Shriram Bearings Ltd. V.

Income Tax Officer, 'e' Ward, Companies District Iii

Supreme Court Of India

Matter No. 85 of 1973

Judgment Date:
26-11-1975

Shriram Bearings Ltd. ..Petitioner

Income Tax Officer, 'e' Ward, Companies District Iii ..Respondent

Bench:
{Hon'ble Judge Sabyasachi Mukherjee   }

Citation:

(1976) ILR 2 CAL 93 ; LQ/SC/1975/480 ;

Sabyasachi Mukherjee, J.

1. The Petitioner is a limited company incorporated under the Indian

Companies Act and is engaged in manufacture of ball bearings in
India. The Petitioner was formerly styled and named as Bharat Ball
Bearing Co. Ltd. and has now been renamed as Shriram Bearings Ltd.
With a desire to start manufacture of cylindrical, spherical and
tapered roller bearings in India the Petitioner entered into a technical
collaboration agreement with Messrs Nippon Seiko Kabushiki Kaisha
of Japan (hereinafter referred to as N.S.K.K., Japan) on April 7, 1965.
The said agreement became effective from June 17, 1966. The said
agreement was subsequently modified by a supplementary agreement
dated March 21, 1966. It would be relevant to set out the material
portion of the said agreement. Section 1(c) of the agreement defined
Trade Secrets as follows:

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 Shriram Bearings Ltd. V. Income Tax Officer, 'e' Ward, Companies District Iii

The term Trade Secrets in this Agreement shall mean all NSK know-
how relating to the products and relating to manufacturing technique
which is considered sufficient enough for the production of products
defined in Section 1(a) of a quality comparable to the quality of NSK's
products.

Manufacturing Technique shall mean design, drawing, manufacturing

process, schedule specifications, data, prints, engineering reports,
laboratory and test results, service and maintenance information,
production engineering data and all other recorded technical
informations including information relating to machinery and
equipment and tools (including machinery and equipment developed by
NSK) used by NSK or considered to be useful by NSK for the
production and assembly of the products.

The Trade Secrets shall include the right of the using patent rights
and/or similar rights established by NSK in any country or countries.

The term Trade Secrets shall also include technical knowledge for
sales and service bulletins and market information on the products
covered by this Agreement.

The Trade Secrets shall also include preparation of data and design
required for the manufacture of Railway axle boxes complete with
roller bearings (except End Cover Rotating type Tapered Roller
Railway Journal Bearings) that may be required by Indian Railways
from time to time and which Bharat proposes to manufacture.

It is understood that payment of the designing and preparation for

such Railway axle boxes is included in the payment for Trade Secrets
given in Section 2(b).
Trade Secrets shall include the improvements and developments made
therein by NSK during the period of the Agreement. The term Trade
Secrets shall also include advice on plant layout and installation.

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 Shriram Bearings Ltd. V. Income Tax Officer, 'e' Ward, Companies District Iii

NSK shall prepare the Trade Secrets in English language and shall
deliver two (2) sets of it to Bharat, Nsk shall not be obliged to deliver
more than two (2) sets.

2. Section 2 of the Agreement dealt with the sale and transfer of

Trade Secrets. It was agreed that N.S.K.K. would sell and transfer and
would deliver unto the Petitioner the Trade Secrets subject) to the
terms and conditions mentioned in the said Agreement. The
Agreement further provided as follows:

The information comprising the Trade Secrets to be delivered to

Bharat under this Section shall be limited to its reasonable
requirements and requested by Bharat from time to time. There shall
be delivered to Bharat forthwith the Trade Secrets relating to the
manufacture of such bearing sizes as Bharat may initially desire after
the first instalment of payment specified in Section 2(b) has been
made to NSK by Bharat and after the guarantee referred to in Section
2(b) has been furnished to NSK by Bharat.

From time to time hereafter during the tenure of this Agreement

there shall be delivered to Bharat the information comprising the
Trade Secrets for such other sizes and types of the products as
Bharat expects to put into production within two (2) years following
the date of receipt of such Trade Secrets.

3. The price for Trade Secrets was stipulated by Clause (b) of Section
2 as hereunder:

(b) Price for Trade Secrets : In consideration of the sale and transfer
to Bharat of the Trade Secrets and as the purchase price therefor,
Bharat will pay to NSiK a sum of U.S. dollars 1,65.000 (One hundred
sixty five thousand only) for which NSiK hereby grants deferment of
payment in accordance with the following due dates.

Instalment number Amount in U.S. dollars Due date

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 Shriram Bearings Ltd. V. Income Tax Officer, 'e' Ward, Companies District Iii

First 35,000 (Thirty five Thousand) On the effective date of the

Agreement
Second 30,000 (Thirty Thousand) One year after the effective date of
the Agreement
Third 50,000 (Fifty Thousand) Two years after the effective date of the
Agreement
Fourth 50,000 (Fifty Thousand) Three years after the effective date of
the Agreement.
Immediately after the due dates of each of the above instalments,
Bharat will apply to Reserve Bank of India and/or any other
Government Agency having jurisdiction in the premises for and use its
best efforts to obtain the permission to pay to NSK the above amounts
and upon receipt of the said permission Bharat shall forthwith make
payments to NSK of such amounts.

4. The Agreement also stipulated that the payments referred to for

sale of Trade Secrets would be free from Indian income-tax. There
was also an agreement for technical assistance and training of
personnel which stipulated that during the Agreement the N.S.K.K.
would give information, advice and assistance to the Petitioner as in
N.S.K.K.'s judgment after consultation with the Petitioner, may
reasonably be required to enable the Petitioner to use the Trade
Secrets in the manufacture and sale of products. It was further
provided that in the exercise of judgment the N.S.K.K. would not
deliberately disregard the Petitioner's reasonable requirements when
such information, advice and assistance as expressed to N.S.K.K. by
the Petitioner. Consideration for technical assistance was stipulated as
hereunder:
In consideration of the rendering of technical assistance and training
of personnel by NSK. Bharat will pay to NSK--

(i) All actual expenses of NSK for its employees and representatives

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 Shriram Bearings Ltd. V. Income Tax Officer, 'e' Ward, Companies District Iii

during the periods in which such individuals are absent from normal
station of employment by NSK for the purpose of being available to
Bharat. Such expenses shall include compensation (including salary
and benefits regularly and actually paid), economy class round trip
travelling expenses by air transportation and appropriate living
expenses in India. Travelling expenses by air transportation and living
expenses in India will be borne by Bharat in Indian Rupees.

(ii) For ten (10) years from the effective date of this Agreement, a
royalty at the following rates on the net Ex-Factory Realization as
hereinbefore defined, upon all sales of the products manufactured and
sold by Bharat:

(1) 2.75% on Railway Journal Bearings;

(2) 3-00% on all other types of products as defined herein before.

5. Clause (f) of the Agreement for Technical Assistance also provided

that the Petitioner should be required to deduct Indian income-taxes
or any other taxes levied by the Government of India on account of
N.S.K.K., the Petitioner and would furnish certificate to the N.S.K.K.,
that such taxes had been paid to the Government of India on behalf of
N.S.K.K. The other provisions relating to the Trade Secrets are
contained in Section 6 of the Agreement which are to the following
effect:

(a) Disclosure of Improvements : Each party will disclose to the other

all developed methods and improvements, relating to the design and
manufacture of products at such time as such improvements and
methods have proved to be used commercially. Such disclosure by
NSK to Bharat will be made without consideration other than that
hereinbefore specified in this Agreement.

(b) Disclosure of Patents : Each party, insofar as it lawfully may,

within six months of the filing date thereof shall furnish the other

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 Shriram Bearings Ltd. V. Income Tax Officer, 'e' Ward, Companies District Iii

party with a copy of each patent application filed by the other party
relating to an invention in respect of the products covered by the
terms of this Agreement.

6. If Bharat develops or improves the Trade Secrets delivered by

N.S.K.K. and granted the patent right and/or other rights of the
techniques so developed, N.S.K.K. shall be granted the use of such
rights in accordance with the following provisions:

(i) Patent rights that have been registered by Bharat upon 8th year of
the Agreement and in respect of which Bharat has delivered Trade
Secrets to NSK during the period of the Agreement, NSK will have
full right for the use thereof during the period of the Agreement and
thereafter irrespective of whether the life of said patent has expired
or not, without any payment.

(ii) Patent rights of Bharat which have been registered by Bharat

during the last two years of the Agreement and the Trade Secrets in
respect of which have been delivered to NSK during the period of the
Agreement, NSK will have the full right for the use thereof during the
Agreement period. If NSK is willing to have the use of such rights
after the Agreement period, Bharat shall grant first priority to NSK
for the use of such rights at such terms as may be agreed at that
time.

If during the period of this Agreement, it is essential to have some

patent of NSK registered in India in order to enable Bharat to use the
same, the expenses for such registration will be borne by Bharat.
Similarly, if it is essential to have some patent of Bharat registered in
Japan in order to enable NSK to use the same, the expenses for such
registration will be borne by NSK.
(c) Territorial Provisions:

(i) NSK will not sell, transfer, license or otherwise reveal the Trade

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 Shriram Bearings Ltd. V. Income Tax Officer, 'e' Ward, Companies District Iii

Secrets to or in any way authorise the manufacture of the products by

any other individual party, organization or other entity in India, NSK
will not itself manufacture the products in India. NSK may, however,
sell in India as per Clause 5(a) any of the sizes of the products until
Bharat commences the manufacture of such sizes.

(ii) Bharat will not use the Trade Secrets for the manufacture of the
products in any country other than India.

(iii) It is clarified that Bharat will have the right to sell the products
in all countries of the world.

(d) Bharat's right to exclude others : NSK hereby conveys to Bharat

for the term of this Agreement whatever rights it may have to prevent
anyone else from using and/or disclosing Trade Secrets for
manufacture and sale of the products in India.

(e) Non-disclosure by Bharat : Bharat will not reveal the Trade

Secrets to any company or individual other than sub-contractors and
such of its employees who are required to know the same in the
course of their employment and on the condition that sub-contractors
and employees agree in writing for the benefit of both NSK and
Bharat not to disclose the Trade Secrets to any unauthorised persons
and not to use them in an unauthorised manner.

7. By the letter dated October 11, 1965, the Under-Secretary to the

Government of India informed the Petitioner that the Government of
India had approved the Petitioner's proposal for collaboration with
NSK for manufacture of Cylindrical, Spherical and Tapered Roller
Bearings and Railway Axle Boxes on the terms and conditions
stipulated in the Agreement. By another letter dated March 15, 1960,
the Under-Secretary to Government of India informed the Petitioner
that the Petitioner might execute the final agreement with N.S.K.K. on
terms already approved by the Government of India. As mentioned
before, it was a sale of Trade Secrets and for which the price was

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 Shriram Bearings Ltd. V. Income Tax Officer, 'e' Ward, Companies District Iii

1,65,000 U.S. dollars, but Messrs N.S.K.K. of Japan had also agreed to
grant technical assistance to the Petitioner to enable it to make use of
the Trade Secrets for manufacture and sale of Cylindrical and
Spherical and Tapered Roller Bearing and to give training to the
employees or representatives of the Petitioner in their own plants in
Japan and to render technical assistance N.S.K.K. of Japan had agreed
to make available its employees or representatives to the Petitioner in
India. The Petitioner in consideration of such service agreed to pay
N.S.K.K. royalty subject to Indian income-tax calculated at the rates
prescribed in Section 3(b) of the technical collaboration agreement on
sale of products manufactured and sold by the Petitioner company.

8. It is the case of the Petitioner that under the said Agreement 'sale
of Trade Secrets' and 'grant of technical assistance' are two separate
and distinct transactions. Sale of Trade Secrets, according to the
Petitioner, was outright sale for a consideration of 1,65,000 U.S.
dollars. Japanese company was required to deliver the Trade Secrets
to the Petitioner in Japan and no service regarding sale of Trade
Secrets was required to be rendered in India, according to the
Petitioner. Consideration for the same was also paid in Japan.
According to the Petitioner, therefore, no tax was payable in India
under the Indian Income-tax Act, 1961, in respect of the consideration
for the purchase of Trade Secrets. The Agreement further provided for
grant of technical assistance and in respect of which tax would be
payable if royalties were paid by the Petitioner on that account.

The Petitioner states that out of this price of 1,65,000 U.S. dollars for
the sale of Trade Secrets, the Petitioner had already remitted the first
three instalments and at the time of remittance of the fourth and the
last instalment, the Reserve Bank of India wrote to the Banker of the
Petitioner to produce certificate from the Income-tax Authorities
stating that the payment was not taxable. Thereafter, the State Bank
of India by its letter requested the Petitioner to forward them

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 Shriram Bearings Ltd. V. Income Tax Officer, 'e' Ward, Companies District Iii

immediately the certificate as required by the Exchange Control

Authorities of the Reserve Bank of India. The Petitioner, thereafter,
sent the letter dated May 4, 1971, to the Respondent No. 1, the
Income-tax Officer, explaining the circumstances under which the said
sum was paid to N.S.K.K. of Japan and requested the Income-tax
Officer to issue a certificate to the effect that the payment to N.S.K.K.
of Japan to the tune of 1,65,000 U.S. dollars in respect of the
purchase of Trade Secrets was not taxable in India. The Petitioner
also, in the meantime, sent a letter to that effect to the Reserve Bank
of India. The Respondent No. 1, the Income-tax Officer, Companies
Dist. Ill, Calcutta, passed an order under Section 195(2) of the
Income-tax Act, 1961. By the aforesaid order, the Income-tax Officer
held that the non-resident's income, namely N.S.K.K. of Japan, accrued
in India as a result of supply of technical know-how, design etc. and
since the technical know-how or drawing though delivered outside
India, were exploited in India, the income accrued and arose in India
and was taxable. In the premises, the Income-tax Officer estimated the
net income under Section 195(2) of the Act in the hands of the non-
resident at the rate of 66-2/3% of the payment to be remitted. The
Income-tax Officer, therefore, held that the Petitioner being resident
party was required to deduct taxes at the appropriate rate before
such remittances.

9. Being aggrieved by the aforesaid order the Petitioner made an

application under Section 264 of the Income-tax Act before the
Commissioner of Income-tax, West Bengal IV, Calcutta. The Addl.
Commissioner of Income-tax being the Respondent No. 2 passed an
order dated January II, 1973 and inter alia held as follows:
...The arguments so advanced by the Assessee apparently appear to be
logically sound, but at the same time it is abundantly clear that the
transfer of this Trade Secrets has not deprived the non-resident party
of use of that asset himself or selling that asset to a person in any

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 Shriram Bearings Ltd. V. Income Tax Officer, 'e' Ward, Companies District Iii

other country of the world other than India even during the tenure
period of the Agreement, i.e. 10 years. Besides, by sale of such Trade
Secrets, NSK has secured a right to put its products in India till such
time S.B. commences the manufacture of such products and for that
purpose NSK has appointed S.B. as its exclusive distributor. In c
short, it may be said that NSK by sale of Trade Secrets has
established some business connection in India. In face of such s a
business connection it is evident that there is an element of profit
that is embodied in the sale of Trade Secrets. At the same time, it is
also true that Section 9 does not seek to bring into the tax net the
whole of the profit accruing or arising from such business connection
since such whole profit cannot be deemed to accrue or arise in India
itself. By allowing 1/3rd of 1,65,000 dollars by way of expenses the
entire profit, viz. 2/3rd of 1,65,000 dollars has been taken by the
Income-tax Officer as arising or accruing to the N.R. in India itself.
This being the only sale of such kind by the N.R. in India the element
of profit embodied thereto cannot be as high as estimated by the
I.T.O. It can only be a portion of such profit that can be said to have
accrued or arisen in India and such portion of profit according to me
cannot exceed 10% of 1,65,000 dollars.

I would, therefore, estimate 10% of 1,65,000 dollars as income in the

hands of non-resident and as such the Assessee is required to pay tax
on such 10% profit before he remits the final instalment of payment.
The order passed by the I.T.O. stands modified accordingly.

10. Being aggrieved by the aforesaid order of the Addl. Commissioner

the Petitioner has come up to this Court under Article 226 of the
Constitution and has obtained this rule nisi.
11. In support of this application two grounds were urged before me.
It was contended that the Income-tax Officer had no jurisdiction to
pass the impugned order under Section 195(2) of the Act. It was

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 Shriram Bearings Ltd. V. Income Tax Officer, 'e' Ward, Companies District Iii

contended that in a case where an Assessee or a party was

contending that no tax was payable, in such a case the provisions of
Sub-section (2) of s 195 of the Act could have no application. In the
instant case, it was the case of the Petitioner that the sum payable by
the Petitioner to the N.S.K.K. of Japan on account of the price for sale
of Trade Secrets was not at all chargeable to Indian income-tax. It
was urged that where a party was liable to pay to non-resident
outside, but was not sure as to what portion would be taxable, in such
a case the Income-tax Officer acquired jurisdiction to pass order under
Sub-section (2) of Section 195 of the Act. But in a case where a party
or an Assessee was contending that no sum payable to non-resident
abroad was chargeable to Indian Income-tax Act, the provision of Sub-
section (2) of Section 195 of the Act could not be attracted. Sub-
section (2) of Section 195 of the Act is in the following terms:

Where the person responsible for paying any such sum chargeable
under this Act (other than interest including interest on securities,
dividend and salary) to a non-resident considers that the whole of
such sum would not be income chargeable in the case of the
recipient, he may make an application to the Income-tax Officer to
determine, by general or special order, the appropriate proportion of
such sum so chargeable and upon such determination, tax shall be
deducted under Sub-section (1) only on that proportion of the sum
which is so chargeable.
12. In aid of his submission counsel for the Petitioner drew my
attention to the decision of this Court in the case of C.O.S.I. Joint
Stock Company and Anr. v. Income-tax Officer, A-Ward, Companies
Dist. III and Ors. 81 I.T.R. 162. In that case where an order passed
by the Income-tax Officer was under challenge K. L. Rov J. held that
application of Section 195(2) of the Act presupposed that the person
responsible for making payment to non-resident was no doubt that tax
was payable in respect of some part of the amount to be remitted to

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 Shriram Bearings Ltd. V. Income Tax Officer, 'e' Ward, Companies District Iii

a non-resident but was not sure what should be the portion so taxable
or the amount of tax to be deducted. He could then make an
application to the Income-tax Officer for determining the amount. It
was only when these conditions were satisfied and an application was
made to the Income-tax Officer that the question of making an order
under Section 195(2) would arise. Where the Income-tax Officer was
only approached for a certificate that no tax was due in respect of
freight charges for goods unloaded at an Indian port, as such, a
certificate was required by the Reserve Bank, it was held, it could not
be said that an application had been made under Section 195(2) of
the Act and any order under Section 195(2) would be in excess of
jurisdiction conferred by the Act. In this case, it should be borne in
mind that the Petitioner made an application to the Income-tax Officer
concerned on May 4, 1971. In that application, after setting out the
facts of the agreement and the terms thereof the Petitioner stated
that the Petitioner would be grateful if the Income-tax Officer issued a
certificate to the effect that the payment to N.S.K.K. of Japan of
1,65,000 U.S. dollars in respect of the Trade Secrets was not taxable
in India. When such an application is made, the Income-tax Officer, t
in my opinion, in view of the scheme of the Act can do either of r two
things. He had to deal with such an application. If he accepts the
contention of the Applicant in toto Chen he is to issue a certificate
that no tax is payable. If on the other hand, he feels that tax was
payable on certain percentage or portion of the amount to be remitted
to non-resident abroad, in such case he can reject the application and
refuse to giant a certificate or he can, as he has done in this case,
determine the portion of the amount of tax that would be payable if
he comes to the conclusion that entirely of the sum was not taxable.
Such a conduct would, in my opinion, only be a reasonable conduct. It
is true that the terms of Section 195(2) of the Act cannot be attracted
unless there is a question of determination of the portion which is

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 Shriram Bearings Ltd. V. Income Tax Officer, 'e' Ward, Companies District Iii

taxable and such a question of determination can only arise if a

person, who thought that a portion was chargeable, made an
application to that effect. But quite apart from the terms of Section
195(2) of the Act on the application made by the Assessee, in my
opinion, the Income-tax Officer could have passed an order
determining the portion of the income which was chargeable to
income-tax under the Indian law. Such an order perhaps in the facts
and circumstances of the case could not have been passed in terms of
Section 195(2) but could have been passed by virtue of the application
made to the Income-tax Officer, otherwise the only course left open to
the Income-tax Officer would have been to reject the application in its
entirety. In view, however, of the decision of K.L. Roy J., as mentioned
hereinbefore, had it been necessary for me to decide this question, I
would have been constrained to refer the matter to a larger Bench.
But in the facts and circumstances of this case that would not be
necessary for the reasons mentioned hereinafter. I find that after the
order of the Income-tax Officer, as mentioned before, the Petitioner
made an application for review to the Commissioner. In that revision
petition the Petitioner himself categorically stated as follows:

The Petitioner company thereupon made an application on 4th May,

1971, under Section 195(2) of the Income-tax Act, 1961, to the
Income-tax Officer, 'E' Ward, Company Dist. III, Calcutta, to issue
necessary certificate. A copy of the application dated 4th May, 1971,
made to the Income-tax Officer is enclosed.
13. Therefore, it was the case of the Petitioner to the Commissioner
that the application made to the Income-tax Officer was an application
made under Section 195(2) of the Act. The Commissioner, inter alia,
proceeded on that basis. It is not, therefore, open to the Petitioner to
contend that the order under Section 195(2) was erroneous or in
excess of the jurisdiction. It further appears that before the
Commissioner no contention to that effect was raised or agitated. In

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 Shriram Bearings Ltd. V. Income Tax Officer, 'e' Ward, Companies District Iii

the aforesaid view of the matter this contention urged in support of

this application cannot be entertained.

14. The next contention urged in support of this application was that
the Income-tax Officer as well as the Addl. Commissioner were in
error in holding that any part of income in respect of the price
payable for purchase of the Trade Secrets, namely, 1,65,000 U.S.
dollars was chargeable to income-tax. This sum of money can become
chargeable under the Income-tax Act, 1961, if this income or receipt
accrued or arose or could be deemed to have accrued or arisen within
the taxable territory, namely, in India. This income actually did not
arise nor accrue in India. There is no dispute on that point. The
question is whether such income can be deemed to have accrued or
arisen in India. Sub-section (1) of Section 195 provides as follows:

(1) Any person, responsible for paying to a non-resident, not being a

company, or to a company which is neither an Indian company nor a
company which has made the prescribed arrangements for the
declaration and payment of dividends within India, any interest, not
being 'interest on securities', or any other sum, not being dividends,
chargeable under the provisions of this Act, shall, at the time of
payment, unless he is himself liable to pay any income-tax thereon as
an agent, deduct income-tax thereon at the rates in force:

Provided that nothing in this sub-section shall apply to any payment

made in the course of transactions in respect of which a person
responsible for the payment is deemed under the proviso to Sub-
section (1) of Section 163 not to be an agent of the payee.
15. The Petitioner was liable to deduct sax from the amount payable
to N.S.K.K. of Japan only if the sum that the Petitioner was liable to
pay to N.S.K.K. of Japan was chargeable to income-tax in India. Such
liability to charge income-tax can only arise as mentioned hereinbefore
if the income can be deemed to have arisen or accrued in India.

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 Shriram Bearings Ltd. V. Income Tax Officer, 'e' Ward, Companies District Iii

Section 9 of the Income-tax Act, 1961, provides as follows:

Income deemed to accrue or arise in India:

(1) The following incomes shall be deemed to accrue or arise in India-

-

(i) all income accruing or arising, whether directly or indirectly,

through or from any business connection in India, or through or from
any property in India, or through or from any asset or source of
income in India, or through or from any money lent at interest and
brought into India in cash or in kind or through the transfer of a
capital asset situate in India:

Explanation--For the purpose of the clause--

(a) in the case of a business of which all the operations are not
carried out in India, the income of the business deemed under this
clause to accrue or arise in India shall be only such part of the
income as is reasonably attributable to the operations carried out in
India;

(b) in the case of a non-resident, no income shall be deemed to

accrue or arise in India to him though or from operations which are
confined to the purchase of goods in India for the purpose of export;

16. It is, therefore, necessary in this case to determine whether this

income can be said to have arisen from a business connection of
N.S.K.K. of Japan in India. The principle upon which the question as
to whether the income could be deemed to have arisen or accrued
through business connection in India for a non-resident has been laid
down by the Supreme Court in the case of Commissioner of Income-
tax, Punjab v. R.D. Aggarwal and Co. and Anr. 56 I.T.R. 20. There the
Assessee had canvassed orders from dealers in Amritsar for supply of
goods and communicated these orders to certain non-resident
exporters. The Assessee had no authority to accept the orders on

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 Shriram Bearings Ltd. V. Income Tax Officer, 'e' Ward, Companies District Iii

behalf of the non-residents. The orders were accepted by the

nonresidents, price was received by them and delivery was also given
outside the taxable territories. No operation such as procuring raw
materials or manufacture of the finished goods took place within the
taxable territories. The Assessee was entitled to certain commission on
these sales. It was held by the Supreme Court that there was no
business connection within the meaning of Section 42(1) of the Indian
Income-tax Act, 1922, which is the corresponding section to Section 9
of the Income-tax Act, 1961, of the Assessee with the non-residents
and the Assessee could not be treated as agent of the non-residents
for the purpose of taxing the profits accrued to them from their
export business. The Supreme Court further observed that business
connection under Section 42 involved a relation between a business
carried on by a non-resident which yielded profits or gains and some
activity in the taxable territory which contributed directly or indirectly
to the earnings of those profits or gains. It predicated an element of
continuity between the business of a non-resident and the activity in
the taxable territories, a stray or isolated transaction not being
normally regarded as business connection. The Supreme Court further
observed that business connection might take several forms, it might
include carrying on a part of the main business or activity incidental
to the main business of a non-resident through an agent or it might
merely mean a relation between the business of the nonresident and
the activity in the taxable territories which facilitated or assisted the
carrying on of the business. In such a case, the question whether
there was business connection from or through which income, profits
or gains arose or accrued to a non-resident must be determined upon
the facts and circumstances of the case. The expression 'business
connection' postulated a real and intimate relation between the
trading activity carried on outside the taxable territories and the
trading activity within the taxable territories. The test, therefore, is to

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 Shriram Bearings Ltd. V. Income Tax Officer, 'e' Ward, Companies District Iii

find out whether there was any operation carried on in the taxable
territory which directly or indirectly helped in earning the income and
in this case the price of 1,65,000 U.S. dollars was paid outside the
taxable territory. The goods in question were delivered outside the
taxable territory. There was no further linking up with the taxable
territories so far as the sales of the Trade Secrets are concerned. It is
true that in this case there was a composite agreement dealing both
with the sale of Trade Secrets as well as the grant of technical
assistance. It is also true that the Agreement) must be read as a
whole. It must also be reiterated that in a case -as in the present one
when the Agreement is not challenged or doubted as not representing
the true intention or bargain between the parties, in such a case the
bargain between the parties must be determined in terms of the
Agreement though the Agreement must be read as a whole. The
Commissioner in the impugned order has stated that apart from the
sale of such Trade Secrets N.S.K.K. has secured a right to sell its
products in India till such time the Petitioner commenced the
manufacture of such products and for that purpose N.S.K.K. appointed
the Petitioner as its exclusive distributor. According to the Addl.
Commissioner, it might be said that N.S.K.K. by sale of Trade Secrets
had established some business connection in India and in the face of
such business connection the Commissioner thought that it was
evident that there was an element of profit which was embodied in
the sale of Trade Secrets. Unless it could be said that the
consideration for the sale of Trade Secrets that was agreed to be
paid, that is, 1,05,000 U.S. dollars, was not only for the purchase of
Trade Secrets but also for consideration that N.S.K.K. would have the
right to sell its product until the Petitioner commenced manufacturing,
in other words, unless it could be said that the consideration
mentioned for the sale of the Trade Secrets was not the real
consideration for the sale of Trade Secrets, it cannot be said that

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 Shriram Bearings Ltd. V. Income Tax Officer, 'e' Ward, Companies District Iii

there was on this ground any activity in the taxable territory for
which the sum of 1,65,000 U.S. dollars was paid. It is true that the
agreement for sale of Trade Secrets might have been entered into
because there was a composite bargain between the parties. From
that point of view of the other activities of N.S.K.K. under the
Agreement are linked up with the sale of Trade Secrets, but the
bargain for the sale of Trade Secrets was an independent bargain as
such and the consideration for the sale must be for the right that the
Petitioner obtained to use Trade Secrets. If that is the position then,
in my opinion, it cannot be said that there was any activity in the
taxable territory which contributed to the earning of 1,65,000 U.S.
dollars.

17. Counsel for the Revenue drew my attention to the observations of

the Bench decision of the Bombay High Court in the case of
Commissioner of Income-lax, Bombay v. Metro Goldwyn Mayer (India)
Ltd. 7 I.T.R. 176, where it was held that whether there was business
connection or not and whether any part of income accrued or arose or
could be deemed to have accrued or arisen within the taxable
territory or not was a question of fact depending upon the facts and
circumstances of the case. In that case one clause stipulated the
obligation of the Assessee to pay to the non-resident 10 per cent of
gross rental hidings arising out of the use or exhibition of each and
every positive print or disc of the production or from the sale or
exploitation thereof in any manner whatsoever, retaining for
themselves the remaining 30 per cent. Therefore, the profit or
payment to non-resident was on the percentage basis of profit arising
from the activity carried on in the taxable territory. In such a
situation the Bombay High Court held that there was a business
connection between these two companies. The ratio of the aforesaid
decision, in my opinion, cannot be applied to the facts and
circumstances of the instant case. Counsel also drew my attention to

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 Shriram Bearings Ltd. V. Income Tax Officer, 'e' Ward, Companies District Iii

the case of Rolls Royce Ltd. v. Jeffrey (Inspector of Taxes) 56 I.T.R.

580. There the controversy which arose was whether certain receipt
was revenue receipt or capital receipt to be included to the
assessment of income-tax under Case f of schedule D to excess profit
levy under the English Income-tax Act. The observations of Lord (sic)
in that context cannot, in my opinion, be applicable to determination
of the question whether there was business connection in the
background of a particular agreement between the parties--between
the non-resident and the Assessee in the instant case. My attention
was also drawn to an unreported judgment of this Court in the case
of Hindusthan General Electrical Corporation Ltd., Calcutta v.
Commissioner of Income-tax, West Bengali, Calcutta I.T. Ref. No. 37 of
1971, judgment delivered on February 20, 1975. The agreement in
that case contained clauses which were significantly dissimilar to the
terms of bargain in the instant case for the sale of Trade Secrets. In
the aforesaid view of the matter, in my opinion, the Commissioner was
in error of law in holding that there was business connection insofar
as the earning of income for the sale of Trade Secrets was concerned
and as such the amount was taxable.

18. Counsel for the Revenue contended that in any event in view of
the reasons given by the Commissioner the Petitioner was not entitled
to move this Court under Article 226 of the Constitution. It is true
that the scope of interference under Article 226 of the Constitution is
limited, but in a case where the order was erroneous and where on
erroneous assumption the Income-tax Officer has passed the order in
question, in my opinion, the Court has jurisdiction to set aside the
order by issuing an appropriate writ of certiorari. The impugned order
of the Commissioner is, accordingly, set aside. The Respondents are
directed to act in accordance with law.

19. The Rule is made absolute to the extent indicated above. There
will be no order as to costs. Operation of this order is stayed for six

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 Shriram Bearings Ltd. V. Income Tax Officer, 'e' Ward, Companies District Iii

weeks.

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