TMI Blog1975 (4) TMI 9X X X X Extracts X X X X X X X X Extracts X X X X ..... within fifteen days from the date of presentation from the State Bank of India, Visakhapatnam, to the purchasers. The remaining 10 per cent. was agreed to be paid on the expiry of the guarantee period of six months after delivery of the respective vessels. The price agreed to be paid was inclusive of 5 per cent. commission payable to Messrs. S. M. Maneklal Industries Ltd., Bombay, agents of the Polish company. The property in the engines was to pass to the purchasers immediately on delivery on board the vessel named by the forwarding agents of the purchasers at the port of shipment named by the Polish company. The agreement made detailed provisions for inspection, testing and acceptance of the engines. The engines were agreed to be erected by the staff of the purchaser under the supervision of the erector and supervising engineer placed at the disposal of the purchaser by the Polish company. The Polish company agreed to supply an erector and a supervising engineer for a period of 12 months for every ship free of charge. The Polish company also agreed to provide for every ship, free of cost, one guarantee engineer for a period of 6 months on board the ship. Detailed provisions were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsolidated application was made by the Commissioner of Income-tax to the Income-tax Appellate Tribunal to state a case and refer the following questions of law for the decision of the High Court: " (1) Whether, on the facts and in the circumstances of the case, the relationship between the Hindustan Shipyard Ltd. and the non-resident fell within the meaning of section 163(1) of the Income-tax Act, 1961 ? (2) If the answer to the above question is in the affirmative, whether on the facts and in the circumstances of the case, any profits or gains accrued or had arisen to the non-resident on account of the business connection with the Hindustan Shipyard Ltd. during the previous years relevant to the assessment years 1967-68 to 1970-71?" The Tribunal stated a case and referred to us for our decision the following question: "Whether, on the facts and in the circumstances of the case, there was any business connection between the Hindustan Shipyard Ltd. and the non-resident so as to justify the appointment of the former as the agent of the latter under section 163 read with section 160(1)(i) of the Income-tax Act, 1961?" The learned standing counsel for the income-tax departmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the further and other facts necessary for decision by the court or the further or other questions of law arising in the case and requiring a decision by the court. The observations of the Supreme Court are confined only to such defective references. They do not justify adjudication by the court of a question not referred to it by the Tribunal either because the Tribunal was not invited to refer such question or because the Tribunal expressly refused to do so. We do not want, therefore, to express our views on the correctness of the following observations of Mr. Sampath Iyengar at page 1636 of the sixth edition (volume 2) of his commentary on the Income-tax Act : " In respect of section 9(1)(i) incomes, the assessment is made normally on the agent in India of the non-resident. The assessee is the agent himself, and he is made substantively liable to the tax. The principal does not come into the picture vis-a-vis the Income-tax Officer. It is for the agent who is so assessed and pays the tax to settle his accounts with his principal. Such agent is called in the 1961 Act a representative assessee. In respect of other incomes, viz., incomes under section 5(2)(a) and section 5(2)( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oodwill of its business in certain territory in India and as consideration allotted to the foreign company 60,000 fully paid shares in the assessee-company. In fact, the capital of the assessee-company was divided into 60,000 shares only and that meant that all the shares of the assessee-company were held by the foreign company. The Privy Council held that although there was no contractual obligation by which the assessee-company was compelled to purchase any of the manufactures of the company, the flow of business between the two companies was secured by the fact that the ultimate and complete control of the assessee-company was vested in the foreign company which owned all its shares. It was, therefore, held that a "business connection" existed between the assessee-company and the foreign company. In Commissioner of Income-tax v. Currimbhoy Ebrahim Sons Ltd. [l935] 3 ITR 395 (PC) the assessee-company which carried on business in Bombay borrowed a sum of Rs. 50 lakhs from the Nizam of Hyderabad, a non-resident. Interest was agreed to be paid at Hyderabad (at that time outside India). In the year of account the assessee-company paid to the Imperial Bank at Hyderabad to the cred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the place of destination where the merchants concerned took delivery by paying invoiced price to a broker or banker. The Allahabad High Court held that there was no "business connection". Sir Iqbal Ahmed C.J. observed : " The next question is whether there was a 'connection' between the assessee and that business. In one way there was an obvious connection in that the assessee was the maker of the goods which were eventually consumed by British India buyers. But we do not think that it is a connection in such a loose sense as this that is contemplated by section 42(1) of the Indian Income-tax Act. On the facts, as proved, what other 'connection' was there? The assessee had no branch, agency or establishment of its own in British India. We cannot discover any facts upon which it can be held even that the assessee, by an arrangement with British India brokers, had in effect constituted an agency for itself. The brokers were not, as far as we know, retained by the assessee. The assessee had no claim upon the goodwill of the brokers. The fact that the assessee may have paid the brokers a commission and certain out-of-pocket expenses, if and when they brought an offer which the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n-resident company or organisation in British India or by the existence of a factory or even by the existence of an agent. Very often, there may be subsidiary company in British India, subsidiary to the non-resident company, formed with the object of selling the manufactured goods or wares of the non-resident principal. The business connection may be even a connection arising out of financial relations. The non-resident business and the resident business may be two separate legal entities and they may be closely connected or associated either by reason of some common control or by reason of the non-resident company or firm financing the resident company or firm. The goods of a non-resident company may be sold by a broker or commission agent residing in British India or the person resident may render various services to the non-resident or conduct business activities. These are some of the factors which result in a business connection within the meaning of the section." In Anglo-French Textile Company Ltd. v. Commissioner of Income-tax (1953] 23 ITR 101 (SC), the assessee-company, a non-resident company, had appointed an Indian company as its constituted agents for the purpose of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will cease and continuity will come in. Mr. Palkhivala's contention is that in this case the only facts found are that the goods were supplied all in the course of the assessment year and there is no finding that any goods were supplied by the assessee in earlier years, and Mr. Palkhivala says that in order to establish continuity goods must be supplied over a period of time which according to him must mean more than at least a year. It is difficult to understand why there should be no continuity if a large number of orders are given by the principal and executed by the agent, even though those orders are within a period of one year or even within the period of one month. What constitutes continuity is not necessarily the length of time during which the connection has been maintained, but the nature of the connection, and if a large number of orders are given from time to time even within a short period, then that may in a given case constitute the continuity necessary to establish a connection, and that is exactly the position here." In Commissioner of Income-tax v. Bhumraddi [1958] 33 ITR 82 (Bom) the Bombay High Court had to consider the question whether the assessee-firm, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... merchants in Amritsar for purchase of goods from the non-resident companies. The orders were offers which the assessees had no authority to accept on behalf of the non-residents. Some commercial activity was undoubtedly carried on by the assessees in the matter of procuring orders, which resulted in contracts for sale by the non-residents of goods to merchants at Amritsar. But on this account no business connection of the assessees with the non-residents within the taxable territories resulted. The activity of the assessees in procuring orders was not as agents of the non-residents in the matter of sale of goods manufactured by the latter, nor of procuring raw materials in the taxable territories for their manufacturing process. Their activities led to the making of offers by merchants in the taxable territories to purchase goods manufactured by the non-residents which the latter were not obliged to accept. The expression 'business connection' postulates a real and intimate relation between trading activity carried on outside the taxable territories and trading activity within the territories, the relation between the two contributing to the earning of income by the non-resident in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e [1954] 26 ITR 650 (Bom) the resident-assessee purchased goods and supplied them to the non-resident company on a large scale and charged commission. In Carborundum Company's case [1973] 92 ITR 411 (Mad) the foreign company was entitled to be paid a percentage of the net sales of the products manufactured by the Indian company in return for the services rendered by it. These cases illustrate that some commonness of interest in the trading activities inside and outside the taxable territories is of the very essence of "business connection". These cases may be contrasted with the cases failing on the other side of the line. In Currimbhoy Ebrahim's case [1935] 3 ITR 395 (PC), apart from the relationship of creditor and debtor, the non-resident creditor had no interest, direct or indirect, in the resident debtor. Visalakshi Achi's [1937] 5 ITR 448 (Rang) [FB] was a similar case. In the case of Hira Mills Ltd. [1946] 14 ITR 417 (All) the assessee sold goods through brokers who were not his employees and who did not canvass orders exclusively for him. The brokers merely passed on the orders to the non-resident-company and did not involve themselves in the sale. In Bhumraddi's case [1958 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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