1982 (12) TMI 58 - AT - Income Tax

Summary

Issues Involved:
1. Principal to Principal Basis
2. Agency Relationship
3. Business Connection
4. Business Operations in India
5. Apportionment of Income

Issue-Wise Detailed Analysis:

1. Principal to Principal Basis:
The first issue is whether the dealings between the US Co. and the Indian Co. are on a principal-to-principal basis. The agreement of 1931 describes the Indian Co. as a dealer, which should sell goods at listed prices only. The purchase order from the Indian customer lists the price in dollars, and the Indian Co. refers to the US Co. as the principal. The Indian Co. places orders with the US Co. only after receiving orders from Indian buyers. The US Co. ships goods directly to the Indian consumer, and the property in the goods passes directly from the US Co. to the Indian consumer in the USA. The Tribunal found that the Indian Co. does not act as an independent buyer but rather as an agent of the US Co., as it cannot sell at any price it likes and does not stock goods due to import license restrictions.

2. Agency Relationship:
The Tribunal considered several tests to determine the agency relationship, including privity of contract and the passing of title to the goods. The Indian Co. acts on behalf of the US Co., and the Indian consumer treats the Indian Co. as an agent of the US Co. The correspondence and terms of payment indicate that the Indian Co. is not acting independently but as an agent. The Tribunal concluded that the Indian Co. is the agent of the US Co., as the transactions are not independent but interconnected, with the Indian Co. facilitating the sale on behalf of the US Co.

3. Business Connection:
The Tribunal examined whether there is a business connection in India under section 9 of the Income-tax Act. The Indian Co. books orders from Indian customers based on the US Co.'s price list and arranges for 90% of the invoice price to be sent to the USA. These activities are regular and ongoing, indicating a business connection. Unlike the case of CIT v. R. D. Aggarwal & Co., where the agent merely forwarded offers, the Indian Co. books orders and acts on behalf of the US Co., establishing a business connection.

4. Business Operations in India:
The Tribunal found that some business operations are carried out in India, including securing orders and negotiating with Indian buyers. Although the goods are manufactured and the title passes in the USA, the Indian Co.'s activities in India constitute business operations. The Tribunal distinguished this case from Carborandum Co. v. CIT and CIT v. Toshoku Ltd., where the facts were different, and the non-resident's operations were outside India.

5. Apportionment of Income:
The Tribunal referred to a CBDT circular stating that the assessment of income arising from transactions secured through an agent in India should be limited to the profit attributable to the agent's services. The Indian Co. receives a commission of 10%, which represents the value of the profit attributable to its services. As per the circular, if the agent's commission fully represents the value of the profit attributable to his service, it should extinguish the assessment. The Tribunal concluded that the profit attributable to the Indian Co.'s operations would not be more than 10%, and since the Indian Co. gets a commission of 10%, there is no liability for Indian taxation.

Conclusion:
The Tribunal allowed the appeal, concluding that the Indian Co. is an agent of the US Co., there is a business connection and operations in India, but the profit attributable to the Indian Co.'s services is fully represented by the 10% commission, resulting in no liability for Indian taxation.