1972 (9) TMI 46 - HC - Income Tax

Summary

Issues Involved:
1. Whether the Indian company had any business connections with Group A and Group B companies under section 42(1) of the Indian Income Tax Act, 1922.
2. Whether any part of the operations of such business was carried out in the taxable territories, making the non-residents' incomes reasonably attributable under section 42(3) of the Indian Income Tax Act, 1922.
3. Whether the Indian company was correctly treated as an agent of the non-resident companies under section 163 of the Income-tax Act, 1961.
4. Whether any profit could be deemed to accrue or arise in India to the non-resident companies in respect of the goods sold by them to customers in India.

Detailed Analysis:

Issue 1: Business Connections with Group A and Group B Companies

The Tribunal concluded that the Indian company had business connections with both Group A and Group B companies. The Indian company had an agreement with T.I. Export Ltd. (Export Company) but no direct agreement with Group A companies. Despite this, the Tribunal found that there existed a business connection due to the dealings facilitated by the Export Company. For Group B companies, the Indian company had direct agreements.

The Tribunal's findings were challenged by the assessee, who argued that there was no privity of contract with Group A companies and that it merely canvassed orders in India. For Group B companies, the assessee contended it acted solely as a canvassing agent without authority to accept offers or bind the companies legally.

Issue 2: Operations in Taxable Territories

The Tribunal found that part of the operations were carried out in India, invoking section 42(3) of the 1922 Act, which corresponds to Explanation (a) to section 9(1)(i) of the 1961 Act. The assessee argued that all significant operations, including procurement of raw materials, manufacture, and acceptance of orders, took place outside India. The Department, represented by Mr. Balai Pal, contended that the Indian company was not a mere canvassing agent but had significant authority and involvement in the business operations.

Issue 3: Agency under Section 163 of the 1961 Act

The Tribunal treated the Indian company as an agent of the non-resident companies under section 163 of the 1961 Act. The assessee argued against this, stating it had no authority to accept offers or bind the non-residents. The Department argued that the Indian company was the sole authorized agent with the power to enter into contracts, thus establishing an agency relationship.

Issue 4: Profits Deemed to Accrue in India

The Tribunal held that profits could be deemed to accrue or arise in India for both Group A and Group B companies. The assessee contested this, arguing that all contracts were finalized and accepted outside India, and no income was received or accrued in India. The Department maintained that the Indian company's activities facilitated the business operations, thus contributing to the income generation.

Conclusion:

Upon reviewing the facts and the Tribunal's findings, the High Court concluded:

- The Indian company had no business connections with the non-resident companies in Group A or Group B within the meaning of section 42 of the 1922 Act and section 9 of the 1961 Act.
- The Indian company did not have the authority to accept offers or enter into binding contracts on behalf of the non-resident companies.
- The Indian company's role was limited to canvassing orders, which were accepted by the non-residents outside India.
- The Tribunal's findings on the existence of business connections and the attribution of profits to operations in India were incorrect.

Therefore, the High Court answered questions Nos. 1, 3, and 5 in the negative, concluding that the Indian company was not correctly treated as an agent under section 163 of the 1961 Act, and no profits could be deemed to accrue or arise in India. Consequently, questions Nos. 2, 4, and 6 did not arise for consideration. Each party was ordered to bear its own costs.