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Issues Involved:
1. Taxability of fees received by the non-resident company from the Indian company. 2. Business connection and income deemed to accrue or arise in India. Issue-Wise Detailed Analysis: 1. Taxability of Fees Received by the Non-Resident Company: The primary issue in both appeals is the taxability of the fees received by the non-resident company from the Indian company. During the relevant assessment year 1980-81, the assessee received $17,342 from Kudremukh Iron Ore Co. Ltd. (KIOCL) for services rendered by an engineer sent to supervise the erection and commissioning of machinery at the Kudremukh Iron Ore Plant. The Income-tax Appellate Commissioner (IAC) held that these fees were taxable as income deemed to accrue or arise in India under section 9(1) of the Income-tax Act, 1961, categorizing them as fees for technical services under section 9(1)(vii). The Commissioner (Appeals) disagreed, stating that the fees were received for a project involving construction, assembly, mining, or like activities, thus falling within the exception provided under Explanation 2 to section 9(1)(vii). Upon review, it was clear that the non-resident company did not enter into a direct contract with KIOCL for construction, assembly, mining, or similar projects. The non-resident company's role was limited to supplying machinery, while KIOCL was responsible for its erection. The engineer's supervision did not amount to a contract for assembling the machinery. The exception in Explanation 2 requires that the recipient undertake the project, which was not the case here. Therefore, the fees did not qualify for the exception, and the Commissioner (Appeals) erred in deleting the addition. This was consistent with prior decisions in Income-tax Appeal Nos. 1048 (Bang.) of 1982 and 192 (Bang.) of 1983. 2. Business Connection and Income Deemed to Accrue or Arise in India: For the assessment year 1980-81, another point of contention was the supply of machinery worth $17,88,337 to KIOCL. The IAC held that the non-resident company had business connections in India, facilitated through Bharatia Cutler Hammer Ltd., an Indian company acting as an agent. The non-resident company secured the order for 6.6 KV Motor Control Centres (MCC) from KIOCL through the Indian agent, who waived its commission to enhance its status in India. The IAC deemed that income accrued to the non-resident company in India due to this business connection, estimating it at 5% of the sale price, amounting to Rs. 7,29,641. The Commissioner (Appeals) found no regular principal-agent relationship between the UK company and the Indian company for this transaction. The Indian company did not receive any monetary consideration for this specific deal, and its involvement did not establish a business connection. The Commissioner (Appeals) deleted the addition, concluding that the Indian company's activities did not amount to a business connection under section 9(1)(i). Upon further analysis, it was determined that the transaction was between principal and principal, conducted at arm's length, and did not lead to a business connection. The Indian company's involvement in securing the deal did not establish a business connection, as it had no authority to bind the foreign principal. The relationship was not that of an accredited agent capable of acting on behalf of the non-resident. This conclusion was supported by case law, including CIT v. Hindustan Shipyard Ltd. [1977] 109 ITR 158 (AP), CIT v. Fried Krupp Industries [1981] 128 ITR 27 (Mad.), Addl. CIT v. Bharat Fritz Werner (P.) Ltd. [1979] 118 ITR 1018 (Kar.), and CIT v. R.D. Aggarwal & Co. [1965] 56 ITR 20 (SC). Therefore, the Commissioner (Appeals) was justified in deleting the addition related to the alleged business connection. Conclusion: Income-tax Appeal No. 414 (Bang.) of 1984 is partly allowed, and Income-tax Appeal No. 415 (Bang.) of 1984 is allowed. The cross-objections filed by the assessee are dismissed as not maintainable.
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