COMMISSIONER OF Il'iCOME-TAX, PUNJAB v. R. D. AGGARWAL & COMPANY October 6, 1964 (K. SUBBA RAO, J. C. SHAH AND S. M. SIKRI JJ.) Income-tax Act, 1922 ( 11 of 1922), s. 42( I )-"Rusi11ess connection", meaning of-Assessee catn•assing orders for non-residents in Jaxable ltrri- tories v.•ithout au1hority to accept orders-No other part in transaction -Relation v.·ith non-resident whether amounrs to business connection- Jncome i11tended to be taxed under s. 42(1 )-Nature of.
The assessees were a firm carrying on business as importers and com- mission agents. They communicated orders canvassed by them from dealers in India to non-residents for acceptance; if a contract rcsu1tcd and the price was paid by the Indian dealers tv the non-resident exporters the assessees became entitled to a commission.
In assessment proceedings the income of the assessecs v.·as computed by the addition of 5% of the net total value of the sale effected by the non-resident exporters in the previous year, because in the Income-tax Officer's \iew there subsisted a 'business connection' between the non-resident dealer and the assessecs. The appel-
late authorities upheld the said view. The High Court however held that there was no 'business connection' v.·itbin the meaning of s. 42( 1) between the assessces and the non-resident exporters.
The Comn1issioner of Income-tax appealed to the Supreme Court by special leave. HELD (i) Section 42(1) of the Indian Income-tax Act, 1922, &eels to tax those profi!s of a non-resident which arise or accrue to him out1ide the taxable territories through or from a "business connection" \vithin the taxable territories. [665 C-E).
(ii) "Business connce1ion" which is nor defined in the Act, may take several forms : it may include carrying on a part of the main husines., activity incidental to the main business of the non-resident through an agent, or it may merely be a relation between the business of the non- resident and the activitv in the taxable territories which facilitates or as5iats the carrying on of that busine~. In each case the question whether there is a busineo;;s connection from or through v.·hich income proftt5 and gains arise or accrue to a non-resident must be determined upon the facts and circumstances of the case.
[664 H; 665 BJ. (iii) The expression "busin~s connection" postulates a real and inti· mate relation between trading activity carried on outside the taxable terri- tories and trading activity within the territories, the relation between the two contributing to the earning of income by the non-resident in his trading capacity.
In the prCsent case, the activity of the assessee in procuring orders was not as agents of the non-resident in the matter of sate of goods manufactured by the latter nor of procuring raw materials in the taxable territories for their manufacturing process. Their activity only led to the making of offers by merchants in the taxable territories to purchase goods manufactured by the non-residents assessees.
[669 G-H; 670 A]. Commissioner of Income-tax v. Remington Typewriters Co. Bombay Ltd. L.R. 58 I.A. 42, Commissiontr of Income-tax, Bombay Prtsidency and Aden v. Currimbhoy Ebrahim and Sons Ltd. L.R. 63 I.A. I. Bangalore Wool/en, Colton and Silk Mills Co. Ltd. v. Commissioner of Income-tax Mndra.<, (1950) 18 J.T.R. 423. Abdul/abhai Abdul Kadar v. Commissioner of Income-tax Bombay City, (1952) 22 l.T.R. 241, Anglo-Frtnch Textile c
C.I.T. V. AGGARWAL & CO. (Shah J.) Company Ltd. v. Commissioner of Income-tax, Madras, [1953] S.C.R. 454 and Hira Mills Ltd. Cawnpore v. Income-tax Officer, Cawnpore, (1946) 14 I.T.R. 417, considered.
CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 808 and 809 of 1963. Appeals by special leave from the judgment and order dated ll October 5, 1960, of the Punjab High Court in Income-tax Refer- ence Nos. 11 and 13 of 1958.
c K. N. Rajagopala Sastri, R. H. Dhebar and R. N. Sachthey, for the appellant. Veda Vyasa and B. P. M aheshwari, for the respondents. The Judgment of the Court was delivered by Shah J. R. D. Aggarwal & Company-called for the sake of
brevity 'the assessees'-are a registered firm having their place of business at Amritsar in the State of Punjab. The assessees carry on business as importers and as commission agents or non-resident exporters with two of whom we are concerned in these appeals. These two non-resident exporters Comptoirs Lainiers Osterietb s.a. Anvers (Belgium) and Filatura e Tessitura Di Tollengno Biella (Italy) are exporters and manufacturers of worsted woollen yarn. The assessees communicate orders canvassed by them from dealers in Amritsar to the non-residents for acceptance; if a con.tract results and price for the goods purchased is paid by the Amritsar dealer to the non-resident exporter, the assessees become entitled to commission varying between 1 t and 2!% of the price.
By Jetter tlated March 24, 1951 the assessees were appointed "sole agents" for the Italian Company "for sale" of worsted woollen yarns in the Indian territories terminable by one month's notice.
The assessees had to "maintain the existing customers" and to secure new customers "conforming !<JI their general terms of sales", and were to receive 2! per cent commission on the net cash amounts arising from the accepted business "concluded by the mediation" of the assessees or directly by the Italian Company with the
customers. The Belgian Company appointed the assessees their representatives for the whole of India on condition that the latter did not represent any other Belgian Mill or yam producer and did not sell Belgian yarn in India on their own account.
ln proceedings for assessment of tax in the assessment year 1952-53 the Income-tax Officer, 'C' Ward, Amritsar computed the income of the assessees by adding Rs. 54,558 being 5% of net total value of yarn sold by the non-resident companies SUPREME
COURT REPORTS [1965) I S.C.R. to Indian merchants in the previous year, because in his view there subsisted business connections between the non-resident exporters and the assessces.
The orders passed by the Income-tax Officer were confirmed in appeal by the Appellate Assistant Com· missioner and also by the Income-tax Appellate Tribunal. The Income-tax Appellate Tribunal submitted a statement of case to the High Court of Punjab on the following two questions : •· ( I ) Whether the relationship between the assessee
and the non-resident fell within the meaning of the expression "business connection" as used in s. 42(1) of the Indian Income-tax Act? ( 2) If the answer to the (second) question is in the
affirmative whether on the facts and in the circumstances of this case any profits or gains accrued or arose or could be deemed to have accrued or arisen ID the non- resident on account of the business connection of tho
non-resident with the assessee during the previous year under consideration." The High Court answered the first question in the negative and declined to answer the second question.
With special leave, the Commissioner of Income-tax has appealed to this Court against the opinion of the High Court in these two cases. Section 42( I) of the Income-tax Act and two related sectiom ss. 40(2) and 43( I) may first be set out. Section 40, insofar as it is mziterial, by sub-s. (2) provides :
"Where the . . . agent of any person not resident in the taxable territories . . . . (such person being hereinafter in this sub-section referred to as a benefi- ciary) is entitled to receive on behalf of such beneficiary, or is in receipt on behalf of such beneficiary of, any in- come, profits or gains chargeable under this Act, the
tax, if not levied on the beneficiary direct, may be levied upon and recovered from such. . . agent. . . in like manner and to the same amount as it would be leviable upon and recoverable from the beneficiary if in direct
receipt of such income, profits or gains." Section 40(2) is an enabling section providing machinery for assessment and recovery of tax from an agent of a non-resident in the taxable territories on income taxable under the Act which the agent is entitled to receive or in fact receives on behalf of the principal if tax be not levied on the principal direct. The
c C.I.T. V. AGGARWAL & CO. ~hah ].) A clause it may be noticed deals with charge to tax on income which the agent is entitled to receive or in fact -receives on behalf ef a non-resident beneficiary.
c Section 42, insofar as it is material, provides: " ( 1 ) All income, profits or gains accruing or arising, whether directly or indirectly, through or from any business connection in the taxable territories, . . . .
shall be deemed to be income accruing or arising within the taxable territories, and where the person entitled to :he income, profits or gains is not resident in the taxable territories, shal! be chargeable to income-tax either in
his name or in the name of his agent, and in the latter case such agent shall be deemed to be, for all the pur- poses of this Act, the assessee in respect of such income-· tax : Provided ….
Provided further . Provided further . (2) Where a person not resident or not ordinarily resident in the taxable territories, carried on busine1>s with a person resident in the taxable territories, and it
appears to the Income-tax Officer, that owing to the dose connection between such persons the cotlrse of business is so arranged that the business done by the resident person with the person not resident or not
ordinarily resident produces to the resident either no profits or less than the ordinary profits which might be expected to arise in that business, the profits derived· therefrom or which may reasonably be deemed to have
been derived therefrom, shall be chargeable to income- tax in the name of the resident person who shall be deemed to be, for all the purposes of this Act, the assessee in respect of such income-tax.
( 3) In the case of a business of which all the ope- rations are not carried out in the taxable territories, the profits and gains of the business deemed under this section to accrue or arise in the taxable territories &hall be only such profits and gains as are reasonably attribut- able to that part of the operations carried out in the
taxable territories." LISup./65-17 SUPRBIE COURT REPORTS [1965] l S.C.R. It may be observed that sub-ss. ( 2) and ( 3) illustrate special cases of business connections and do not purport to limit the connota- tion of that expression.
Section 43, by the first paragraph, provides : "Any person employed by or on behalf of a person residing out of tbe taxable territories, or having any business connection with such person, or through whom
such person is in the receipt of any income, profits or gains upon whom the Income-tax Officer has caused a notice to be served of his intention of treating him as the agent of the non-resident person sh"!ll, for all the'
purposes of this Act, be deemed to be such agent : " This section auihor;,cs th~ Income-tax Officer to appoint a person as statutory agent of a non-resident, and to assess him as agent of a non-resident in respect of the income of the non-resident in the taxah!e territories.
The only question that falls to be determined in these appeal.\ is whether tr.ere was in the two cases between the non-resident companies and the asscssees such a relation a< may be called "business connection" in the ta·rnble territories: If the answer to this question be in the affirmative, the assessees would a< statutory agents be chargeable to tax on behalf of the non-resident Companies on profits and gains reasonably attributable to those parts of the operations which were carried on in the taxable territories.
The expression ';business" is defined in the Act a1 any trade, commerce, manufacture or any adventure or concern in the nature of trade, commerce or manufacture. but th~ Act contains no definition of the expression "business connection" and iL~ precise connotation is vague and indefinite.
The expression "busine1s connection" undoubtedly means something more than "business". A business connection in s. 42 involves a relation between a business carried on by a non-resident which yields profits or gaim and some activity
in the taxable territories which contributes directly or indirectly to the earning of those profits or gains. Jt predicates an clement of continuity between the business of the non-resident and the activity in the taxable territories a stray or isolated tra1L1action is nom,al!y not to be regarded as a business connection. Business connection may take several forms it may i!!clude carrying on a part of the main business or activity inci- dental to the mair. business of the non-resident through an agent, or it may merely be a relation between the business of the non- II
C.I.T. v. AGGARWAL & CO. (Shah J.) A resident and the activity in the taxable territories, which facili- tates or assists the carrying on of that business. In each case the question whether there is a business connection from or throu!ih which income, profits or gains arise or accrue to a non- resident must be determined upon the facts and circumstances of the case.
A relation to be a "business connection" must be real and intimate, and through or from which income ·must accrue or arise whether directly or indirectly to the non-resident. But it must
in all cases be remembered that by s. 42 income, profit or gain which accrues or arises to a non-resident outside the taxable c territories is sought to be brought within the net of the Income-tax law, and not income, profit or gain which accrues or arises or is deemed to accrue or arise within the taxable territories. Income received or deemed to be received, or accruing or arising or deemed to be accruing or arising within the taxable territories in the previous year is taxable by s. 4 (1 ) (a) & ( c) of the Act, whether the person earning is a resident or non-resident. If the agent of a non-resident receives that income or is entitled to receive that income, it may be taxed in the hands of the agent by the machinery provision enacted in s. 40 (2). Income not taxable under s. 4 of the Act of a non-resident becomes taxable under s. 42(1) if there subsists a connection between the activity in the taxable territories and the business of the non-resident, and if through or from that connection income directly or indirectly arises.
Important cases which have arisen before the Courts may be briefly reviewed, not for evolving a definition applicable generally to all cases, but with a view to illustrate what relation between the non-resident and the activity in the taxable territories which contributes to the earning of income may or may not be regarded as business connection.
In Commissioner of Income-tax v. Remington Typewriters Co. (Bombay) Ltd.(') a Company incorporated under the Indian Companies Act, 1913, which was a subsidiary of an American Company was deemed for the purposes of the Indian Income-tax Act to be the statutory agent of the latter Company and was charged to tax under s. 42( 1) in respect of profits made by that Coinpany.upotrmachines exported to the taxa~le territories and in H respecf of dividends received from the Indian Company, although the assessee Company was not an agent for the American Company (1) L.R. SS I.A; 42.
surRfME COURT REPORTS I %5] I S.C.R. under s. 40, as it had not received the profits and gains in question. In that case, in consideration of transfer of the good- will of the American Company in a specified territory in India shares were allotted by the assessee Company to the American Company.
In respect of those shares dividend was paid to the American Company by the assessee Company : the American Company also sent machines to the assessee Company for sale within the territory.
The profits made by the American Company by sale of the machines and dividends received by the American Company from the assessee Company were held taxable on the ground that there existed a business connection.
In Commissioner of Income-tax Bombay Presidency and Aden v. Currimbhoy Ebrahim and Sons Ltd. ( 1 ) advance of a loan by a non-resident was held not to be a business connection. Currim-
bhoy Ebrahim & Sons Ltd. a private limited Company carrying c on business as managing agents of various companies and as dealers in cloth, borrowed a loan from the Nizam of Hyderabad and executed a document in Bombay and as security for repay- ment of the loan deposited shares in joint stock companies and created an equitable mortgage of immovable properties in British l ndia. The Joan was to be repaid in Hyderabad then an Indian State. The taxing authorities treated the private Company as agent in the taxable territories of the Nizam within the meaning of s. 43 of the Indian Incoml>-tax Act, and assessed to tax the interest on the loan which the taxing authorities regarded as profit or gain which must be deemed to have accrued or arisen to the Nizam, through or from a business connection or property in British India within the meaning of s. 42( I) of the Act.
The Judicial Committee held that the loan transaction wa~ an isolated transaction. There being nothing to show that the Nizam had at any time any interest, direct or indirect, in the respondent Com- pany, there was no business connection in British India within the meaning of s. 42 of the Act between the Company and the Nizam and the interest on the loan did not constitute a profit or gain accruing
or arising to the Nizam, directly or indirectly, tln-ough or from any business connection or property in British India, chargeable to income-tax in the name of the Company. In Bangalore Woollen, Cotton and Silk Mills Co. Ltd. v. Com- missioner of Income-tax, Madras(') the assessee a Company
registered ill the Indian State of Mysore carried on the business of manufacturing woollen, cotton and silk goods at Bangalore. The (I) L.R. 63 I.A. I. (2) (1950) ts J.T.R. 423. c
c.I.T. v. AGGARWAL & co. (Shah !.) assessee's managing agents had their head office at Madras in British India. Under the managing agency agreement, the agents bought raw materials and other articles or things required for the purpose or use of the assessee and sold and disposed of goods manufactured by the assessee.
Manufactured goods were also sold in the Mysore State and deliveries were effected in that State, but the agents collected the price of the goods sold in British India and credited it in their books to the account of the assessee as they also acted as bankers of the assessee. It was held by the Income-tax Officer that the assessee Company was liable to pay tax under the Indian Income-tax Act under two heads-(i) on the profits attributable to the sale proceeds received in British India and (ii) on the profits that accrued or arose outside British India to the assessee by reason of business connection in British India.
The High Court of Madras held that the managing agents purchased in British India raw materials required for the business continuously for several years, received the sale proceeds of manu- factured goods in British India and credited in their books to the account of the Company acting as bankers, met all the expen- diture from out of the collections in their hands, paid for the purchase, made also other payments referred to in the managing agents' accounts. This was a clear case of a business connection in British India in respect of income which accrued or arose to the assessee outside British India.
In Abdul/abhai Abdul Kadar v. Commissioner of Income-tax Bombay City(') the assessee acted as commission agent of a non- resident and entered into transactions within the taxable territories on behalf of the non-resident, but he was not the sole commission agent of the non-resident who did business through tither agents as well.
The assessee also purchased cloth on behalf of other constituents. It was held that there was a business connection, because it was not predicated of a business connection that the broker must be exclusively retained by the assessee.
Chagla C.J., in dealing with the provisions of s. 42( 1) observed: ". . . . the language used by the Legislature is very wide, any business connection is not necessarily that business
connection which is constituted by a pe!lTianent and exclusive agency. On the other hand a mere casual connection, a connection which has no continuity, would also not be a business connection
as contemplated by the Legislature under section 42. (I) (1952) 22 J.T.R. 241. SUPREME COURT REPORTS (1965) l S.C.lt. Therefore, in order that the agency which constitutes a connection between a non-resident and the assessee
should be a business connection as contemplated by Section 42 there must be an clement of continuity in the agency. An isolated transaction through an agent, or even a connection for a short period, would not
necessarily constitute business connection." Then there is a decision of this Court : Anglo-French Textile Company Ltd. v. CommissiJner of Income-tax, Madras('). The assesscc-a Company incorporated in the United Kingdom-
owned a spinning and weaving factory at Pondicherry in French India. The assessee had appointed another limited Company in M~dras as its constituted agent for the purpose of its business in British India.
During the relevant year of acco11nt no sales of yarn or cloth manufactured by the assessee Company were effected in British India, but all the purchases of cotton required for the factory at Pondicherry were made by the agents in British India and no purchases were made through any other agency. In that case, it was held, that the assessee Company had a busi- ness connection in British India within the meaning of s. 42 and a portion of the profits of the non-resident attributable to the purchase of cotto•1 in British India could be apportioned under ~. 42(3).
In Hira Mills Ltd .. Cawnpore v. lncol'fftLta:x Officer, Cawn- pore(') a non-re>idcnt Company carried on business of manufac- turing cloth at Ujjain in the Indian State of Gwalior and sent cloth to Cawnpore in British India.
Goods were sold by the Company's salesman at Cawnporc and the sale proceed~ were collected by him at Cawnpore. In these transactions, income accrued or arose to the Company in Rritish India within the meaning of s. 4( I). The Company's goods were also m~rketed in British India through brokers who were not the Company's employees and who were not canvassing orders exclusively for the Company. Offers of purchase sent by brokers to Ujjain were not in any special foilTI. They were either accepted or rejected by the Company at Ujjain, but all contracts were for delivery "F.O.R. Ujjain".
Goods were generally consigned to "self' at the place of destination and the merchants took delivery after paying the invoiced price plus freight and insurance to a broker or banker in British India in exchange of endorsed railway receipts. On
(0 JI 953) S.C.R 454. (2) (1946) 14 J.T.ll. 417. c C.I.T. V. AGGARWAL & CO. (Shah/.) A these facts the Allahabad High Court held that there was no business connection in British India.
The distinction between Abdullabhai Abdul Kadar's case(') and the Hira Mills' case(2) may be noticed. In the former the commission agents had purchased cloth in the taxable territories B for the non-resident and in the latter the agents did not purchase or sell goods for the non-resident: they merely canvassed orders which were in the nature of offers and communicated them to the non-resident who had the option to accept or reject the offers. The sales took place outside the taxable territories, and in the c
view of the)ncome-tax Appellate Tribunal "presumably also, the goods were paid for at Ujjain." The Court was on the question framed and referred not called upon to consider whether because of payment of the invoiced price plus insurance and freight to a broker or banker in British T ndia, and delivery in exchange of endorsed railway receipts, the case fe]J i.yithin s. 4 (1) (a) or s. 4(1)(c).
Turning to the facts of the present case, as found by the revenue authorities, contracts for the sale of goods took place outside the taxable territories, price was received by the non- residents outside the taxable territories, and delivery was also given outside the taxable territories.
No operation such as procuring raw materials, manufacture of finished goods,· sale of goods or delivery of goods against price took place within the taxable terri- tories : the assessees merely procured orders from merchants in Amritsar for purchase of goods from the non-resident companies. The orders were offers which the assessees had no authority to accept on behalf of the non-residents.
Some commercial activity was undoubtedly carried on by the assessecs in the matter of procuring orders which resulted in contracts for sale by the· non- residents of goods to merchants at Amritsar.
But on this account no business connection of the assessces with the non-residents within the taxable territories resulted. The activity of the assessees in procuring orders was not as agents of the non-resi- dents in the matter of sale of goods manufactured by the latter, nor of procuring raw materials in the taxable territories for their manufacturing process.
Their activities led to the making of offers by merchants in the taxable territories to purchase goods manufactured by the non-residents which the Iattet ·were not obliged to accept.
The expression "business connection" postulates a real and intimate relation between trading activity {!) 22 I.T.R. 241. (2) 14 I.T.R 417. SUPREME COURT REPORTS [ 1965) I S.C.R. carried on outside the taxable territories and trading activity within the territories, the relation between the two contributing to the earning of income by the non-resident in his trading activity. In this case such a relation is absent.
In that view of the case, these appeals must fail and arc dismissed with costs. One hearing fee. Appeals dismissed.