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Issues Involved:
1. Whether the assessee-company derived any income from business connection in India chargeable to tax u/s 42 of the Indian Income-tax Act, 1922. Summary: Issue 1: Business Connection in India The Tribunal referred the question of whether the assessee-company, a non-resident company, derived any income from business connection in India chargeable to tax u/s 42 of the Indian Income-tax Act, 1922. The assessee, a UK-incorporated company dealing in petroleum products, sold its products to its wholly-owned Indian subsidiary, Gulf Oil (India) Private Ltd. The modus operandi involved the Indian subsidiary placing orders, which were accepted and executed by the non-resident company in the UK. The goods were shipped from Great Britain, and the Indian subsidiary cleared and sold them in India. Issue 2: Income Accruing in India The Income-tax Officer held that the Indian subsidiary was the sales organization of the non-resident company, establishing a business connection in India. He attributed 75% of the profits to operations in India and taxed the non-resident company accordingly. The Appellate Assistant Commissioner upheld this view, noting that several operations, such as canvassing orders and securing import/export quotas, took place in India. Issue 3: Tribunal's Findings The Tribunal found that: (a) The non-resident company had a business connection in India. (b) Canvassing of orders by the Indian subsidiary was on its own account and irrelevant for u/s 42(3). (c) Contracts were concluded in the UK. (d) Goods were unconditionally appropriated to the contract on shipment. (e) The Indian subsidiary carried on its own business, with no operations in India attributable to the non-resident company's profits. Issue 4: Revenue's Contention The Revenue argued that the transactions should be considered as between principal and agent, not principal-to-principal, given the 100% ownership of the Indian subsidiary by the non-resident company. They cited a circular by the Central Board of Direct Taxes (CBDT) which clarified that if transactions are on a principal-to-principal basis and at arm's length, the mere existence of a business connection does not warrant assessment u/s 42. Issue 5: Court's Conclusion The Court concluded that the transactions between the non-resident company and the Indian subsidiary were indeed on a principal-to-principal basis. The Indian subsidiary was taxed on its own profits, indicating it operated independently and not as an agent of the non-resident company. Therefore, the provisions of u/s 42(3) were not applicable. Final Judgment The question was answered in the negative, in favor of the assessee. The Revenue was ordered to pay the costs of the reference to the assessee.
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