1980 (5) TMI 17 - HC - Income Tax

Summary

Issues Involved:
1. Business connection between the Indian company and the non-resident foreign company within the meaning of section 9 of the Income-tax Act, 1961.
2. Taxability of the receipts of the non-resident foreign company in India.
3. Assessment of the Indian company as an agent of the foreign company.

Summary:

Issue 1: Business Connection u/s 9 of the Income-tax Act, 1961
The court examined whether there was a business connection between the Indian company and the non-resident foreign company within the meaning of section 9 of the Income-tax Act, 1961. The agreement between the Indian company and the German company involved the supply of equipment, technical coordination, and supervision of erection. The court noted that the term "business connection" involves a relation between a business carried on by a non-resident and some activity in the taxable territories contributing to the earning of profits or gains. The court referred to the Supreme Court's observations in CIT v. R. D. Aggarwal and Co. [1965] 56 ITR 20, emphasizing the need for a real and intimate relation between trading activities outside and within the taxable territories.

Issue 2: Taxability of Receipts
The court analyzed the agreement's terms and concluded that the foreign company's activities, such as the sale of machinery and supply of spare parts, were completed outside India on f.o.b. terms. Therefore, there were no operations in India that could establish a business connection or liability to tax. The court referred to several cases, including Carborandum Co. v. CIT [1977] 108 ITR 335 and CIT v. Gulf Oil (Great Britain) Ltd. [1977] 108 ITR 874 (Bom), to support the principle that transactions on a principal-to-principal basis do not constitute a business connection.

Issue 3: Assessment of Indian Company as Agent
The court clarified that the Indian company was assessed in a representative capacity as the agent of the foreign company. The Tribunal's confusion in identifying the assessee was highlighted, and the court emphasized that the Indian company was not liable for tax on its purchases but acted as a representative assessee for the foreign company. The court reiterated that the foreign company's operations in India were limited to deputing personnel for supervision, who were treated as employees of the Indian company, and thus did not constitute a business connection.

Conclusion:
The court concluded that there were no operations in India attributable to the foreign company that could give rise to any profits being earned in India. The assessments for the years under consideration were rightly set aside by the AAC and the Tribunal. The question referred was answered in the negative and in favor of the assessee, with the assessee entitled to costs.