Y. Bhaskar Rao, J.
1. The following two questions are referred under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as the Act), for our opinion ;
'1. Whether, on the facts of the case, the sum of Rs. 2,04,095 received by the assessee, a foreign company, from Karnataka Power Corporation is in the nature of fees for technical services, within the meaning of Explanation 2 below Section 9(l)(vii) of the Income-tax Act ?
2. Whether the Income-tax Appellate Tribunal is correct in law in holding that income by way of fees for technical services, whetherarising out of business connection or not was required to be dealt with only under Clause (vii) and not under Clause (i) of the Section 9(1) of the Income-tax Act ?'
2. The facts of the case are : The assessee is a foreign company and assessment is made through its agent, Karnataka Power Corporation Ltd., for the assessment year 1980-81. The agent of the assessee company, i.e., Karnataka Power Corporation Limited (Indian company), entered into an agreement on January 30, 1974, with Energomach Exports of Russia (hereinafter called the foreign company), for supply of equipment for being installed at Linganamakki Hydroelectric Project and on the same day a supplementary agreement was also entered into with the foreign company to depute its. experienced engineers to supervise the installation of the equipment at the dam site. As per the supplementary agreement, the foreign company has agreed to provide technical advice and assistance to the purchaser in the erection, adjustment and commissioning of the equipment as well as for training the engineers of the Karnataka Power Corporation. Relevant clauses were provided in the agreement. The cost of the equipment supplied by the foreign company came to Rs. 3,11,28,029. The technical personnel supervised the actual erection of the equipment supplied by the foreign company at the dam site and did other jobs laid down under the contract. For the work done by the technical personnel, the Karnataka Power Corporation paid a sum of Rs. 2,40,095 to the foreign company during the accounting period. The question that arises for our consideration is whether in respect of this payment there is any liability to tax on the foreign company under Section 9 of the Act. Before the assessing authority it is contended that Section 9 of the Act is not attracted and the assesses company is not taxable, as there was no business connection. The said contention was negatived by the assessing authority and it was held that the assessee is liable to pay tax. Assailing the order of the assessing authority an appeal was filed. Before the appellate authority it was pleaded that the tax liability at the most would arise under Section 9(l)(vii) of the Act. But, by virtue of the proviso thereto, the assessee is not liable to pay tax, as the proviso provides that all transactions which are covered by an agreement prior to April 1, 1976, are not governed by Section 9(l)(vii) of the Act. The appellate authority accepted the contention and held that there is no tax liability. The Revenue preferred an appeal before the Income-tax Appellate Tribunal. The Tribunal also agreed with the view of the appellate authority and as the Revenue sought the reference, the reference is made to this court regarding the two questions referred supra.
3. The question for our consideration is whether rendering the services for erection of the machinery sold by the assesses company to the Karnataka Power Corporation and making the machinery function by deputingengineers and offering technical services amount to transaction involved in business connection.
4. The question what constitutes 'business connection' has been considered by a number of High Courts earlier. Therefore, it is just and proper to refer to the relevant case law on the subject.
5. In the case of CIT v. Copes Vulcan Inc. : [1987]167ITR884(Mad) , the question referred was whether the assessee is liable for payment of tax under Section 9(l)(i) or 9(l)(vii) of the Act, when there are technical services rendered and the Madras High Court held therein that, when technical services are specially covered under Section 9(l)(vii) of the Act, they will not fall under Section 9(l)(i) of the Act. It is further stated that, when there is a special provision dealing with a special type of income, the general provision will not apply and held that the tax liability conies under Section 9(l)(vii) of the Act. As the proviso to Section 9(l)(vii) of the Act excludes transactions which were held under the agreement earlier to April, 1976, there is no tax liability to the assessee. When there is any technical service rendered arising out of business connection, it will not fall under Section 9(l)(i) of the Act even if it does not come under Section 9(l)(vii), because of the agreement providing technical services or technical know-how, as the agreement entered into is prior to April, 1976, and the proviso to Section 9(l)(vii) of the Act excludes the tax liability of the assessee.
6. The Division Bench of the Andhra Pradesh High Court in CIT v. Hindustan Shipyard Ltd. : [1977]109ITR158(AP) , considered the scope and meaning of 'business connection' and after considering earlier cases on the subject held thus (headnote) :
'To conform with the requirements of the expression 'business connection' which have been fairly settled by judicial decisions, it is necessary that the common thread of mutual interest must run through the fabric of the trading activities carried on outside and inside the taxable territory and the same has been described as 'real and intimate connection'. The commonness of interest may be by way of management control or financial control or by way of sharing of profits. It may come into existence in some other manner but there must be something more than mere transaction of purchase and sale between principal and principal in order to bring the transaction within the purview of the expression 'business connection' within the meaning of Section 9(l)(i) and 163(l)(b) of the Income-tax Act.'
7. The interpretation given by the Andhra Pradesh High Court regarding 'business connection' squarely applies to the present case.
8. In Carborandum Co. v. CIT : [1977]108ITR335(SC) , the Supreme Court considered whether making services of foreign technical personnelavailable to the Indian company amounts to 'business connection' or not and held that it will not. The Supreme Court elaborately referred to all the relevant cases and held that supply of technical personnel and technical know-how by the foreign company to the Indian company for erection of plant and machinery and expenses incurred thereto will not amount to arising out of business connection.
9. Learned counsel for the Revenue relied upon a judgment of the Andhra Pradesh High Court in Bharat Heavy Plate and Vessels Ltd. v. Addl CIT [1979] 119 1TR 986, and contended that the Division Bench of the Andhra Pradesh High Court has clearly laid down that rendering service by supply of technical know-how for erecting plant and machinery will amount to expenditure arising out of a business connection and, therefore, that has to be accepted.
10. It is to be noticed that the Division Bench has referred to the earlier case wherein it was found that merely agreeing to supply technical personnel and technical know-how for erection of machinery will not amount to expenditure arising out of business connection unless there is continuity of activities. The fact in that case is that the foreign company has a share in the Indian company and the right to assign to the Indian company the production rights. Both the foreign and the Indian companies had the right to change the personnel and to assign to the assessee the production rights. The agreement therein provided for supply of machinery and technical know-how and technical personnel for installation of the machinery and the foreign company had a share in the Indian company. Therefore, it was held that there is business connection between the foreign company and the Indian company and the foreign company has got interest in the ownership of the Indian company by way of share or any other mode and as such supply of technical services and technical know-how definitely has to be held in the business connection, because they have got interest in the management of the Indian company itself as its shareholder. Therefore, the judgment is quite different from the present one.
11. In the present case, the foreign company has no share or interest in the management of the Indian company. The foreign company has sold the machinery to the Indian company and for installation of the said machinery and plant supplied technical personnel and technical services until the machinery starts functioning and production. Thereafter, the services of the technical personnel in the Indian company will cease and the Indian company is not responsible to the foreign company. Except to complete the terms of the agreement entered into for the purchase of machinery there is no other interest of the foreign company in the Indian company. Therefore, it cannot be said that there is any businessconnection or the salary and other expenses paid to the technical personnel will amount to the expenses incurred in business connection.
12. Therefore, we answer both the questions against the Revenue and in favour of the assessee.