LexM/S. CARBORANDUM CO. versus C.I.T., MADRAS
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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. The appellant con1pany filed its return of incoine for the year
in question w:th an application for refund of the entire tax deducted at source.
The income tax officer took the view in his assessment order that sc;::, of the
technical fee p3i<l to the American company was earned by it in India and only
that small ..amount wns assessable to income-tax and directed the refun(J of rnajr;r
portion of the tax deducted at sou"rce to the assessee company. The Commis-
sioner of Income-tax in exercise of his revjsional p1;nvers under s. 33B of the
Act took the view that at least 75% of the technical fee earn..:!d _by the assessing
company during the year of account had accrued of arisen in Jr.dia even though
the technical information was supplied by the asseSsee company from outside
India and the technical personnel furnished by the assessee company to the Indian
company although worked under the control of and \vas pa·d for by the Jatl':r
inasmuch as the situ'i of the services so rendered was in India.
Treating the
technical fee in the nature of royalty paid, it directed the Incom~·tax Officer to
revise the ass:ssrnent on the basis that 75% of it· should be taken as incnn1e
accruing or 3-rising in Ind.a ·to the assessee company. On appeal, the Appe!Infe
Tribunal set aside the said ord~r and restored that of the Income·tax Ofil:er even
though it was of the view that even 5% of the technical fee conlJ not be taken
as income of_ the asses$ec COJDpany taxable under the Act. The Tribunal held
thnt Li.! u:::e of the t~chn'.cal assistance and know-ho\v given by the American
Company and made use of by the Indian Company in the taxable territor\' couid
not make the former Fable to payment cf income tax on the amount of tec_hnical
fee received by it nor \vas it any royalty. It also rejected a new stand t:iken by
the Revenue that the assessee company must be deemed to be working in con-
junction with the Indian Company in the manufacture of its
rroducto;.
On
reference under s. (€(1) of th~ Act the Revenue took another new plea that the
agreement c1car1Y established a business connect£on between the two companies
and as such techrlical fee received by the ass~ssee comp:iny hnd-accrued or arose
from such business connection a:ssessable to income-tax under s. 4(1) (c) rt>nd
withs. 42 of the Act.
"fhc objectiorl of the-assessce con1pany to the entertnin-
ment of the new Point at· the reference stage that it did not arise out of the
Tribunal's order was over-ruled bv the Hie:h Cntl'·t nn the
ground
that tte
1question referred to _was in general terms and comnrehensive en"ouzh to embrace
within its ambit the point of anniicability of s. 42f1) of thP. Act to th,,. tr~n.,o:ic
tions in question. Upholding the stand taken .on behalf: of the Revenue the Jlia:h
Court answered the qu"stion referred to it in it'I favour against the asscssce
company. On appeal by certificate the appeliant contended :
B
c
D
E
F
G
II
A
B
c
D
E
F
G
H
476
SUPREME COURT REPORTS
[1977] 3 s.c.R.
(I) That th.e High Court could not go into the matter of business
connection between the two companies when such a question
was never raised or in issue at any earlier stage;
(2) That the High Court was wrong in founding the tax liability
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