M/S. CARBORANDUM CO. vs. C.I.T., MADRAS

CIVIL APPEAL No. 89/1975Supreme Court[1977] 3 S.C.R. 47511 April 1977Bench: 3 JudgesAuthor: P.N. BHAGWATI, N.L. UNTWALIA, S. MURTAZA FAZAL ALI10 pages
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What were the facts?

The appellant, a foreign company, entered into an agreement on June 22, 1955, with an Indian company, M/s. Carborandum Universal Ltd., to provide technical and know-how services. In return, it was to receive an annual service fee of 3% of the net sale proceeds of products manufactured by the Indian company. For the assessment year 1957-58, the appellant received Rs. 95,762/- as service fee, with a portion deducted at source for income tax. The Income Tax Officer assessed a small portion as taxable in India. The Commissioner of Income-tax, however, revised the assessment, holding that at least 75% of the fee accrued or arose in India. The Appellate Tribunal set aside the Commissioner's order, restoring the ITO's assessment. The Revenue then raised a new plea of 'business connection' under Section 42 of the Act at the reference stage, which the High Court entertained and ruled in favor of the Revenue.

What did the Supreme Court hold?

The Supreme Court held that the High Court was wrong in entertaining the new point of 'business connection' at the reference stage as it was neither raised before the Tribunal nor considered by it, and did not arise from the Tribunal's findings. The Court clarified the distinction between actual accrual and deemed accrual under Section 4(1)(c) and Section 42. It found that the technical service fee received by the assessee did not accrue or arise in India. The Court also ruled that the activities of the foreign personnel deputed by the American company did not constitute a business activity carried on by the company in India, and even if a business connection existed, no part of the operation was carried out in India, thus Section 42 was not attracted. The Court noted that 5% of the fee was brought to tax by the ITO and no appeal was filed by the assessee against this, so it was not taxable. Therefore, the technical fee in excess of 5% was not taxable. The appeal was allowed, the High Court's judgment was set aside, and the question referred was answered in favor of the assessee.

What were the issues?

1. Whether the High Court could entertain a new point regarding 'business connection' under Section 42 of the Income Tax Act, 1922, at the reference stage when it was not raised before the Tribunal. - Assessee's contention: The High Court erred in entertaining the new point as it did not arise from the Tribunal's order. - Revenue's contention: The question referred was general enough to include the applicability of Section 42. 2. Whether the technical service fee received by the assessee from the Indian company accrued or arose in India, or was deemed to accrue or arise in India under Section 4(1)(c) read with Section 42 of the Income Tax Act, 1922, based on an alleged 'business connection'. - Assessee's contention: The High Court was wrong in founding tax liability on the alleged business connection and failed to examine apportionment under Section 42(3). - Revenue's contention: The agreement established a business connection, making the technical fee taxable under Section 4(1)(c) and Section 42.

Which sections of the Income-tax Act were involved?

Section 4(1)(e),Section 42,Section 4(1)(c),Section 33B,Section 6(1),Section 42(1),Section 42(3),Section 9(1)

AI-generated summary — verify with the full judgment below

M/S. CARBORANDUM CO. v. C.I.T., MADRAS April 11, 1977 475 {P. N. BIIAGWATI, N. L. UNTWALIA AND S. MURTAZA FAZAL ALI, JJ.] /11con1e-tax Act, 1922-S. 4(1)(e)-Distinction between concept of actual accrual and notion on deenied accrual-Reference under lncome-tnx Act, 1922- New facts neither raised nor considered by the Tribunal cannot be entertailled by the Hij[h Court at reference s/af?e. · Inco111e-tax Act, 1922-S. 42-Scope and applicab;!ity of 'business connec- tion'.

The appellant a foreign company \vithin the Il1eaning of s. 2(5.·\) of Jncome Tax Act, entered into an agreement with 1\1/s. Carborandum UniversaJ Ltd., _..,,,- having its registered office at 1\Iadras on June 22, 1955 and rendered certain technical and knowhow services. In view of the said services it \vas to rece;ve from the Indian co·rnpany an annual service fee equal to 3 per centum of the net sale proceeds of the products manufactured by the latter.

During the year of account relevant to the assessment year 1957-58 the appel- lant company received a sum of Rs. 95,762/- from the Indian company as its service fee. A £ood slab of it \va3 deducted at source on account of income- tax and super-~ax. T

The order continues below.

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