Patna High Court
Addl. Commissioner Of Income-Tax vs New Consolidated Gold Fields Limited ... on 21 February, 1983
Equivalent citations: [1983]143ITR599(PATNA)
Author: Nagendra Prasad Singh
Bench: Nagendra Prasad Singh
JUDGMENT Nagendra Prasad Singh, J.
1. The Income-tax Appellate Tribunal under Section 256(1) of the I.T. Act, 1961 (hereinafter to be referred to as " the Act "), has forwarded the statement of the case on the following questions of law :
" 1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that there was no business connection in India between the New Consolidated Gold Fields Ltd., London, and the Indian Copper Corporation Ltd., Ghatsila?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that there was no income to the non-resident which could fall within the categories enumerated in Section 9(1)(i) of the Act and, as such, the question of bringing any such income to tax in the hands of the agent would not arise ? "
2. From the statement of the facts it appears that the assessee-company during the assessment year in question was carrying on business of mining and treatment of copper and other ores. On October 22, 1959, an agreement was entered into between the assessee-company and one New Consolidated Gold Fields Ltd., London (hereinafter to be referred to as " the Gold Fields "). In that agreement the Gold Fields were appointed as technical advisers to the assessee-company in regard to its exploration, mining and mineral dressing operations on the terms and conditions mentioned in that agreement. In Clause 2 of the agreement, the details of the nature of technical advice the Gold Fields were required to give was mentioned. The relevant part of Clause 2 aforesaid is as follows:
"2. Gold Fields shall undertake through its staff all the duties normally undertaken by technical advisers to a mining company with regard to the technical advice in respect of the operation of the said undertaking and in particular but without detracting from the general nature of the above provisions Gold Fields shall:--
(a) give to the company all such technical advice including mechanical and electrical engineering matters incidental thereto as may from time to time be requested by the company for the proper working of the said undertaking;
(b) once in every year cause a member of its staff who shall be a mining or mechanical or electrical engineer or matellurgist as agreed between the company and Gold Fields to visit the said, property for the purpose of conferring with the general manager or other proper officials of the company and inspecting the said property whereafter Gold Fields shall report to the company on such visits provided always that if in addition to such annual visits Gold Fields shall at the request of the company send out to the said property for any purpose either a member of its technical staff or an independent consultant the company shall pay to Gold Fields (in addition to the remuneration payable under clause 6 hereof and any sums payable under clause 8 hereof) such sum as shall be agreed between Gold Fields and the company ;
(c) give to the company's general manager or other proper officials such advice and assistance as may be reasonable or advisable for the purpose of implementing any recommendations made by Gold Fields and approved by the company... "
3. In cl. 6 of the agreement it was stipulated that for general services under Clause 2 aforesaid, " the company shall pay to Gold Fields a retaining fee at the rate of 7,000 per annum, such remuneration being paid in sterling in London..." In cl. 8 of the agreement it was further provided that in addition to the fee payable under cl. 6 aforesaid, any sum payable by virtue of the proviso to cl, 2(b), the company shall repay to the Gold Fields all incidental disbursements and out of pocket expenses incurred in the execution of its duties including, inter alia, all reasonable travelling, living, hotel and other expenses incurred by the Gold Fields' representatives in connection with the company's business, The company also undertook to pay to Gold Fields a commission at the rate of 21/2% or such other percentage as may from time to time be agreed on the f.o.b. cost of all plant, machinery and supplies purchased by the company through Gold Fields and to pay for any services rendered by the Gold Fields which had not been specifically referred to or provided, including for inspections of plant, machinery and other goods outside the United Kingdom.
4. On the basis of the aforesaid agreement, the ITO, while passing an assessment order for the year 1960-61 of the assessee-company, came to the conclusion that the assessee-company was an agent within the meaning of Section 163 of the Act and the annual remuneration of 7,000 sterling (Rs. 70,002) payable to the Gold Fields by the assessee-company shall be deemed to be the income accruing to a non-resident which is taxable in the hands of the assessee-company.
5. On appeal, the AAC came to the conclusion that even if the as'sessee-company is held to be an agent within the meaning of Section 163(1) of the Act, no business connection within the meaning of Section 9(1) of the Act had been established, so that any income accruing to such non-resident could have been taxed through its agent, the assessee-company. That finding has been approved by the Tribunal on appeal being filed on behalf of the Department. At the instance of the Department, the Tribunal has referred the questions mentioned above for the opinion of this court.
6. Learned standing counsel for the Department submitted that once it is held that the assessee-company is an agent of the non-resident company within the meaning of Section 163 of the Act, there is no escape from the liability created on such company by virtue of Section 9 of the Act.
7. Section 5(2) of the Act, which is relevant, is as follows :
"(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which-
(a) is received or is deemed to be received in India in such year by or on behalf of such person ; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year."
8. On a plain reading, Sub-section (2) of Section 5 conceives that in some situations a non-resident may receive an income or it may be deemed to have accrued to him. What shall be the deemed income, has been specified in Section 9(1)(i) of the Act, the relevant part whereof is as follows :
" 9(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 the transfer of a capital asset situate in India. Explanation.--For the purposes of this 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 through or from operations which are confined to the purchase of goods in India for the purpose of export."
9. In view of the aforesaid sub-section any income accruing to a nonresident through business connection in India or through some source of income in India shall be deemed to accrue or arise in India. Sections 160 and 163 are the provisions under which any person in India, on conditions mentioned in those sections having been fulfilled, can be treated as an agent or representative-assessee within the meaning of those sections. Section 161 makes such representative-assessee liable to assessment in his own name in respect of the income of the person of whom he is deemed to be a representative-assessee, If, in the facts and circumstances of the present case, it is held that the conditions of Section 9 of the Act have been fulfilled, then the income derived by the non-resident company has to be included in the income of the assessee-company for the purpose of assessment.
10. From the different clauses of the agreement aforesaid entered into between the Gold Fields Ltd. and the assessee-company, it appears that under Clause 6 the retaining fee at the rate of 7,000 per annum in sterling was to be paid in London for the general services mentioned in Clause 2 thereof. Under cl, 8 the assessee-company had to repay to Gold Fields all incidental disbursements and out of pocket expenses incurred in the execution of its duty including reasonable travelling, living, hotel and other expenses incurred by the representatives of the Gold Fields. The controversy is only in respect of the payment of the said 7,000 sterling which was admittedly paid in London in terms of Clause 6 of the agreement. There is no controversy in the present case regarding the payments, if any, made in terms of Clause 8 of the agreement in India. The payment of 7,000 sterling cannot be held to be an income which a non-resident has received in India or an income which had accrued to a non-resident in India, within the meaning of Clauses (a) and (b) of Sub-section (2) of Section 5 of the Act. About such an income now the only question to bo examined is as to whether in view of Section 9(1) it shall be deemed to have accrued in India.
11. Learned counsel for the assessee-company submitted that the annual payment of 7,000 sterling having been made in London for technical advice given from London to the assessee-company cannot be held to be an income accruing through any business connection in India or through any other source of income in India. According to the learned counsel, even if it is assumed that the Gold Fields were having business connection in India, even then, in view of Expln. (a) to Section 9(1)(i) of the Act, only such part of the income which is reasonably attributable to the operations carried out in India shall be the deemed income of such a non-resident, and, as the payment of 7,000 sterling was made in London for the technical advice given to the assessee-company from London, this income cannot be reasonably attributed to the operations carried out in India so as to be the deemed income within the meaning of Section 9(1)(i) of the Act.
12. The expression "business connection" has been considered in different judicial pronouncements. In the case of GIT v. R.D. Aggarwal and Co. [1965] 56 ITR 20 (SC), it was pointed out by the Supreme Court that the Act does not contain the definition of the aforesaid expression "business connection" and its precise connotation is vague and indefinite, but undoubtedly it means something more than business. In that context it was observed as follows (p. 24) :
"A business connection......involves a relation between a business carried on by a non-resident which yields profits or gains and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits or gains. It predicates an element of continuity between the business of the non-resident and the activity in the taxable territories: a stray or isolated transaction is normally not to be regarded as a business connection.'.....In each case the question whether there is a business connection from or through which in come profits or gains arise or accrue to a non-resident must be determined upon the facts and circumstances of the case. "
13. As such, in order to bring within the net of the Act the income derived by a non-resident, it has to be established that there was an element of continuity between the business of the non-resident and the activity in the taxable territories. In the case of CIT v. Toshoku Ltd. [1980] 125 ITR 525 (SC), the scope of Section 9 of the Act has been construed. The Supreme Court took note of Expln. (a) to Section 9(1)(i) and pointed out that in the case of a business of which all the operations are not carried out in India, the income of the business deemed under that 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. In that connection, it was observed (p. 531):
"If no operations of business are carried out in the taxable territories, it follows that the income accruing or arising abroad through or from any business connection in India cannot be deemed to accrue or arise in India."
14. In the facts of that case it was held that the commission amounts which were being earned by the non-resident assessee for services rendered outside India cannot be deemed to be income which have either accrued or arisen in India.
15. Taking into consideration the different clauses of the agreement and the findings recorded by the AAC and the Tribunal, it has to be held that 7,000 sterling was being paid to the non-resident at London for the advice given from London, which income cannot be reasonably attributed to the operations carried out in India. In my opinion, it is difficult to hold that a continuity between the business of the non-resident and the activity in the taxable territories in respect of the income in question has been established so as to hold that there was a business connection between the nonresident and the assessee-company. In view of Expln. (a) to Section 9(1)(i) of the Act, if the income of 7,000 sterling has to be reasonably attributed to any operations carried out in India, then only, it shall be deemed to be an income within Section 9(1)(i) of the Act. It cannot be disputed that an Explanation is an integral part of the section. Reference in this connection may be made to the cases of CIT v. Sanichar Sah Bhim Sah AIR 1955 SC 661 and Bihta Co-operative Development and Cane Marketing Union Ltd. v. Bank of Bihar [1967] 37 Comp Cas 98 ; AIR 1967 SC 389.
16. On behalf of the Department reliance was placed on a recent judgment of the Supreme Court in the case of Barendra Prasad Ray v. ITO [1981] 129 ITR 295. In that case the assessees were held to be the agents of a non-resident, having business connection with such non-resident. The assessees were partners of a firm of solicitors in Calcutta and they acted as solicitors of a German Corporation in certain patent suits filed in the Calcutta High Court. A London solicitor instructed the assessee-firm to retain one U.K. Barrister in the suits. The assessee did not pay any fee to that U.K. Barrister but on materials it was established that the U.K. Barristerappeared in the Calcutta High Court on the instruction of the assessee-firm. A question arose as to whether the payment made to the U.K. Barrister can be taxed in the hands of the assessee-firm treating the fiim as the agent having business connection with the U.K. Barrister. The Supreme Court held that on the facts there was connection between the assessee-firm and the U.K. Barrister, which was real and intimate and not a casual one. It was further held that the barrister aforesaid earned fees for arguing the case in India only through that connection which was held to be a business connection within the meaning of Section 9(1) of the Act. In my view, this decision is not of much help to the Department. In that case a categorical finding had been recorded that the connection between the assessee and the non-resident was real and intimate and it was found that the non-resident had earned income by associating himself with the assessee in India. In that case there was no dispute that the income earned by the non-resident was co-related to the activity of such nonresident in India because the non-resident had appeared in the Calcutta High Court. So far as the facts of the present case are concerned, I have already pointed out that the non-resident received in London 7,000 sterling for the technical advice given to the assessee-company from London. The income to such a non-resident, in the facts and circumstances of the present case, cannot be co-related with the activity of any such nonresident within the territory of India so as to make it an income within the meaning of Section 9(1) of the Act.
17. Mr. K.N. Jain, learned counsel for the assessee, while distinguishing the aforesaid case of the Supreme Court [1981] 129 ITR 295, has drawn our attention to Palkkivala's Income-tax Supplement to 7th Edn., where there is a commentary about the aforesaid case of the Supreme Court. In that commentary it has been pointed out that under the provisions of the Act "business connection" shall not include a professional connection and that the expressions " business " and " profession " have been used in the Act in a separate and distinct sense, as such, in the aforesaid judgment the Supreme Court should not have included the income from the professional connection within the expression " income from business connection ". Learned counsel for the assessee has also referred to Section 2(13) and Section 2(36) where "business" and "profession" have been separately defined and to other sections of the Act where "income from business" and "income from profession" have been separately dealt with. He also cited several cases saying that in an Act where distinction has been maintained between two expressions then by necessary implication one shall be excluded from the definition of the other, meaning thereby "income from business connection" shall exclude " income from professional connection ". Any way, we are not concerned with that because in the aforesaid judgment the Supreme Court has held that there was no warrant for giving a restricted meaning to the expression " business connection " so as to exclude " professional connection "from its scope. But, in view of my finding that in the facts and circumstances of the case, the income which accrued to the non-resident was not through any business connection in India and, in any case, as the said income cannot be reasonably attributed to any operations carried out in India within the meaning of the Explanation aforesaid, questions Nos. 1 and 2 have to be answered in the affirmative and against the Department. However, there will be no order as to costs.
Ashwini Kumar Sinha, J.
18. I agree.