TMI Blog1979 (2) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... ing carried on, but B.D.H. and A. H. thereafter individually sold the stocks lifted by each of them and each of them accounted for the entire profit earned by it individually thereon. The ITO completed the assessments of both these entities separately for the assessment years 1956-57 to 1961-62, i.e., the years under reference, by including the profits earned by them respectively from sales of Indian insulin. Before doing so, the ITO had called for various particulars including a copy of the said agreement dated 15th December, 1954. Later on, the ITO initiated assessment proceedings against the assessee in this reference in the status of a firm under s. 147(a) of the I.T. Act, 1961. In his view B.D.H. and A. H. had formed themselves into a partnership and the said partnership had carried on the business of manufacturing Indian insulin. According to the ITO, the profit earned by the said firm in the assessment years in question had not been brought to tax. In reply to the notice of the ITO, the assessee first of all protested that there was no entity as suggested by the ITO and filed a return of income showing " Nil " income. Its contention was that the agreement dated 15th D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mutually arranged, it was entirely responsible for its sale and that it was that party and not the other or the supposed joint entity which was concerned with the profit earned or losses made from insulin sold subsequently. In the view of the Tribunal, the activity of manufacturing insulin jointly carried on by the two companies, which was unaccompanied by similar joint activity of sale, could not be said to constitute business and it was neither a business nor an adventure in the nature of business, whatever else it might be. The Tribunal also held in favour of the assessee that the relevant clauses of the agreement failed to disclose the element of mutual agency, which, in the opinion of the Tribunal, was an essential ingredient of a partnership. On that count also the Tribunal upheld the objection of the appellants before it, viz., the assessee. The Tribunal concluded that the joint activity under the agreement consisted of and ended with the production of insulin which was jointly owned and that once insulin was produced and was divided and paid for at actual cost, the joint activity ended at that stage. According to the Tribunal, the activity carried on did not result in any p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovided for accounts to be kept by individual parties relating to manufacture and advertisement of Indian insulin and to any research thereon. We then have cls. 7 and 8 which may be fully extracted : " 7. All expenditure and receipts arising from the manufacture of Indian insulin and its transfer from jointly owned stocks to the individual parties hereto in accordance with this agreement shall be borne by and belong to the parties in equal shares. 8. A H shall pay B.D.H. (India) monthly at the transfer price as defined in clause 11 hereof for all stocks taken from jointly owned stocks during the immediately preceding calendar month : Provided that every such payment shall be subject to adjustment and settlement on the taking and settling of the next half yearly account as hereinafter provided. " These two clauses are followed by cl. 9 which indicates what amounts are to be debited to the joint account. There are certain rights and obligations thereafter provided for in cl. 10, which are not very material. Clause 11, however, is very material, of which sub-cl. (i) may be fully extracted, since counsel for the revenue strongly relied upon the provisions contained therein. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the parties hereto shall be pooled and equally divided between them. " Under cl. 18 the term of agreement is for a period of five years from 1st January, 1954, and it is thereafter to continue from year to year unless and until either party shall give twelve months' notice in writing for determination thereof. According to Mr. Joshi, under this agreement B.D.H. were to manufacture from solid insulin to be procured from the named English concern injectible Indian insulin and both the raw materials and the manufactured product were to be jointly owned by the two parties until it was transferred to the individual accounts of the two parties in mutually agreed proportions at the transfer value provided for under cl. 11 read with cl. 8. In his submission this transfer value was the price at which the insulin manufactured by B.D.H. on the joint account was sold to the individual parties and the difference between this price and the cost of production would be the profit of the partnership. On the other hand, Mr. Palkhivala urged that the transfer value provided for was not a price in the normal business sense but an ad hoc price initially charged from the party lifting the quantiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e considered to be the profit of the so-called partner- ship. It is a business arrangement between the two entities, under which one of them is to carry out the manufacturing programme for both of them and the full cost of that programme is to be covered in the manner as indicated by the various clauses of the agreement earlier set out. Such an activity, in our opinion, does not and cannot result in any profit. Profit would certainly accrue from the sales activity, but the sales activity is to be carried out individually by the two companies and the joint manufacturing programme comes to an end, as rightly observed by the Tribunal, at the stage when the injectible insulin is transferred to the individual accounts of the two parties. Once the essential nature of this arrangement is realised, all other questions become academic and one need not concern oneself with whether the arrangement is a pure business arrangement in the nature of the manufacturing programme undertaken by one party on behalf of itself and another or a joint venture or perhaps even a partnership as the same is known to law. Whatever be the nature of the entity, the arrangement is such that it results in the manuf ..... X X X X Extracts X X X X X X X X Extracts X X X X
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