1983 (3) TMI 17 - HC - Income Tax

Summary

Issues Involved:
1. Whether 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.
2. 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.

Issue-wise Detailed Analysis:

1. Business Connection of M/s. Martin Black & Company (Wire Ropes) Ltd. (U.K.) in India:

The Tribunal had to determine if there was a 'business connection' in India for M/s. Martin Black & Company (Wire Ropes) Ltd. (U.K.) (hereinafter referred to as "Martin Black"). The assessee-company argued that the services provided by Martin Black, such as reports, statistics, patterns of demand, and other advisory services, were rendered outside India, and thus the royalty payments were not taxable in India. The Income Tax Officer (ITO) contended that the transaction was not merely an outright sale but involved ongoing obligations and control by Martin Black, establishing a business connection in India. The Appellate Assistant Commissioner (AAC) and the Tribunal both found that the services were rendered entirely outside India and that there was no business connection in India. The Tribunal emphasized that the location of documents and the restrictions on their use did not establish a business connection. The High Court upheld the Tribunal's finding, stating that no business activity by Martin Black was carried out in India, thus no business connection was established.

2. Taxability of Royalty under s. 9(1)(i) of the Income-tax Act, 1961:

The second issue was whether the royalty payments made to Martin Black were taxable in India under section 9(1)(i) of the Income-tax Act, 1961. The ITO argued that the payments were for the use of assets in India and thus taxable. The AAC and the Tribunal found that the payments were for services rendered outside India, and the restrictive clauses in the agreement did not alter the character of the services. The High Court noted that under section 9(1)(i), income is deemed to accrue in India if it arises from any business connection in India. The Court referred to the Supreme Court's decision in Carborandum Co. v. CIT, which held that for income to be taxable, some business operations must be carried out in India. The High Court concluded that since all services were rendered outside India and no business operations were carried out in India by Martin Black, the royalty payments were not taxable in India.

Conclusion:

The High Court affirmed the Tribunal's decision, answering both questions in the affirmative and in favor of the assessee. The Court held that there was no business connection of Martin Black in India and that the royalty payments were not assessable to tax in India under section 9(1)(i) of the Income-tax Act, 1961. The Court emphasized that the liability to pay income tax in India cannot be created by an agreement between parties and must be based on statutory provisions. The judgment highlighted the importance of establishing a business connection and business operations in India for tax liability under section 9 of the Income-tax Act.