Venkataramaiah, J.
1. Because all the above cases arise out of a common agreement and the questions of law which arise for consideration in them are interconnected, we are disposing of all of them by this common order.
2. M/s. International Instruments Private Ltd., Bangalore (hereinafter referred to as 'the IIP'), is a company engaged in the manufacture of dashboard instruments used in automobiles and tachometers at Bangalore, India. M/s. VDO Tachometer Werke Adolf Shingling Gmbh. (hereinafter referred to as 'the VDO') is a joint stock company incorporated at Frankfurt, Germany. M/s. Instek Zurich (hereinafter referred to as 'the Instek'), is a company registered in Switzerland. An agreement was entered into on September 30, 1959, in Germany between IIP represented by its managing director, Sri N. Krishnan, and VDO providing for a collaboration for the purpose of manufacturing dashboard instruments and tachometers at the factory of IIP in Bangalore in accordance with the licence granted by the VDO. The relevant parts of the agreement read as follows:
'WHEREAS VDO are manufacturers of measuring instruments for road vehicles, including their respective driving parts and accessories (hereinafter referred to as 'licensed articles'):
AND WHEREAS VDO has, at the request of the guarantor abovenamed, agreed to grant the licensee company a manufacturing licence of the aforesaid licensed articles for the territory of Union of India (hereinafter referred to a the 'licensed territory'):
(Note: IIP is the licensee-company and Sri N. Krishnan is the guarantor).
It is hereby mutually agreed as follows:
I. VDO agrees to grant the licensee-company a manufacturing licence for the licensed territory entitling it to make the licensed articles described above.
This manufacturing licence embraces:
(a) The transfer of all ideas and the disclosure of all experiences obtained in the held of the licensed articles, to wit, the surrender of workshop drawings, specifications and other construction data.
(b) The rendering of regular practical advice by members of VDO's staff.
(c) The permission to use the VDO trade-mark in the manner laid down in clause II hereafter.
This manufacturing licence does not include gratuitous transfer of ideas and gratuitous disclosure of designs for factory equipment, such as machines, tools, etc., required for the construction of any licensed articles or any parts thereof and the same shall not be included within the scope of this agreement.
II. The obligations of the licensee-company under this agreement are set out below:
(a) Organisation of production
The licensee-company undertakes to organise and to operate the production of the licensed articles to an extent sufficient to cover approximately the demand for such licensed articles in the licensed territory.
(b) Restraint of competition
The licensee-company shall, as far as the scope of the licensed articles is concerned, co-operate exclusively with VDO. This condition embraces the licensee-company's liability, during the continuance of this agreement, not to establish any co-operation with a business enterprise competing, directly or indirectly, with VDO not to work for such an enterprise in any way whatever, either directly or indirectly, unless and otherwise approved by VDO.
The licensee-company shall buy from or through VDO all and any instruments or parts relating to the scope of the licensed articles, but not manufactured by the licensee-company itself, unless VDO state in writing their unwillingness to effect such supplies.
(c) Procurement of machinery
The licensee-company undertakes to buy exclusively from or through VDO the entire factory equipment required for making the licensed articles, such as machines, testing and control devices, tools and like, unless such equipment is already available or is made available or can be manufactured in the licensed territory.
(d) Procurement of parts and raw materials
The licensee-company undertakes to purchase exclusively from VDO all and any parts required for manufacturing the licensed articles which cannot be manufactured by the licensee-company. Similarly, the licensee-company undertakes to buy exclusively from or through VDO all raw materials required for making the licensed articles, unless such materials are available or produced in the licensed territory.
(e) Designation of trade-mark
During the continuance of this agreement, the licensee-company is entitled to use the protected trade-mark 'VDO' for the licensed articles, but only as part of the following combination:
'Yenkay License VDO' (f) Standard of quality
The licensee-company undertakes to achieve and maintain for all the licensed articles manufactured by it a standard of quality comparable to that of VDO.
(g) Research by the licensee-company
In case the licensee-company carries on any research and development resulting in any experiences, improvements and innovations made and discovered in the field of the licensed articles, the licensee-company undertakes to keep VDO regularly informed in respect of the same. If any part of the know-how resulting from research thus developed is intended to be used by VDO for the purpose of its manufacture in Germany or for being passed on for exploitation to their other licensees elsewhere, VDO shall be entitled to do so. The VDO shall in such cases pay as a contribution to the research and development cost of the licensee-company an amount which, unless agreed to otherwise, shall be two per cent. of the total turnover of the component to which such know-how relates.
(h) Distribution
The licensed articles made by the licensee-company are intended for distribution only within the licensed territory and the countries of Ceylon, Burma, Singapore (Malaya) and China. Supplies effected to any other countries shall be made only under an authorisation in writing by VDO.
The provision, however, shall not apply to any equipment fitted in the licensed territory into vehicles or other finished products fit for service and exported together with such products from the licensed territory.
III. Obligation of VDO:
(a) Restraint of competition
VDO undertakes, during the continuance of this agreement, not to grant any other person in the licensed territory a licence for manufacturing any of the licensed articles.
(b) Promotion of production
VDO agrees to lend the services of the required technicians for the erection, production and training of Indian personnel in India for a specific period on contract basis with Government approval for which the licensee-company is obliged to pay their emoluments in full, consisting of:
Salary,
House rent allowance,
Transport and other legitimate facilities for the duration of their stay in India.
VDO undertakes to support the licensee-company to the best of its ability in manufacturing the licensed articles and apart from surrendering all the data required for this purpose to render the licensee-company adequate advice, e.g., by training employees of the licensee-company in VDO enterprises or by sending members of VDO's staff to the licensee-company. The licensee-company shall pay the travelling expenses and the cost of boarding and lodging incurred in consequence of such consultative activity. In the event that the delegation of such members of VDO's staff to the licensee-company may exceed a period of fifteen days, VDO is entitled to request the licensee-company to share in defraying the cost of salary up to 50 per cent. paid to the delegated member or members of VDO's staff other than the members who are let on contract basis under the preceding clause.
IV. Supply of original VDO instruments
The licensee-company shall for the licensed territory have the exclusive right to import and to sell original VDO instruments. VDO cannot sell any original VDO instruments to any other person in the licensed territory except with the licensee-company's consent.
V. Payment of licence fees and other charges
In consideration of the grant of the manufacturing licence and other rights, facilities and assistance under this agreement, the licensee-company agrees to make the following payment to VDO:
(a) An amount of DM. 250,000 for surrender of technical data and know-how, such as cost of drawings, cost of designs, project reports, working process and construction data, required for the manufacture of licensed articles. The licensee-company has assured VDO that this payment is free of tax under the Indian laws and in case any tax became payable for this payment, the licensee-company shall reimburse VDO to that extent.
(b) Licence fee to VDO amounting to three per cent. (free of tax) of the total turnover of the licensed articles.
(c) Licence fee to Instek Zurich amounting to one per cent. (free of tax) of the total turnover of the licensed articles. VDO has assured the licensee-company that this licence fee is in respect of payment to be made by VDO to Instek Zurich for the licence held by the VDO from the said company.
(d) An amount equal to two per cent. of the total turnover of the licensed articles, being the contribution of the licensee-company towards the cost of research and development incurred by the VDO, subject to VDO establishing proof that such research and developments were carried in the year exclusively for India to the extent of the value payable. The licensee-company has assured VDO that this payment is free of tax under the Indian laws and in case any tax becomes payable for this payment, the licensee-company shall reimburse VDO to that extent.
The expression 'turnover' in this agreement means the net price of the licensed article received by the licensee-company from its first customer, less the cost of imported components.
The licensee-company shall render VDO a quarterly statement on the turnover in accordance with this clause. The licensee-company shall pay the licence fee annually, to wit, within one month of the end of each financial year. The licensee-company shall see to it that the licence fee is always paid in time, but it cannot be held responsible for any delay in the receipt of the remittances by VDO that may result from the clearing transactions between the two countries involved. VDO in such case may require the licensee-company to deposit it dues in a banking company in the licensed territory...
X. Proper law of contract
The parties agree that this agreement shall be governed by German law and for all purposes including its interpretation and effect and the rights and obligations of the parties to it. The proper law of the contract shall be the German law.'
IIP commenced production of the measuring instruments under the agreement during the accounting year relative to the assessment year 1962-63. We are concerned in these cases with the liability to tax of VDO and Instek under the provisions of the I.T. Act, 1961 (hereinafter referred to as 'the Act'), for the assessment years 1962-63 to 1969-70. It may be mentioned here that VDO and Instek which are non-resident companies have been treated as companies under s. 2(17)(iv) of the Act and IIP has been treated as the agent of these two companies under s. 163 of the Act.
Sub-section (2) of s. 5 of the Act provides:
'5. (2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which -
(a) is received or is deemed to be received in India in such year by or on behalf of such person; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year.'
3. The case of the department throughout has been that in the instant case the income which is liable to tax either in the hands of VDO or in the hand of Instek is income which is deemed to have accrued or arisen in India. Section 9 of the Act explains the expression 'income deemed to accrue or arise in India'. The relevant part of s. 9 as it stood during the assessment years 1962-63 to 1970-71, with which we are concerned, was 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 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. 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.........'
4. (The rest of the section is unnecessary for the purposes of these cases).
5. Under the agreement between the IIP and VDO referred to above, in addition to the payment of an amount of DM. 250,000 for surrender of technical data and know-how under clause (a) of art. V, IIP had to pay under clause (b) of art. V licence fee to VDO amounting to three per cent. (free of tax) of the total turnover of the licensed articles and under clause (c) of art. V licence fee to Instek amounting to one per cent. (free of tax) of the total turnover of the licensed articles through VDO. Instead of payment of DM. 250,000, shares of the equivalent value in IIP were allotted to VDO with the consent of the Government of India and that amount is not liable to tax although the dividend income therefrom is being subjected to tax under the Act. We are not concerned with the tax payable in that regard in these cases. We are concerned only with the liability of VDO or Instek in respect of the payment of licence fees made pursuant to cls. (b) and (c) of art. V amounting to four per cent. of the total turnover of the licensed articles.
6. The question relating to the taxability of the licence fees payable as mentioned above arose for consideration before the ITO for the first time in the assessment year 1962-63. He brought to tax the entire four per cent. payable under cls. (b) and (c) of art. V of the agreement in the hands of VDO during that assessment year by his order dated December 28,1967. On the same day, he passed four other assessment orders for the assessment years 1963-64, 1964-65, 1965-66 and 1966-67, taxing the entire four per cent. of the total turnover in the hands of VDO. The ITO consequently held that Instek was not liable to pay any tax in respect of license fee of one per cent. of the total turnover payable under clause (c) of art. V of the agreement and passed orders of nil assessments. Aggrieved by the orders of assessment passed by the ITO in respect of assessment years 1962-63 to 1966-67, VDO preferred appeals before the Appellate Assistant Commissioner of Income-tax (hereinafter referred to as 'the AAC') contending that the entire licence fee of four per cent. of the total turnover was not taxable under the Act as it had not accrued or could not be deemed to accrue in India and in any event the licence fee of one per cent. payable to Instek under clause (c) of art. V of the agreement could not be treated as VDO's taxable income. During the pendency of those appeals, the Commissioner of Income-tax took action under s. 263 of the Act proposing to revise the order of 'nil' assessment passed in the case of Instek in respect of the assessment years 1963-64, 1964-65 and 1965-66, as he was of the opinion that the orders in question were erroneous and prejudicial to the interest of the revenue. After hearing IIP, the agent of Instek, he set aside the said orders and directed the ITO to assess the licence fee of one per cent. payable under clause (c) of art. V in the hands of Instek represented by IIP. Aggrieved by the said orders, Instek preferred appeals before the Tribunal. These appeals were dismissed by the Tribunal by its order dated February 8,1974. At the instance of Instek a common question is referred to us in I.T.R.C. Nos. 69,70 and 71 of 1975, in regard to the correctness or otherwise of the Commissioner's orders.
7. Pursuant to the orders of the Commissioner under s. 263 of the Act, the ITO revised the orders of assessment in the case of Instek for the assessment years 1963-64 to 1965-66, and also framed assessments accordingly in respect of the assessment years 1966-67 to 1970-71. Instek preferred appeals against these assessments before the AAC contending that licence fee of one per cent. payable under clause (c) of art. V of the agreement was not taxable. The appeals were dismissed. The appeals filed by Instek against the orders of the AAC before the Tribunal were also dismissed. At the instance of Instek, a common question has been referred to us in I.T.R.C. Nos. 53 to 56 and 66 to 69 of 1976.
8. We shall now revert to the assessment orders passed by the ITO on October 28, 1967, in the case of VDO in respect of assessment years 1962-63 to 1966-67, bringing into charge the entire four per cent. payable under cls. (b) and (c) of art. V of the agreement in its hands. Aggrieved by those orders as mentioned earlier, VDO preferred appeals before the AAC. He allowed the appeals in part. He held that whereas licence fee of three per cent. payable under clause (b) of art. V chargeable to tax in the hands of VDO, licence fee of one per cent. payable under clause (c) of art. V was not chargeable. Accordingly he directed modification of the orders of assessment passed on October 28,1967. Aggrieved by the orders of the AAC, both VDO and the department filed appeals before the Tribunal. The Tribunal dismissed the appeals. In respect of assessment years 1967-68, 1968-69 and 1969-70, the ITO passed three orders of assessment in the case of VDO on December 28,1971, bringing to tax the entire licence fee of four per cent. in the hands of VDO. The appeals filed by VDO against these orders before the AAC were partly allowed as in the case of earlier years. VDO and the department filed appeals against those orders of the AAC also. Those appeals were also dismissed by the Tribunal. At the instance of VDO two questions of law which are common to these assessment orders have been referred to this court in I.T.R.C. Nos. 55 to 62 of 1975. At the instance of the department the Tribunal has referred one common question in respect of assessment years 1963-64 to 1969-70 in I.T.R.C. Nos. 36 to 42 of 1975. That is how we have 26 reference before us.
9. The questions referred to us in all the above cases are as follows:
I.T.R.C. Nos. 55 to 62 of 1975:
'1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the entire 3% of the turnover of International Instruments Private Ltd., which was payable by it to its foreign collaborator, M/s. VDO Tachometer Werke, was income of the foreign collaborator liable to be taxed in India
(2) Whether the Tribunal was right in holding that the sum of 1% on the value of the turnover of International Instruments Private Ltd., was not the income of VDO Tachometer Werke, West Germany, and, therefore, the question of allowing the payment of the same of M/s. Instek, Zurich, did not arise ?'
I.T.R.C. Nos. 36 to 42 of 1975: 'Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that 1% of the turnover which was payable under clause 5(c) of the agreement dated September 13, 1959, was not part of the income of M/s. VDO Tachometer Werke, West Germany, assessable to tax in India ?'
I.T.R.C. Nos. 69,70 and 71 of 1975: 'Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the Commissioner was justified in invoking the provisions of section 263 of the Income-tax Act, 1961 ?'
I.T.R.C. Nos. 53 to 56 & 66 to 69 of 1976: 'Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the 1% licence fee payable by M/s. International Instruments Pvt. Ltd., to M/s. Instek AG, Zurich, was the income of the latter which accrued or arose in India and was thus liable to be taxed in India ?'
10. Although there are five questions referred to us, in substance there are only the following questions, namely:
' (1) Whether, the licence fees payable under clauses (b) and (c) of article V of the agreement are taxable under the Act
(2) If the answer to the above question is in the affirmative -
(i) whether the entire licence fees payable under both the clauses are taxable in the hands of VDO
or
(ii) whether the amount of three per cent. payable under clause (b) of article V in the hands of VDO and the amount of one per cent. payable under clause (c) of article V in the hands of Instek, are taxable under the Act.'
11. We shall first take up the question whether the amount of licence fees payable under cls. (b) and (c) of art. V of the agreement is income which is deemed to have accrued or arisen in India The AAC observed as follows. In paras. 12 and 13 of his order dated January 18, 1971, in the appeals filed by VDO:
'12. In contesting these findings, Sri Swaminathan, on behalf of the appellant, urges the following facts:
(i) that the contract between the appellant and the Indian company was arrived at outside the taxable territory;
(ii) that the services of the appellant were rendered outside the taxable territories, for instance the technical know-how such as drawings, plans, inspection of goods, raw materials, etc., were delivered abroad, as also the selection of personnel, factory equipment, plant and machinery. The training of Indian personnel was given abroad and that no employee of the appellant came to India to train any Indian personnel or to give any advice; and
(iii) that as regards the German technical personnel employed in India from time to time their contracts of service were approved by the Government of India and they became employees of the Indian company solely subject to its control and authority. Such services were in pursuance of a contract between the technical personnel and the Indian company and had no connection with the services to be rendered by the appellant under its contract with the Indian company.
In my opinion, it is possible to accept all the facts urged by Sri Swaminathan and yet hold that the technical fees should be deemed to have accrued in the taxable territories. The place where a contract is agreed upon may be material where the obligations under the contract have also been finally fulfilled and determined in the place. Otherwise, it becomes merely a place where the parties to the contract meet and put their signature to signify their consent whereas the whole series of operations in terms of the contract take place elsewhere. This contract was essentially an agreement to exploit an asset-the owner of the asset getting both a liquidity sum as well as specified share continuously in the yield that springs up by exploiting such assets without any serious detriment to it. Such exploitation constitutes a definite source of income as mostly the services have been in the taxable territories and nowhere else. The appellant is an invisible partner in the manufacture and sale of measuring instruments by the Indian company and if the Indian company is to cease production, the appellant would not get anything, however valuable its co-operation might be. Rupees three or four of...... (?) Technical fees has its source in the sale in India of every article worth Rs. 100 and not in the contract concluded some time in 1959. In my opinion, for income to accrue, the presence of the appellant or its agents in India is not necessary. The constructive participation of the appellant in the income-yielding activity is quite sufficient.'
12. The Tribunal in its order dated February 8, 1974, in the appeals filed in respect of assessment years 1962-63 to 1969-70, held as follows:
'We, however, are not able to agree with the department that VDO was actually participating in the industry or business carried on by IIP in India. VDO and IIP are two different legal entities and because VDO holds a certain number of shares in IIP, which, in any case, do not form the majority of those shares, would not lead to the inference that VDO was carrying on business in India through IIP or that it was participating in the business of IIP in India and was entitled to a certain share of profit on the basis of such participation. What it was entitled to was royalty and a payment for technical assistance, and this could not be said to be due to any actual participation in the business of IIP in India.'
13. But relying upon the decision of the Madras High Court in CIT v. Carborandum Company : [1973]92ITR411(Mad) and the decision of the Calcutta High Court in Performing Right Society Ltd. v. CIT : [1974]93ITR44(Cal) , the Tribunal held:
'However, on the view taken by the Madras High Court and the Calcutta High Court referred to earlier, the question of apportionment does not arise. In this view, no part of the licence fees paid by IIP to VDO could be taken as having accrued or arisen or deemed to accrue or arise outside the taxable territories and the whole of it should be taken as deemed to accrue or arise in the taxable territories.'
14. It should be stated here that the decision of the Calcutta High Court referred to above has been no doubt affirmed by the Supreme Court in Performing Right Society Ltd. v. CIT : [1977]106ITR11(SC) . But that decision is distinguishable from the present case because it was held by the Supreme Court in that case that the income in question was income which had in fact accrued or arisen in India and the question whether income was one which was deemed to have accrued in India as defined in s. 9 of the Act did not arise for consideration. In so far as the decision of the Madras High Court is concerned, it has to be stated that the said decision has been reversed by the Supreme Court in Carborandum Company v. CIT : [1977]108ITR335(SC) .
15. It is clear from the findings recorded by the Tribunal that VDO did not carry on any operations through IIP and that it had not participated in the business of the IIP in India and no income accrued on the basis of any such participation. Sri S. R. Rajasekharamurthy, learned counsel for the department, argued that the existence of the agreement itself was sufficient in the eye of law to establish business connection between VDO and the IIP and the production of the licensed articles by IIP must be deemed to have been the result of the operations carried on by VDO in India. He further relied upon the clause in the agreement which authorised VDO to provide the services of technical personnel to IIP as supporting the case of the department that there was participation of VDO in the business of IIP. It has to be stated have that in order that an income of a non-resident received from an Indian resident can be considered as 'deemed' income under s. 9 of the Act, two factors must be established, namely, (i) the said income must have accrued or arisen whether directly or indirectly through or from any business connection in India or from any other source mentioned in s. 9(1)(i), and (ii) that in the case of a business, some operations must have been carried on by the non-resident in India. This is clear from clause (i) of s. 9(1) of the Act and clause (a) of the Explanation to it. The Explanation provides:
'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.'
16. It follows that if no operations are carried out in India, no income can be deemed to accrue or arise in India even though there may be business connection in India.
17. In so far as the second ground urged by the learned counsel for the department based on the clause under which VDO may make available the services of technical personnel, the Tribunal has observed as follows:
'It is in the context of the above agreement that we have to see to what extent the licence fees paid by IIP to VDO could be held to accrue or arise outside India. The case of the assessee before the lower authorities was that the contract between IIP and VDO was arrived at outside India and VDO rendered its services also outside India and in so far as the German technical personnel employed by IIP from time to time were concerned their contracts of service were approved by the Government of India and they became employees of IIP solely subject to its control and authority. It was accordingly claimed that no portion of the licence fee accrued or arose to VDO in India.'
18. Having observed as stated above, the Tribunal did not deal with the question whether or to what services were actually rendered by the technical personnel of VDO in India. But the AAC in para. 13 of his order observed that it was possible to accept all the facts urged by the learned counsel for the assessee, one of them being, as could be seen from para. 12 of this order:
'that as regards the German technical personnel employed in India from time to time, their contracts of service were approved by the Government of India and they became employees of the Indian company solely subject to its control and authority. Such services were in pursuance of a contract between the technical personnel and the Indian company and had no connection with the services to be rendered by the appellant under its contract with the Indian company.'
19. This part of the finding of the AAC remains undisturbed that it has to be held that no employee of VDO carried on any business operation in India on its behalf. It follows that VDO has not carried out any business operations in India and has not derived any income which is attributable to any such operation. We are of opinion that in the facts and circumstances of the case it is not possible to agree with the connection of the department that any part of the licence fee payable under cls. (b) and (c) of art. V of the agreement can be deemed to have accrued or arisen in India in view of the decision of the Supreme Court in the case of Carborandum Company : [1977]108ITR335(SC) , the relevant part of which reads as follows (p. 334):
'The High Court was wrong in its view that activities of the foreign personnel lend or deputed by the American company amounted to a business activity carried on by that company in the taxable territory. The finding of the Tribunal in that regard was specific and clear and was unassailable in the reference in question. The American company had made the services of the foreign personnel available to the Indian company outside the taxable territory. The latter took them as their employees, paid their salary and they worked under the direct control of the Indian company. The service rendered by the American company in that connection was wholly and solely rendered in the foreign territory. Even assuming, however, that there was any business connection between the earning of the income in the shape of the technical fee by the American company and the affairs of the Indian company, yet on part of the activity or operation could be said to have been carried on by the American company in India. And in the absence of such a sustainable finding by the High Court the provisions of section 42, either of sub-section (1) or of sub-section (3), were not attracted at all. The judgment of the High Court under appeal in Commissioner of Income-tax v. Carborundum Company : [1973]92ITR411(Mad) is not correct. It has rightly been pointed out by the Bombay High Court in Commissioner of Income-tax v. Tata Chemicals Ltd. : [1974]94ITR85(Bom) , with reference to the similar or almost identical provisions in section 9(1) of the Income-tax Act, 1961, that in order to rope in the income of a non-resident under the deeming provision it must be shown by the department that some of the operations were carried out in India in respect of which the income is sought to be assessed. The finding of fact recorded by the Tribunal being against the department in that connection, the Bombay High Court refused to call for a reference.
For the reasons stated above, we hold that, on the facts and in the circumstances of the case, the technical service fee received by the assesses company from the Indian company during the accounting year relevant to the assessment year 1957-58 did not accrue or arise in India nor could it be deemed to have accrued or arisen in India.'
20. (Note:- The provisions of s. 42(1) and (3) of the Indian Income-tax Act, 1922, referred to in the above passage correspond to s. 9(1)(i) and Explanation (a) of the Act. )
21. The fact that the licence fees payable was a certain percentage of the turnover of the goods produced in India does not also lead to the inference that any operations are carried on by VDO in India in view of the above decision of the Supreme Court where also the foreign company was receiving three per cent. of the net sale proceeds of the products manufactured in India. Merely because certain goods are manufactured in India by an Indian company with the aid of technical know-how obtained by it abroad from a non-resident company, it cannot be said that the non-resident company has been carrying on business operations in India, in the absence of any other material which points to the contrary.
22. At this stage it may be appropriate to refer to certain subsequent amendments made to s. 9(1) of the Act by adding cls. (vi) and (vii) by Finance Act, 1976, and Finance (No. 2) Act, 1977, with effect from April 1, 1977. Clause (vi) (b) and (vii) (b) are relevant for the present case. They read as follows:
' (vi) income by way of royalty payable by -......
(b) a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India;...... (vii) income by way of fees for technical services payable by -...... (b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India......'
23. It is significant that a proviso has been added to clause (vi) and a similar proviso has been added to clause (vii). Both the provisos expressly declare that nothing contained in cls. (vi) and (vii) shall apply in relation to any income by way of royalty or fees for technical services payable in pursuance of an agreement made prior to April 1, 1976, and approved by the Central Government. The said provisos to cls. (vi) and (vii) read with Explanation (1) given below each of them, would show that Parliament intended to alter the law in relation to the liability of such payments to tax perhaps in the context of the decision of the Madras High Court in the case of Carborandum Company : [1973]92ITR411(Mad) , which would not be consistent with the decision of the Bombay High Court in the case of Tata Chemicals Ltd. [1974] 94 ITR 85, which has been approved by the Supreme Court in the case of Carborandum Company : [1977]108ITR335(SC) . Notwithstanding the amendment of s. 9 of the Act by the addition of cls. (vi) and (vii), it is clear that these cases continue to be governed by the provisions of s. 9 of the Act as explained by the Supreme Court in Carborandum Company's case : [1977]108ITR335(SC) .
24. Having regard to the findings recorded by the AAC which have remained undisturbed by the Tribunal and the findings of the Tribunal itself and the principle enunciated by the Supreme Court in the case of Carborandum Company : [1977]108ITR335(SC) , we hold that the licence fees payable under cls. (b) and (c) of art. V of the agreement in question cannot be treated as income which is deemed to accrue or arise in India. The payment made pursuant to those clauses are outside the scope of s. 9 of the Act and are not taxable.
25. Clause (b) of art. V of the agreement clearly shows that three per cent. of the total turnover of the licensed articles has to be paid to VDO. There can be so dispute about it. Clause (c) of art. V of the agreement, however, provides that licence fee amounting to one per cent. of the total turnover of the licensed articles has to be paid to VDO because VDO has undertaken to pay that sum for the licence held by it from Instek. Instek is not a party to the agreement. There is no privity of contract established between IIP on the one hand and Instek on the other. Under the agreement VDO has not acted as the agent of Instek. In the circumstances, it cannot be said that Instek had any business connection with IIP much less can it be said that any amount was paid by IIP within the taxable territory to Instek. In these circumstances, s. 9 of the Act would not be applicable at all to the case of Instek and whatever income it may have derived from VDO on account of VDO entering into agreement with IIP. Hence, assessments made on Instek are wholly without jurisdiction.
26. In so far as VDO is concerned, it has to be held that, even though under the agreement four per cent. is payable by IIP to VDO, the net income derivable by VDO is only three per cent. as it has undertaken to pay one per cent. out of the four per cent. receivable by it in lieu of the licence held by VDO from Instek. The amounts payable under cls. (b) and (c) cannot be attributed to any operation carried out by VDO in India.
27. In view of the foregoing, our answers to the questions referred to us by the Tribunal in these cases are as follows:
28. I.T.R.C. Nos. 55 to 62 of 1975:
(1) In the negative and in favour of the assessee.
(2) The amount of one per cent. of the total turnover payable under clause (c) of art. V of the agreement is no doubt payable by IIP to VDO, but the ultimate destination of that amount if Instek. VDO has to pay it in lieu of the licence held by it from Instek.
29. I.T.R.C. Nos. 36 to 42 of 1975:
One per cent. of the total turnover which was payable under clause (c) of art. V of the agreement was part of the receipt of VDO to be paid to Instek and is not assessable to tax of India.
30. I.T.R.C. Nos. 69, 70 and 71 of 1975:
The Commissioner was not justified in directing assessment to be made on Instek in respect of one per cent. of the total turnover payable under clause (c) of art. V of the agreement.
31. I.T.R.C. Nos. 53 to 56 & 66 to 69 of 1976:
One part cent. licence fee payable under clause (c) of art. V of the agreement was ultimately the income of Instek, but cannot be deemed to accrue or arise in India and hence is not liable to tax in India.