1999 (6) TMI 5 - HC - Income Tax

Summary

Issues:
1. Determination of business connection between an Indian company and a non-resident foreign company.
2. Assessment of whether an Indian company can be regarded as an agent of a non-resident foreign company under section 163 of the Income-tax Act.

Issue 1: Determination of Business Connection:

The case involved assessing the existence of a business connection between an Indian company and a non-resident foreign company. The Indian company, engaged in purchasing machinery from the foreign company, was alleged to have a business connection leading to tax liability. The Income-tax Officer contended that the Indian company acted as an agent of the foreign company under section 163 of the Income-tax Act due to the business connection between them. However, the Tribunal, following precedent, held that there was no business connection. The Tribunal emphasized that the deputation of foreign experts for supervision was merely incidental to the contract and not indicative of a business connection. The judgment referenced previous cases to support this interpretation. The court agreed with the Tribunal's view, concluding that the deputation of personnel was incidental to the sale agreement and did not establish a business connection, aligning with the precedent set in CIT v. Hindustan Shipyard Ltd. [1977] 109 ITR 158(AP).

Issue 2: Assessment of Agency Relationship:

The second issue revolved around whether the Indian company could be considered an agent of the non-resident foreign company under section 163 of the Income-tax Act. The Revenue relied on a previous judgment where the court found a business connection based on the control and authority shared between the companies. However, the court distinguished this case from the present situation. In the cited case, separate payments were made for machinery supply and consultation services, indicating a business connection. In contrast, in the current case, the payments were solely for the sale of machinery, with the deputation of personnel being incidental to the contract. The court highlighted that the personnel's role was supervisory, not operational, and their expenses were borne by the foreign company. Consequently, the court concluded that the Indian company did not act as an agent of the foreign company, as the deputation of personnel was ancillary to the sale agreement and did not establish a business connection as per section 163 of the Income-tax Act.

In summary, the court ruled in favor of the assessee-company, holding that there was no business connection between the Indian company and the non-resident foreign company. The judgment emphasized that the deputation of foreign personnel for supervision was incidental to the sale agreement and did not establish an agency relationship or a business connection under the Income-tax Act. The decision aligned with established precedent and highlighted the importance of distinguishing between incidental activities and substantive business connections in determining tax liability.