company's product to the territories specified in the agreement. The Tribunal was of the opinion that it would be wrong to lay too much emphasis on the location of the documents and papers or the restrictions imposed as to the use of those documents and papers in deciding the point in issue. The Tribunal found that Martin Black had rendered services to the Indian company outside India and, therefore, the Tribunal held that the amount of royalty could not be taxed in India under Section 9(1)(i) of the I.T. Act.
8. The CIT being aggrieved by the order of the Tribunal applied for referring some questions of law arising out of the order of the Tribunal under Section 256(1) of the I.T. Act and the two questions of law which we have set out hereinbefore were referred by the Tribunal to this court.
9. The main contention on behalf of the Revenue before us is that there was some business connection between the assessee and the non-resident company, M/s. Martin Black & Company (Wire Ropes) Ltd., U.K. It has been pointed out that practical know-how and some other documents were sold by the non-resident company to the Indian company for exploitation in India. Strong reliance has been placed on Clauses 4, 5 and 6 of the agreement which have been set out in the order of the Tribunal and are as follows:
'4. In consideration of these services to be rendered by 'Martin Black' in the territory to 'the company' hereunder, 'the company' shall pay 'Martin Black' as royalty :
(a) At the rate of 3% of the f.o.b. price received by the company in respect of the products exported by the company to the dollar area during the term of this agreement.
(b) At the rate of 3% of the f.o.b. price received by the company in respect of the products exported by ' the company ' to the sterling area during the said term.
(c) At the rate of 11/2% of the f.o.b. price received by' the company ' in respect of the products exported by ' the company ' to the rupee area during the said term.
Payments mentioned against Clauses (a), (b) and (c) are subject to Indian taxes.
For the purpose of this clause, the f.o.b. prices shall mean the prices actually received by the company less allowance for :
(a) Defective quality and/or shortage :
(b) Damaged and/or returned products;
(c) Charges and expenses for packing, freight and insurance.
5. All information and data made available to ' the company ' by ' Martin Black ' under this agreement and designated confidential shall be entitled to be sub-licensed by ' the company ' provided that the terms of such sub-licence are approved by ' Martin Black ', ' the company ' and the Government of India and subject thereto all such information and data shall be kept secret and confidential by 'the company' except for the purpose of this Agreement.
6. All documents and papers supplied by ' Martin Black' to 'the company' under this Agreement shall be and remain the property of 'the company'.'
10. Mr. Bagchi submits that by Clause 4 the parties had agreed that the nonresident companies will have to pay tax in India. In our opinion, this clause merely provides that the non-resident will pay tax in India if such tax is payable in India in accordance with law. Moreover, the liability to pay income-tax in India cannot be created by an agreement between the parties. Whether the non-resident company is liable to pay tax in India or not will depend upon the provisions of the I.T Act.
11. In order to make a non-resident company liable for payment of tax,some business activity in India on the part of the non-resident companywill have to be established. The finding of the Tribunal which we haveset out earlier is that the agreement was entered into outside India. Thenon-resident company was to render services outside India and the payment was to be remitted to U.K. and the documents and papers relating to marketing intelligence and market services of other products would be delivered outside India. In view of these findings of the Tribunal, it is not possible to accept the contention that there was some business activities of the non-resident company in India.
12. Mr. Bagchi, on behalf of the Revenue, strongly relied on Clauses 5 and 6 of the agreement and contended that the non-resident company was interested in the information and data that was supplied to the assessee and could control the business of the assessee-company in India and, therefore, the business activity of the non-resident company in India was established thereby.
13. Clause 6 of the agreement makes it clear that all documents and papers supplied by the non-resident to the Indian company will be the property of the Indian company. Under clause 6 the documents and papers supplied by the non-resident has to be treated as confidential. The Indian company has to keep all such information and data supplied by the nonresident secret and confidential and if the assessee wanted to allow anybody also to use such information and data, prior approval from the nonresident company was necessary. Although the expression 'sub-licensee' has been used, it cannot be inferred from that that the property in the information and data remained with the non-resident and the Indian company was using that property only under a licence. Clause 6 has categorically put this matter beyond any dispute. The Indian company was free to use the data and other information supplied by the non-resident company but the restriction was on sharing of this data and information with a third party. A limited restriction was imposed on the use of the data and information supplied by the non-resident. But that did not amount to doing of any business or carrying on any business activity by the non-resident company in India.
14. There is no statutory provision under which the income of the nonresident, in a case like this, can be brought within the net of assessment in India. The relevant section is Section 9 of the I.T. Act which is as follows :
'9. (1) The following incomes shall be deemed to accrue or arise in India-
(i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India;
Explanation.--For the purposes of this clause--
(a) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India.'
15. The non-resident company did not have any property or asset or source of income in India. The only question, in this case, is whether the non-resident company had earned any income ' from any business connection in India'. In the facts of this case, in order to bring the income of the non-resident within the mischief of Section 9(1)(i), it has to be shown that there was some business operation carried out by the non-resident in India. If the entire business operation of the non-resident is carried out in India, then the income arising from such business operation will be wholly taxable. But in case of a business of which all the operations are not carried out in India, the income has to be reasonably attributed to the operations carried out in India.
16. The Supreme Court in the case of Carborandum Co. v. CIT : 108ITR335(SC) , held on similar facts that even assuming that there was any business connection between the earning of the fee and the affairs of the Indian company, no part of the activity or operation could be said to have been carried on by the appellant in India. In that case, the Supreme Court was dealing with a transaction between an Indian company and a non-resident company for rendering technical know-how and services to the Indian company. On facts which are similar to the facts in our case, the Supreme Court held that in order to rope in the income of a nonresident it must be shown by the Department that some of the business operations were carried out in India in respect of which the income is sought to be assessed.
17. In the case before us nothing has been brought on record which would go to show that the non-resident had carried on any business activity in India. On the contrary the clear finding of the Tribunal is that no business operation has been carried out by the non-resident in India.
18. Reliance is also placed on behalf of the Revenue on a decision of the Andhra Pradesh High Court in the case of Bharat Heavy Plate & Vessels Ltd. v. Addl. CIT : 119ITR986(AP) . In that case also, the facts were entirely different. It was found by the Tribunal that the nonresident rendered consultancy services for the construction of a plant. For the said purpose, the non-resident deputed its employees to India. The salaries of the foreign personnel were paid by the non-resident and not by the assessee. Fee for the services rendered was to be paid by the assessee to the non-resident. Both the non-resident and the assessee had the right to change the composition and the number of the personnel. The non-resident had to assign to the assessee the production rights as well as the general and assembly drawings, technical information and other documentation. The price for technical documentation was fixed at Rs. 30 lakhs and fee for consultancy activity was fixed at Rs. I 1,91,735. Both parties had to continuously inform each other of the progress of deliveries and all the facts necessary for the fulfilment of the obligation and thus mutually co-operate and render assistance to each other. On these facts the Division Bench of the Andhra Pradesh High Court held that there was business connection between the assessee-company and the non-resident within the meaning of Section 163(1)(b) of the I.T. Act.
19. But the facts of the case before us are entirely different. The finding of the Tribunal is that all the business operations of the non-resident were to be carried out outside India. Then; is no clause in the agreement that has been produced before us which requires thelnon-resident to render any service or carry out any business operation in India. In view of the facts found by the Tribunal and having regard to the agreement and in the light of the principles laid down by the Supreme Court in the case of Carborundum Co. v. CIT : 108ITR335(SC) , both the questions are answered in the affirmative and in favour of the assessee.
20. There will be no order as to costs.