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TMI Blog1968 (12) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... with the assessee under which the assessee undertook to study and advise VEM on the possibility of acquisition of iron and manganese ore mines in India and to supervise the execution of contracts concluded by VEM with the Indian exporters of ores as to quantity, quality, time of delivery and transport until f.o.b. steamer. This arrangement was to continue for a year from the beginning of 1st of July, 1952, and VEM was to pay the assessee pounds 112-10-0 per month by way of reimbursement of costs incurred by them on the exploration for acquisition of ore mines in India and a special remuneration to be mutually, agreed upon between the parties from time to time on the basis of tonnage actually shipped and paid for, with regard to its advice and supervision of the contracts already entered into or to be entered into by VEM with the Indian exporters. Although the arrangement was for one year, it continued subsequently in respect of the advice to be given by the assessee to V.E.M. about the contract for the supply of ores already concluded and to be concluded thereafter and for the correct execution of those contracts, and remuneration was paid by VEM to the assessee in the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s read with section 34 ". In the assessment proceedings he held that the assessee could be treated as agent of VEM and the income of the latter under section 42 could be taxed in the hands of the assessee. According to the Income-tax Officer, in respect of the procurement of the ore from India in the course of its business activity it had a business connection in India and profits or gains apportion able to the purchasing activity in India could be said to have arisen or accrued to VEM from the said business connection. The V.E.M.'s business connection in India was with the assessee and consequently in respect of the income, profits and gains which could be deemed to have accrued or arisen from the said business connection under section 42 could be assessed in the hands of the assessee as the agent of VEM under section 43. The Income-tax Officer accordingly estimated the total profits of VEM on the goods imported from India at 10% of their export price and the profit apportionable to the business connection in India which pertained to the procurement in India as 1/4 thereof. The Income-tax Officer's order was confirmed in appeal by the Appellate Assistant Commissioner. In further a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppers as given above, VEM was liable to tax under section 42 ? 2. If the answer to question No. 1 is in the affirmative, whether having regard to the memorandum dated 23-5-1952 and the services rendered by the assessee, the assessee was liable to be treated as an agent under section 43 of VEM, the non-resident, and if so, to what extent ? 3. Whether the issue and service of notice under section 43, after the relevant notices under section 22(2) were served, invalidated the assessments for 1957-58 and 1958-59 ? 4. Whether the assessment for 1954-55 is invalid because the assessee was given an opportunity to place the objection to the application of section 43 after the notice under section 22(2) read with section 43 was served on the assessee? " The question, which was refused by the Tribunal, was in these terms: " Whether the assessment upon the applicant as an agent of the non-resident, VEM, for the assessment year 1954-55 is barred by limitation and otherwise valid in law ? " The Tribunal's reason for refusing the question was that the contention that the assessment for the said year was barred by limitation was neither raised before the Tribunal nor before the departmental ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplication and consequently having been the subject-matter of the other reference, the notice of motion would not survive. In view of these facts, the notice of motion must be dismissed. We order accordingly. Coming now to the first two questions, which may conveniently be considered together, the main questions to be considered are whether the connection, which the assessee had with VEM, constituted a business connection of VEM so as to enable the Income-tax Officer to regard the assessee as the deemed agent of VEM for the purpose of section 43 assessment and whether through such business connection as VEM may be having with the assessee, could any part of the profits or gains of VEM in its trading activity be deemed to have arisen or accrued to VEM ? It is the contention of Mr. Mehta that it may be that VEM had some connection with the assessee. It may also be that the nature of the connection may be commercial connection in the sense that it may have something to do with the commercial activity of VEM. That, however, would not constitute it a business connection unless the connection was with, the business activity as such of VEM. Mr. Mehta's contention is that the connection o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rded as a business connection. Business connection may take several forms : it may include carrying on a part of the main business or activity incidental to the main business of the non-resident through an agent, or it may merely be a relation between the business of the non-resident and the activity in the taxable territories, which facilitates or assists the carrying on of that business. In such cases the question whether there is business connection from or through which income, profits or gains arise or accrue to a non-resident must be determined upon the facts and circumstances of the case. The expression ' business connection ' postulates a real and intimate relation between the trading activity carried on outside the taxable territories and the trading activity within the territories, the relation between the two contributing to the earning of income by the non-resident in his trading activity. " It would thus be seen that in order to constitute a "business connection " as contemplated by section 42, there must be an activity of the nonresident in the taxable territories having an intimate and real relation of a continuous character with the business of the non-resident and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accepted, no business resulted from the activity. Although, therefore, there was some commercial activity on the part of the assessee, which was not altogether unconnected with the trading activity of the non-resident, it had not a real and intimate connection with the trading activity of the non-resident. Mr. Mehta has relied strongly on this case and has argued that the present case before us falls in the line of this case. He has pointed out that in the present case before us also no direct part was taken by the assessee in the purchase of the raw materials by the non-resident in the taxable territories. The contracts for the supply of raw materials were entered into directly between the non-resident and the Indian exporters, the goods were shipped by the exporters and the price was also paid direct to the exporters. Just as in the case before the Supreme Court, the assessee had merely canvassed for orders and forwarded them to the non-resident and had thus merely rendered some service in connection with the trading activity without the service being actually connected with any part of the trading activity as such, the assessee in the present case also has performed only certai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rely consist of advising the non-resident as to the advisability of entering into contract with certain Indian exporters, it went much further and concerned itself with the activity of procuring raw materials itself. The assessee's part corresponded to an organisation set up by the non-resident in the taxable territories for the purpose of ensuring a regular and proper supply of the raw materials. Although the contracts for the supply of ore were entered into directly with the exporters and price was also paid to them directly, due and proper performance of the contracts, which was an important part of the activity of the procurement of the raw material, was entrusted to the assessee. The part played by the assessee in the activity of procurement of raw material was a real and intimate part, which was contributing to the improvement of the profits of the non-resident and preventing its losses. The non-resident, for the purpose of its business activity, was very much interested in procuring ore from Indian exporters in a steady, regular and proper manner. Its experience with the Indian exporters was not satisfactory and in the interest of its business it was anxious to see that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om a business connection in British India within the meaning of section 42 of the Income-tax Act. In our opinion, this case is entirely of a different kind from the one before us. In that case the income, which was the commission earned by the nonresident, did not arise out of any activity within British India but out of the activity, which was solely performed outside the taxable territories. There was no activity in British India which had contributed to the earning of the said income. The learned judges observed as follows: " There is no warrant for holding that purchase and supply of raw material to a resident manufacturer by a non-resident would render the commission earned by the latter liable to tax under section 42(1) in the absence of anything to show that there was any course of dealing between the resident and the non-resident or that the commission earned by the non-resident was made to depend on business done in British India. The commission paid to the non-resident had reference solely to the purchases made outside British India and was in no way affected by the business done in British India. The principle is clear that something more than mere rendering of services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he business activity of the non-resident. We do not know whether its business activity consisted of merely purchasing of ore in markets ; whether it could profitably purchase and sell it in other markets, where it could be sold at a profit, or whether the ore procured by it from the taxable territories was for the purpose of manufacture of goods and the manufacture and the sale of the finished goods were also parts of its business activity. We also do not know the entire extent of the business of the non-resident. If the assessee had supplied proper material before the income-tax authorities on the basis of which a more definite and certain apportionment could have been made, the position would have been different. On the material, as it stands, we cannot say that the Income-tax Officer has erred in making his calculations. Coming then to the third (sic) question, the only argument urged before the Tribunal was that in respect of the assessment for the assessment year 1954-55, although the notice under section 43 was issued on the 20th March, 1957, and a notice under section 22 was issued five days later on the 25th March, 1957, no opportunity had been given to the assessee to sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at him as the agent of the non-resident that he could be deemed to be such an agent. In other words, unless the notice is served, the person could not be deemed to be an agent under section 43 and unless he could be deemed to be an agent, no proceeding can be initiated for making an assessment on him. It is, therefore, argued that the service of a notice under section 43 is a condition precedent to the initiation of an assessment proceeding against an agent under section 43 of the Indian Income-tax Act. We do not think that the contention raised by Mr. Mehta is sustainable. Having regard to the scheme of sections 42 and 43, if the requirements of section 42 are satisfied, a deemed income accrues or arises to the non-resident in the taxable territories and becomes taxable under the Indian Income-tax Act. Section 43 is a section for facilitating the assessment of such deemed income by making it assessable in the hands of a deemed agent. A deemed agent of the non-resident is a person, who has such relation with the non-resident as is specified in the section, namely, that he must be employed by or on behalf of the non-resident or he must have a business connection with him or the non ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax Officer cannot be sustained. Moreover, the irregularity pointed out by the assessee is at best a procedural irregularity which, on the facts of the case, has caused no prejudice to the assessee. It may also be pointed out that no grievance as to this procedural irregularity had been made by the assessee before the Income-tax Officer. For all these reasons, we are of the opinion that the Tribunal was right in taking the view that the assessments for the assessment years 1957-58 and 1958-59 were not invalidated, as contended by the assessee. In the result, therefore, our answer to the questions arising on Income-tax Reference No. 67 of 1962 are as follows: Question No. 1 in the affirmative. Question No. 2: first part, in the affirmative, and the second part, to the extent found by the Income-tax Officer. Questions Nos. 3 and 4 in the negative. We then come to the companion Reference No. 102 of 1968 relating to the correctness of the rectification of the assessment order for the assessment year 1954-55 under section 154 of the Indian Income-tax Act. We have already mentioned the facts relating to the said question, which is as, follows : " Whether, on the facts and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax Officer's order, which has merged in the order of the Appellate Assistant Commissioner and the Tribunal is only to that extent to which it was taken in appeals before the said authorities. In view of the observations of the Supreme Court in State of Madras v. Madurai Mills Co. Ltd., which are reproduced in the order of the Appellate Tribunal, Mr. Joshi, learned counsel for the revenue, has fairly conceded that he will not be able to rely strongly on the merger argument and has consequently not seriously pressed the said point before us. On the other point, however, he has urged that section 154 having spoken merely of an amendment of the order, the scope of the jurisdiction of the Income-tax Officer under the said section is limited and cannot extend to the cancellation of the whole order. We are not prepared to agree with the said submission. The power intended to be given under section 154 is to rectify an error apparent on the face of the record. Amendment of the order is the consequence of the rectification and its purpose is to give effect to the rectification. If the rectification involves an amendment, which will affect the whole of the order, it cannot be said that sim ..... X X X X Extracts X X X X X X X X Extracts X X X X
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