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TMI Blog1986 (8) TMI 111X X X X Extracts X X X X X X X X Extracts X X X X ..... basis of the returns filed by the assessee. Subsequently, these assessments were reopened under section 147(a) of the Act on the ground that certain incomes chargeable to tax had escaped assessment due to the omission of the assessee to disclose fully and truly all the material facts necessary for its assessments. The assessing officer found from the file of Fertiliser and Chemicals Travancore, an Indian company (FACT) that the said FACT had entered into an agreement on 24-4-1965 with Power Gas Corporation of United Kingdom (a non-resident company PGC). Under this agreement PGC was to render certain services to FACT for designing and constructing Synthesis Gas Plants in consideration of certain fees. The services were to be rendered by PGC in order to design and erect the plants for FACT and FACT was to pay fees to PGC in consideration for the above services. It is stated in the agreement that PGC have the know-how for erection of the aforesaid plants based upon the process developed by the assessee, i.e., Imperial Chemical Industries (ICI). This agreement also stipulates that PGC will provide the services to FACT while erecting the plants according to the ICI process. FACT was to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement dated 1-1-1964 must be deemed to accrue in India. The assessing officer has also recorded that the fees must be deemed to have accrued in India because the services were rendered in India. According to him, only because the agreement for services was made through PGC in London, it cannot be said that no services were rendered in India by the assessee. Reliance was placed on clause 7 of the agreement dated 24-4-1965 which says that a part of the fees payable by FACT to PGC had to be transmitted by the latter to the assessee because of the prior agreement of PGC with the assessee. It is the case of the assessing officer that since a part of the fees received by PGC was to be transmitted to the assessee in London, the said fees must be deemed to accrue in India. The assessing officer observed that the agreement between PGC and FACT is dependent upon the agreement between PGC and ICI and secondly, the assessee has made available its technical information to FACT through PGC. Thirdly, the assessee has received certain payments from FACT through PGC for imparting indirectly its technical know-how. Fourthly, the assessee appears to be, though implicitly, a party to the agreement mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee did not, in fact, render any services to FACT in India in spite of the fact that it was obliged to render certain services in case PGC requests it to do so. In point of fact, no such request was made in respect of the contract between PGC and FACT and so none of the services envisaged under the agreement dated 1-1-1964 was actually rendered while PGC was executing its contract dated 24-4-1965 with FACT. He stated that when the agreement dated 1-1-1964 was entered into by the assessee, it was not even aware that PGC would, sometime in future, enter into an agreement with a concern in India. In fact, PGC has entered into similar agreements with parties in several other countries, namely, Australia, Czechoslovakia, Finland, France, Japan, Malaysia, South Africa, Spain, USSR, South Korea and Qatar. In this connection, he drew our attention to the letter dated 28-10-1980 from the assessed addressed to the assessing officer which reads thus: "I am giving below the answers to the questions raised by you to my representative during the hearing on 29-8-1980. 1. Whether ICI received any representation/letter from FACT regarding difficulties in utilising ICI techniques passed on throug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount payable thereunder has to be passed on by PGC to the assessee. He explained that the real reason for stating that fact in the agreement dated 24-4-1964 was to convince FACT that they were not being overcharged. In order to make that position clear, PGC had to reveal its prior agreement with the assessee under which a portion of the fees paid by FACT had to be parted with by PGC. Next, he stated that even if it is assumed for the sake of argument that there was a business connection between the assessee and FACT, yet no amount is taxable in India because no operation was carried out by the assessee in India vide Explanation to section 9(1)(i). 6. Regarding reopening of the assessments, Shri N.A. Palkhivala urged before us that the assessee did not omit to disclose any material facts necessary for its assessments. As the amounts under consideration were not taxable in India, the assessee did not think it obligatory to disclose them in the returns. According to him, only those items which are normally taxable under the Act but are exempt under some other provisions of the said Act has to be declared in Part III of the return prescribed for the companies under the Income-tax R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red to the decision in the case of McDowell Co. Ltd. for the proposition that the Court should not approve a device set up to avoid tax. According to him, both the agreements have to be read together and if it is so done then it was clear that the assessee had earned the income in India through the agency of PGC. Hence, he urged that the revenue is entitled to succeed on the merits of the case and so the reassessments, as affirmed by the Commissioner (Appeals), deserved to be upheld. 8. Regarding the validity of reopening of the assessments Shri B.K. Bagchi stated that the reopening was validly done as the assessee did not disclose all the material facts necessary for its assessments inasmuch as the amounts under consideration were not declared in the original returns. 9. Shri N.A. Palkhivala replied that when the assessee entered into an agreement on 1-1-1964 with PPGC it had absolutely no idea as to how and where and when PGC will put to use the rights obtained by the latter under the said agreement. When the assessee was not even aware of the income to be received from FACT by PGC in future, it could not be said that the two agreements constituted a device for avoiding any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t some personnel for carrying out the business activities of the Indian company in India and the question was as to at which place the services were rendered by the non-resident company so that that place would become the place of accrual of the income. It was held that the activities of the foreign personnel lent by the foreign company did not amount to a business activity by the foreign company carried out in India. The foreign company had made the services of the foreign personnel available to the Indian company outside India. The decision, thus, lays down the important rule that income accrues where the services were rendered and not where those services were subsequently used. A particular income can accrue to a person only once. If it has already accrued to him outside India, it can no longer accrue again within India. In that reported case, it was also held that even assuming that there was a business connection between the earning of the fee and the affairs of the Indian company, no part of the activity or operation could be said to have been carried on by the non-resident in India and so no part of the fee could be deemed to accrue in India. 11. We have considered the va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sume that the assessee had sold outright the rights which it parted with under the agreement dated 24-4-1965 for a consolidated lump sum fee to be paid once for all. In that case, the assessee would have been totally unconcerned with the amounts earned by PGC thereafter anywhere else in the world and would have been outside the Indian tax net. Merely because the mode of payment under the agreement dated 1-1-1964 was related for the purpose of quantification to the subsequent earnings of PGC, it cannot be said that a business connection was established between the assessee and the country in which PGC used the rights it had purchased long after the purchase was made. Evidently, the mode of payment cannot decide the place of accrual. The place of accrual is the place where the services are rendered. These services have been rendered by the assessee in the United Kingdom and not in India. Consequently, there is no business connection and no income can be deemed to have accrued in India to the assessee under either of the aforesaid two agreements. Even assuming, for the sake of argument, that there is a business connection, there has been no operation carried out by the assessee in Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X
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