Shriram Bearings Ltd. vs Income Tax Officer, ''E'' Ward, Companies District III

Sabyasachi Mukharji, J.—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:

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.

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.

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.

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

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.

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 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.

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 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.

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 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.

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 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.

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 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 u/s 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 u/s 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.

Being aggrieved by the aforesaid order the Petitioner made an application u/s 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 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.

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.

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 u/s 195(2) of the Act. It was 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.

In aid of his submission counsel for the Petitioner drew my attention to the decision of this Court in the case of Czechoslovak Ocean Shipping International Joint Stock Company and Another Vs. Income Tax Officer, A-Ward and Others, . 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 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 u/s 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 u/s 195(2) of the Act and any order u/s 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 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, u/s 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.

Therefore, it was the case of the Petitioner to the Commissioner that the application made to the income tax Officer was an application made u/s 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 u/s 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 the aforesaid view of the matter this contention urged in support of this application cannot be entertained.

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.

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. 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;

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 Vs. R.D. Aggarwal and Company, . 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 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 u/s 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 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 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.

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 Tax, BOMBAY Vs. METRO GOLDWYN MAYER (INDIA) LTD. (AS AGENTS OF CULVER EXPORT CORPORATION OF NEW YORK)., , 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 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 the case of Rolls Royce Ltd. v. Jeffrey (Inspector of Taxes) 56 ITR 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.

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.

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 weeks.