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TMI Blog1975 (8) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... n the United Kingdom, which for the sake of convenience will be hereinafter referred to as " non-resident company ". It has a wholly owned subsidiary company called Gulf Oil (India) Private Ltd. incorporated in India in or about 1922. It appears that prior to 1922 the products of the assessee were being sold in India to a firm. After 1922 the petroleum products dealt with by the assessee were being sold by the Indian subsidiary company. The modus operandi of effecting sale of their petroleum products may be described thus : The non-resident company received indents from time to time for the supply of the products from the Indian subsidiary company. The Indian subsidiary company has its own branches in India with its head office in Bombay. The requirements of the branches are set out in the form of orders and are sent through the head office to the non-resident company. The non-resident company accepted these orders along with those relating to the head office also in London and executed those orders thus : The goods were shipped from Great Britain and the relevant bills of lading were taken in the name of the Indian subsidiary company. The insurance was effected by the non-resident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia, that is, in taxable territories to which profits could be attributed under section 42(1) of the Act. The Income-tax Officer also laid considerable emphasis on the fact that the facility provided for the sale of the goods by the U.K. company in India was by formation of 100% subsidiary which controlled and promoted the sales of the goods of the parent company, and that it thus suggested that there were operations pertaining to the transactions in question in India. For the assessment years 1947-48 and 1948-49 the Income-tax Officer took the view that 10% would be the profit earned by the non-resident on the sales to the Indian subsidiary and that out of this 10%, 75% could be attributed to the operations in India. In other words, he took the view that 7 1/2% of the total profits as being attributable to the operations in India and brought to tax the relevant amounts for the said years. For the assessment years 1949-50 and subsequent years, he took the proportionate profits as assessed in U. K. and applied 75% thereto as profits attributable to India. Against the orders of the Income-tax Officer the assessee preferred appeals before the Appellate Assistant Commissioner for sever ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ears under consideration. Against these orders the assessee preferred second appeals to the Tribunal. In these appeals it was contended on behalf of the assessee that there were no operations whatsoever in India and as such no amount could be taxed. It was pointed out that the Appellate Assistant Commissioner had taken into account items such as canvassing of the orders done by the Indian subsidiary company and the contracts of sales between the non-resident and the Indian subsidiary company as having taken place not wholly abroad, but for the purpose of section 42(3) the operations relevant were only those which could have, resulted in profit to the assessee and that such of the operations pertaining to the transactions which had been undertaken by the Indian subsidiary in the course of its own business, on the profit of which it had suffered taxation, were irrelevant. The Tribunal recorded the following findings in the matter on a consideration of rival submissions that were put forward by counsel on either side : (a) That the non-resident company has business connection in India as a result of its dealings through its Indian subsidiary company within the meaning of section 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l have to be considered qua the transactions put through the Indian subsidiary for the relevant assessment years and unless the transactions are regarded as between principal and principal, the provisions of section 42(3) would be attracted, especially in view of the fact that the Indian subsidiary company was a 100 per cent. subsidiary of the non-resident company. However, Mr. Joshi was fair enough to invite our attention to a circular bearing No. 23 of 1969, dated July 23, 1969, issued by the Central Board of Direct Taxes where certain clarifications have been issued by the Board on the scope of provisions of section 42 (section 9 of the Income-tax Act, 1961), and their applicability in certain types of cases and he fairly conceded that the question raised in the instant reference may have to be considered having regard to the guidelines or clarifications that have been issued by the Board in the said circular. Paragraph 2 of the circular runs thus : " 2. The expression ' business connection ' admits of no precise definition. The import and connotation of this expression have been explained by the Supreme Court in their judgment in Commissioner of Income-tax v. R. D. Aggarwal a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness connection ' arising out of the parent-subsidiary relationship will not give rise to an assessment, nor will the fact that the parent company might exercise control over the affairs of the subsidiary. " Under item (ii) above, the Board has clarified that where a non-resident parent company sells goods to its Indian subsidiary, the income from the transaction will not be deemed to accrue or arise in India under section 9, provided three conditions are satisfied : (i) the contracts to sell are made outside India which on the finding of the Tribunal has been found in the instant case in favour of the non-resident company ; (ii) the sales are made on a principal-to-principal basis and at arm's length-an aspect on which Mr. Joshi wanted us to consider the matter in the light of the facts and circumstances of the case ; and (iii) the subsidiary does not act as an agent of the parent--again an aspect which will have to be considered in view of the facts and circumstances obtained in the instant case. There is no doubt that the Indian subsidiary is a hundred per cent. subsidiary of the non-resident, but the Tribunal has found as a fact that all the contracts regarding the sal ..... 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