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Issues Involved:
1. Whether the income of $165,000 accrued to N.S.K. in India and is taxable. 2. Interpretation of Section 9 of the Income-tax Act, 1961 regarding income deemed to accrue or arise in India. 3. Connection between the sale of trade secrets and the rendering of technical assistance and training of personnel. Detailed Analysis: 1. Whether the income of $165,000 accrued to N.S.K. in India and is taxable: The primary issue in this appeal is whether the income of $165,000 can be said to have accrued to N.S.K. in India, thereby requiring the respondent company to deduct the amount of tax payable on this sum before remitting it to N.S.K. under Section 195(2) of the Income-tax Act, 1961. The court analyzed the agreement between the respondent company and N.S.K., which consisted of two parts: the sale of trade secrets and the rendering of technical assistance and training of personnel. The court observed that the sale of trade secrets occurred in Japan, and the payment of $165,000 was also to be made in Japan. Therefore, no part of this transaction could be said to have been carried out in India. The court concluded that the income of $165,000 did not accrue or arise in India and was not subject to Indian income tax. The court quashed the order of the Additional Commissioner of Income-tax, which had held that a portion of the income accrued in India and was taxable. 2. Interpretation of Section 9 of the Income-tax Act, 1961 regarding income deemed to accrue or arise in India: Section 9(1) of the Income-tax Act, 1961, lays down the circumstances when income can be deemed to accrue or arise in India. It includes income accruing or arising through or from any business connection in India. The court emphasized that for income to be deemed to accrue or arise in India, there must be a business connection in India. Clause (a) of the Explanation to Section 9(1) states that only such part of the income as is reasonably attributable to the operations carried out in India will be deemed to accrue or arise in India. The court found that the agreement between the respondent company and N.S.K. did not establish a business connection in India for the sale of trade secrets. The sale of trade secrets was an independent transaction that took place in Japan and was not linked to any business operations in India. 3. Connection between the sale of trade secrets and the rendering of technical assistance and training of personnel: The court examined whether the sale of trade secrets and the rendering of technical assistance and training of personnel were linked transactions. The court held that these were separate transactions and could not be considered as a single, indivisible agreement. The court noted that the agreement did not make the sale of trade secrets conditional upon the rendering of technical assistance and training. The respondent company was not obliged to seek technical assistance and training from N.S.K. The court applied the test of whether the sale of trade secrets was made subject to a compulsory business operation in India, which it found was not the case. The court also referred to relevant case law, including the Supreme Court's decision in Carborandum Co. v. CIT, which supported the view that the income from the sale of trade secrets did not accrue in India. The court distinguished the present case from other cases cited by the appellants, such as Rolls-Royce Ltd. v. Jeffrey and CIT v. Ciba of India Ltd., based on the specific facts and circumstances. Conclusion: The court concluded that the appellants failed to establish any business connection of N.S.K. in India regarding the transaction of the sale of trade secrets for $165,000. The income from this transaction did not accrue or arise in India and was not subject to Indian income tax. The appeal was dismissed, and the rule nisi was made absolute, with no order for costs. The court also dismissed the cross-objection by the respondent and denied the oral application for a certificate for appeal to the Supreme Court, as no substantial question of law of general importance was found to require determination by the Supreme Court.
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