Consultancy fee earned by a non-resident company is taxable in India if it arises from its activity carried on in India.

( 1 ) THE question referred for our opinion, under s. 256 (1) of the I. T. Act, 1961, is :"whether, on the facts and in the circumstances of the case, any income accrued or arose to the non-resident in respect of the fee for consultancy activity as a result of operations carried out by it within the taxable territories and which constituted a business connection ?"

( 2 ) FACTS relevant may briefly be stated : In pursuance of certain agreements entered into between the Govt. of India and the Govt. of Czechoslovakia, the Govt. of India formed a company, called "bharat Heavy Plate and Vessels Ltd. ", a wholly Govt. of India-owned company for manufacturing heavy plates and high pressure vessels. On 27/02/1968, an agreement was entered into between the "bharat Heavy Plate and Vessels Ltd. " (hereinafter referred to as "the company") and the "skoda Exports", Praha (Czechoslovakia), whereunder the Skoda agreed to render technical assistance and consultancy service to the company in erecting its plant and in putting it on stream. In this referred case, we are concerned with two assessment years, viz. , 1969-70 and 1970-71. For the assessment year 1969-70, the Department held that an amount of Rs. 13,000 was paid to Skoda for the consultancy service rendered by it in the territories of India, and that 1/6th of the total turnover of the company should be treated as income arising on account of Skodas activity, in India. So far as the assessment years 1970-71 is concerned, the amount paid on this account was held to be Rs. 1,08,130. On appeal, however, the AAC held that 80% of the consultancy fees should be deemed to have arisen on account of Skodas activity in India, and accordingly taxable. On further appeal to the Income-tax Appellate Tribunal (there were appeals both by the assessee, as well as by the Department, and a number of questions were argued in appeal, but, we are concerned herein with the fees paid on account of consultancy services only), the Tribunal held, on a consideration of the relevant clauses of the agreement, that the consultancy fees paid to Skoda must be held to have arisen on account of its activity carried on in India; but, observed that, what part of it should be attributed to the consultancy service in India and what part to its activity, if any, carried on in Czechoslovakia, should have to be determined. Accordingly, the matter was remitted to the ITO with a direction to recompute the profit attributable to the consultancy service in India, in assessee from a qualified chartered accountant in Czechoslovakia. It is thereupon that the assessee applied for and obtained this reference under s. 256 (1) of the Act.

( 3 ) SRI S. Parvatha Rao, learned counsel for the assessee, contended that, under the agreement dated 27/02/1968, the non-resident company, viz. , Skoda, agreed to depute certain technical personnel to India to render technical assistance, guidance and advice, the agreement also provided for payment of the salaries of such person by the Indian company. The consultancy fee provided for under the agreement is not at all for anything done or any activity carried on by the non-resident company in India, but is on account of training given to the deputed personnel in Czechoslovakia, and as a compensation for gathering and sparing those persons for deputation in India. His contention, therefore, is that the consultancy fee is paid not on account of any activity carried on by the non-resident company in India, but on account of something done by the non-resident company in Czechoslovakia itself and, therefore, the said amount cannot be said to be taxable in India.

( 4 ) ON the other hand, Shri M. S. N. Murthy, learned standing counsel for the Department, supported the reasoning and the conclusion of the Tribunal.

( 5 ) THE agreement dated 27/02/1968, says that it has been entered into with a view to train India personnel in Czechoslovakia to render consultancy activities or technical assistanc