1974 (12) TMI 1 - HC - Income Tax

Summary

Issues Involved:
1. Taxation of managing agency commission
2. Jurisdiction of income accrual and taxation
3. Interpretation of Double Taxation Avoidance Agreement

Detailed Analysis:

1. Taxation of Managing Agency Commission:
The primary issue revolves around the taxation of the managing agency commission earned by the assessee, a private limited company, from Sutlej Cotton Mills Ltd., a company with its factory in Pakistan but registered in India. The Income-tax Officer in India taxed 50% of the commission based on the "Two-man Committee Report" and the "Avoidance of Double Taxation Agreement" with Pakistan. However, the Pakistan tax authorities later taxed 100% of the commission, following the Supreme Court of Pakistan's decision in Octavious Steel & Co. Ltd. v. Commissioner of Income-tax, Dacca, which held that the entire managing agency remuneration accrued in Pakistan and was taxable there.

2. Jurisdiction of Income Accrual and Taxation:
The Tribunal found that the factory operations and sales of Sutlej Cotton Mills Ltd. were entirely conducted in Pakistan, and thus, the income from the managing agency commission accrued in Pakistan. The Tribunal applied Article 9 of the Schedule to the Double Taxation Avoidance Agreement between India and Pakistan, concluding that the Indian authorities were not justified in taxing 50% of the commission. The Tribunal's decision was based on the principle that income accrues where the business operations generating the income are conducted.

3. Interpretation of Double Taxation Avoidance Agreement:
The Tribunal and the High Court referred to the Double Taxation Avoidance Agreement between India and Pakistan, particularly Articles IV and IX, which state that income is taxable in the country where it actually arises or accrues. The "Two-man Committee Report" suggested a 50-50 allocation of managing agency commission between the two countries, but this was not legally binding. The High Court noted that there was no legal provision or agreement between the Central Boards of Revenue of India and Pakistan to enforce this allocation. The Court emphasized that the Supreme Court of Pakistan's decision, which taxed 100% of the commission in Pakistan, took precedence.

Conclusion:
The High Court affirmed the Tribunal's decision, holding that the Income-tax Officer in India was not justified in including 50% of the managing agency commission in the assessee's income. The Court concluded that the income from the managing agency commission accrued entirely in Pakistan, where the business operations were conducted, and thus was taxable there. The question referred to the Court was answered in the affirmative and in favor of the assessee, with each party bearing its own costs.