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TMI Blog1998 (1) TMI 50X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 9(1)(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, whether arising 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 ?" 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 equ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Before the appellate authority it was pleaded that the tax liability at the most would arise under section 9(1)(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(1)(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. The question for our consideration is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hnical know-how, as the agreement entered into is prior to April, 1976, and the proviso to section 9(1)(vii) of the Act excludes the tax liability of the assessee. The Division Bench of the Andhra Pradesh High Court in CIT v. Hindustan Shipyard Ltd. [1977] 109 ITR 158, considered the scope and meaning of "business connection" and after considering earlier cases on the subject held thus: "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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... connection and, therefore, that has to be accepted. 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 fo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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