1989 (5) TMI 3 - SC - Income Tax

Technical know-how and services received form non-resident - Whether CIT is justified in refusing no objection of certificate - It is inconceivable that a law should be made by Parliament in India which has no relationship with anything in India - question whether the ingredients, in terms of the impugned provision, indicate a nexus is one of substantial importance, as it concerns collaboration agreements with foreign companies - case is referred to Constitution Bench

Summary

Issues Involved:
1. Competence of Parliament to enact section 9(1)(vii) of the Income-tax Act, 1961.
2. Requirement of business connection for taxing non-resident income post the 1976 amendment.
3. Alleged discrimination under section 9(1)(vii) violating Article 14.

Detailed Analysis:

Point No. 1: Competence of Parliament to Enact Section 9(1)(vii)
The petitioner contended that Parliament lacked the competence to enact section 9(1)(vii) as it has an extra-territorial operation without any nexus between the person sought to be taxed and the country seeking to tax. The petitioner argued that the Norwegian company did not have any office or business activity in India and that the payments made to the Norwegian company were not liable to Indian income tax. The petitioner relied on precedents like Wallace Brothers and Co. Ltd. v. CIT [1948] 16 ITR 240 and Carborandum Co. v. CIT [1977] 108 ITR 335, arguing that the payments were not taxable in India and thus not subject to deduction at source.

The court, however, observed that after the adoption of the Constitution, India is a sovereign republic, and Article 245(2) explicitly allows Parliament to make laws with extra-territorial operation. The court noted that the Income-tax Act, 1961, is a post-Constitution law made under List-I, item 82, and that section 9(1)(vii) deems certain incomes to accrue or arise in India, including fees for technical services provided by non-residents for use in India. The court concluded that the provisions of section 9(1)(vii) are within the legislative competence of Parliament, as they have a sufficient territorial nexus with India, given that the services and know-how are utilized in India.

Point No. 2: Requirement of Business Connection Post 1976 Amendment
The petitioner argued that even after the introduction of section 9(1)(vii) by the Finance Act of 1976, the requirement of a business connection for taxing non-resident income continued to apply, as established in Carborandum Co. v. CIT [1977] 108 ITR 335. The petitioner cited the Karnataka High Court decision in VDO Tachometer Werke, West Germany v. CIT [1979] 117 ITR 804 to support this contention.

The court, however, clarified that the 1976 amendment added specific clauses to section 9(1), including clause (vii), which explicitly deems fees for technical services paid by an Indian to a non-resident for use in India as income arising in India. The court held that the clear language of the new clause overrides the previous requirement of a business connection, as established under the 1922 Act. Consequently, the court rejected the petitioner's contention, affirming that the amended section 9(1)(vii) does not require a business connection for taxing such income.

Point No. 3: Alleged Discrimination under Section 9(1)(vii) Violating Article 14
The petitioner contended that the 1977 amendment to section 9(1)(vii), which introduced a proviso exempting agreements made before April 1, 1976, created invidious discrimination between companies with agreements before and after that date, thus violating Article 14 of the Constitution.

The court rejected this argument, stating that the 1977 amendment merely restricts the application of the 1976 amendment to agreements entered into after April 1, 1976, which is a reasonable classification. The court emphasized that such a classification does not violate Article 14, as it reasonably distinguishes between agreements based on their date of execution. The court noted that the petitioner's challenge was against the entire clause, not just the proviso, and held that the classification was legally valid and non-discriminatory.

Conclusion:
The court dismissed the writ petition, upholding the validity of section 9(1)(vii) and rejecting all contentions raised by the petitioner. The court made no order as to costs and refused the petitioner's application for leave to appeal to the Supreme Court, concluding that no question of general importance requiring the Supreme Court's consideration arose in this case.