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Income‑tax Reference No. 48 of 1936, decided on 7th February 1957.
S. 42‑Non‑resident‑Profits earned in foreign territories through agent in India‑Liability of Indian agents to pay tax‑Whether agent liable to pay tax in respect of profits from orders placed directly or through shipping agents from agency area.
If a non‑resident company, earns profits in territories outside India (e.g., Burma and Ceylon) through work done by their agents in India whose agency territory comprises those foreign territories also, the agents in India can be assessed to tax in India as the statutory agents of the non‑resident company in respect of the profits made by the latter in those foreign territories through the Indian agents.
Where, under the terms of agency the agents in India of a non‑resident were entitled to a commission on all orders, whether they were placed directly with the company or through the agents or through shipping companies, from the agency area, and the records also showed that the agents carried out important obliga tions with regard to the customers who placed their orders directly or through shipping companies;
Held, that the non‑resident was liable to pay tax in India through the agents in respect of all such orders, not merely in respect of orders placed through the agents.
By these application, which are consolidated for the sake of convenience, Soho House, a registered firm, requires the Appellate Tribunal to refer to the High Court several questions of law, which are said to arise out of the Tribunal's orders in I.T.As. Nos. 7013 and 7014 of 1954‑55. Inasmuch as, in our opinion, a question of law does arise out of the aforesaid orders, we hereby draw up a statement of the case and refer it to the High Court of Judicature at Bombay under section 66 (1) of the Indian Income‑tax Act. Parties agree that all the material facts are correctly stated and that there is no omission of any material fact.
S. & D. Rivet Co. was carrying on the business of manufac ture and sale of bifurcated and tubular rivets, upholstery nails, drawing pins, etc., at Leicester in the United Kingdom. S. & D. Rivet Co., hereinafter referred to as the non‑resident company, was incorporated as a limited company styled Steels & Busks Limited. There was an agreement dated 3rd March, 1952, between Steels & Busks Limited and Soho House, a registered firm, carrying on business in Bombay. A copy of the agreement is Annexure "A" and forms part of the case. It was the case of the parties before the Tribunal that there was at the material time exactly a similar agreement in force between the non‑resident company and Soho House. A copy of the agreement between the non‑resident company and Soho House was not produced, but reliance was placed on the agreement dated 3rd March, 1952, between Steels & Busks Limited and Soho House. Some of the relevant clauses of the agreement dated 3rd March, 1952, are as follows:
"1. The Company (Steels & Busks Limited) hereby appoint the Agents (Soho House) as from the 3rd day of March, 1952, to be their Agents for India (hereinafter called the Agency Territory') for the sale of Bifurcated and Tubular Rivets, Upholstery Nails and Drawing Pins, and any other articles manufactured or sold by the Company in the course of their business as may be mutually agreed upon between the parties hereto, but all orders obtained by the Agents shall be subject to the approval of the Company who may either accept or refuse the same.
2. The Agents shall not exhibit or offer for sale in any other countries outside the Agency Territory any of the articles specified in this Agreement and during the continuance of this Agreement the Agents shall not represent or solicit orders for similar goods to those dealt in by the Company and covered by this Agreement on behalf of any other person, firm or company.
3. The Company shall pay to the Agents a commission of 5% (five percent.) calculated on the net amount of cash received by the Company in payment of all orders accepted by the Company and delivered to the Agency Territory, such commission to be paid quarterly.
5. The Agents shall not collect any debts or money for the Company (except in special cases on the authority of the Com pany), but all the accounts shall be paid by the customers direct to the Company.
7. The agents shall from time to time keep the Company informed of all matters and transactions affecting the Company's business in the Agency Territory and shall well and faithfully serve the company as such agents as aforesaid and use their best endeavours to obtain orders for and extend the business of the company.
8. All sales shall be made direct to the customers and their full names and addresses and the nature of the business shall be shown on all order sheets and correspondence, and the agents shall keep correct records of all transactions in relation to the company and shall make full reports as the company may direct of all business done' by them."
3. The agreement dated 3rd March, 1952, refers to India as the agency territory, but it was‑ understood at the time of the hearing of the appeals that India included, at least for the relevant assessment years, Burma and Ceylon. There was evidence that a representative of Soho House visited Burma for the purpose of the non‑resident company's business.
4. The Appellate Assistant Commissioner in his order dated 30th December, 1954, relating to the appeal against the assessment for the year 1950‑51 has given a summary of the modus operandi of the non‑resident company and Soho House referred to herein after as the agent. We can do no better than reproduce paragraphs 3 and 4 of the Appellate Assistant Commissioner's order giving the summary
"Though by agreement Messrs Soho House are the autho rised indenting agents for the agency territory' it appears that according to the actual course of business only small portion of the orders are booked by the agents and forwarded to the non‑resident principal while the bulk of the orders are either placed directly by the customers or by shipping houses in London. Orders so procured by the agents or placed directly by the customers or by shipping houses in London are finally accepted or rejected by the non‑resident company in London and sales of the goods are all made F.O.B'. English port. In the case of orders procured by the agents, they forward the indents of the merchants to the principal. If the orders are accepted an intimation will be received from the company .by the agents and the customers are accordingly informed. In the case of orders placed directly by customers or through shipping houses in London it is stated that agents know nothing of these transactions and they come to know these transactions only when they receive a copy of the invoice and the goods despatched. After receipt of the confirmation of the orders the customers, who either place their orders through the agents or directly, open letters of credit with a bank in London in favour of the non‑resident company, Messrs S. D. Rivet & Co.' Invoices and other relevant shipping documents are made over by the non‑resident company to the bankers in London who discount them and‑ send them for collection to bankers in India. The latter then present the draft to the customers in India and deliver the documents to them against payments. In respect of good sold through shipping houses in London the terms of sales are net cash in London. The shipping houses send these goods over here to customers on the terms mutually agreed upon between them. But whatever be the actual mode of operation the agents are paid by the non‑resident commission in respect of the entirety of the sales made in the agency territory' on a quarterly basis. At my instance the appellant has filed a detailed statement of sales on which commission has been received during the assessment years 1950‑51 and 1951‑52 by the agents (vide Annexure A')."
"4. Regarding their actual services and activities as agents apart from procuring and forwarding indents, the agents admit in their letter dated 13th September, 1954, filed with me that they send to the non‑resident company market reports, but proceed to state regarding the results of activities done by us we have to state that their products are so well known in the market, since several decades that we have not much to do'. To see exactly what are the other activities of the agents connected with the business of the non‑resident I have issued summons and called for the actual correspondence between the principal and the agents and with other constituents. I have had them examined by the Income‑tax Officer and a copy of the Income‑tax Officer's report dated 21st December, 1954, on the examination of the correspondence has also been furnished to the appellant (vide Annexure B'). Mr. S. B. Shah, C. A., present with H. F. Shah, appellant's representative states that they have nothing further to say in respect of the Income‑tax Officer's report dated 21st December, 1954."
A copy of the letter dated 13th September, 1954, is Annexure B' and forms part of the case. A copy of the report of the Income‑tax Officer dated 21st December, 1954, is Annexure C' and forms part of the case.
5. Soho House was treated by the Income‑tax Officer as the statutory agent of the non‑resident company for the assessment years 1950‑51 and 1951‑52.
6. We reproduce a statement of sales on which commission was received by the agent during the years of account relevant to the assessment years 1950‑51 and 1951‑52.
| Year | Total Sales | Orders booked through us | Order placed directly | Orders through shipping houses | Total sales in India |
| 1 | 2 | 3 | 4 | 5 | 6 |
|
| Rs. a.p. | Rs. a.p. | Rs. a.p. | Rs. a.p. | Rs. a.p. |
| 1950-51 | 2,78,809 9 6 | 39,568 3 0 | 3,066 3 0 | 1,33,035 13 0 | 1,75,670 3 9 |
| 1951-52 | 3,70,624 12 6 | 18,630 9 9 | 9,109 14 6 | 3,04,223 1 6 | 3,31,963 10 2 |
| Year | Orders booked through us | Order placed directly | Orders through shipping houses | Total sales in India |
|
| 7 | 8 | 9 | 10 |
|
| Rs. a. p. | Rs. a. p. | Rs. a. p. | Rs. a.p. |
| 1950-51 | 10,560 1 0 | 801, 6 1 | 91,777 11 0 | 1,03,139 3 6 |
| 1951-52 | 3,696 2 6 | 3,383 2 0 | 31,581 13 0 | 38,661 1 9 |
These figures given in the statement have not been verified, but will be verified, if necessary.
7. The Income‑tax Officer estimated the non‑resident com pany's "deemed" income under section 4 2 of the Act at 5% of the sales in India, Burma and Ceylon. The Appellate Assistant Commissioner agreed with the Income‑tax Officer.
8. Three contentions were raised before the Appellate Tribunal. They were as follows: (1) The non‑resident company had no business connection in the taxable territories. (2)‑ The sales of the goods manufactured by the non‑resident company effected in Burma and Ceylon should be excluded for the purpose of determining the "deemed income under section 42 of the Act. (3) The agent should be taxed only in respect of the deemed income of the non‑resident company arising out of the orders booked by the non‑resident company through the agent.
9. These contentions were not accepted by the Appellate Tribunal, but it reduced the rate of 5% adopted by the Income‑tax Officer and confirmed by the Appellate Assistant Commissioner to 22%. A copy of the Tribunal's order for the assessment year 1950‑51 is Annexure D' and forms part of the case.
10. Whether or not the non‑resident company had a business connection in the taxable territories is a question of fact and degree and all questions of fact and degrees are questions of fact. No question of law, therefore, arises out of the Tribunal's finding that the non‑resident company had a business connection in the taxable territories. Inasmuch as, however, a case is being stated to the High Court, we shall also refer the question relating to business connection.
11. The questions of law that, therefore, arise are:
(1) Whether there was material on the record on the basis of which the Tribunal could have come to the conclusion that the non‑resident company had a business connection in the taxable territories in the years of account relevant for the assessment years 1950‑51 and 1951‑52
(2) Whether in computing the deemed income of the non resident company under section 42 of the Act are the profits of the non‑resident company relatable to the sales effected in Burma and Ceylon to be excluded
(3) Whether Soho House was assessable under section 42 read with section 43 of the Act in respect of the income of the non resident company not only on the sales made by it through Soho House, but also sales pursuant to the orders placed by the purcha sers, either directly or through shipping houses in London
N. A. Palkhivala for the Assessee.
Advocate‑General for the Commissioner.
‑The assessees were appointed agents of S. & D. Rivet Co. by an agreement, dated 3rd March, 1952, and under this agreement the principal company was to pay to the assesses a commission of 5 percent. calculated on the net amount of cash received by the company in payment of all orders accepted by the company and delivered to the agency territory. It is not disputed that the agency territory comprised India, Burma and Ceylon. The Income‑tax Department held the assessees to be the statutory agents of the principal company, and in respect of the sales of the company effected in India they allocated a portion of the profits as arising here, brought those profits to tax, and called upon the statutory agents to pay the tax, and it is with regard to this claim of the Department that three questions arise on this reference.
The first question is : ‑ Whether there was material on the record on the basis of which the Tribunal could have come to the conclusion that the non‑resident company had a business connection in the taxable territories in the years of account relevant for the assessment years 1950‑51 and 1951‑52 On the facts before us, nothing could be clearer than that there was a definite business connection in the taxable territories. The profit earned by the company was the result of the business connection in this country and the assessees embodied, if one might so put it, that business connection by acting as the sole selling agents of the company and helping the company to earn profits. The first question really has not been seriously pressed by Mr. Palkhivala.
The second question is : Whether in computing the deemed income of the non‑resident company under section 42 of the Act, are the profits of the non‑resident company relatable to the sales effected in Burma and Ceylon to be excluded This question can only be decided on the consideration of the aspect of the matter which relates to the business connection with India. It is true that if there was no business connection with regard to the earning of the profits in Ceylon and Burma, then the non‑resident company would not be liable, but if there was a business connec tion in this country then wherever the profits might have accrued, so long as the statutory agent was in India against whom the Taxing Department could go, then the non‑resident company would be liable to pay for the profits earned in countries outside India through its statutory agent. Again, the record makes it quite clear that the company succeeded in earning profits out of its business in Ceylon and Burma through the work done by the assessees in India. The assessees used to send their represen tatives to Burma and to Ceylon and copies of invoices of goods sent to the constituents concerned and copies of acknowledgment letters by S. & D. Rivet Co. were being sent to the assessees. The assessees also advised the company with regard to the credit worthiness of the parties concerned and whether, goods could be supplied to them on a letter of credit basis. The assessees were also asked by the company to contact the parties concerned and get the relevant information regarding prices, etc. Therefore, with regard to this aspect of the work the assessees acted precisely in the same manner, whether the orders were from India or from Burma or from Ceylon. Therefore, in our opinion, a clear business connection is established with regard to the orders placed from Burma and Ceylon and the non‑resident company is liable with regard to the income earned in Burma and Ceylon.
The third question is with regard to certain orders which were placed directly or through shipping agents. The record shows that the orders placed with the company fell into three classes: orders which were placed through, the assessees as the agents of the company, orders which were placed directly with the company, and orders which were placed through shipping agents; and Mr. Palkhivala's contention is that the non‑resident company is liable to pay tax through the assessees only in respect of orders placed through them and not in respect of orders falling under the other two categories. Now, the overriding fact in this case is that the assessees received 5 percent. commission with regard to all orders, in whichever category they felt, and obviously the assessees were interested in seeing that a large member of orders were placed with the company so that their commission should aggregate to a large amount. Therefore, as far as the interest of the assessees was concerned, it made no difference whether the orders were through them or through the shipping agents or direct, and the record also shows that the assessees carried out important obligations with regard to customers who placed their orders direct or through the shipping agents. Even where indents were placed through shipping agents by parties in India, copies of invoices were sent to the assessees for record purposes and the assessees were always apprised of the sales effected directly or through shipping agents and the assassees were also consulted regarding the credit‑worthiness of the parties concerned and were also asked to contact the parties concerned. When we have, as we do have here; a single agency where no distinction is made with regard to earning of the commission by the agent, with regard to the nature of the orders placed, then it is difficult, if not impossible, to say that the agent did less work or more work with regard to one class of orders than with regard to another. There fore, in our opinion, the position in law is the same, whether the orders were placed through shipping agents or were placed direct.
In the result we answer question (1) in the affirmative, question (2) in the negative, and question (3) in the affirmative. .
The assessee to pay the costs.
Questions answered accordingly.
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