http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 6  

PETITIONER: COMMISSIONER OF INCOME-TAX, ANDHRA PRADESH HYDERABAD

       Vs.

RESPONDENT: TOSHOKU LTD., GUNTUR ETC.

DATE OF JUDGMENT29/08/1980

BENCH: VENKATARAMIAH, E.S. (J) BENCH: VENKATARAMIAH, E.S. (J) BHAGWATI, P.N.

CITATION:  1981 AIR  148            1981 SCR  (1) 587

ACT:      Commission payable to non-resident foreign agent by the statutory agent-Statutory  agent  making  credit  and  debit entries in  his books  of account under the head "commission account" on receipt of the sale price from the foreign agent and thereafter  on remitting  the commission  amount to  the foreign  agent-Whether  the  commission  amounts  sent  were assessable to  income tax-Sections  5(2), 9(1)(i),  160, 161 and 163  of the  Income Tax  Act,  1961  read  with  Board’s Circular (XXVII-I)  of 1953  No. 26  (II/53) dated  July 17, 1953-Whether the  amounts should be treated as income deemed to have accrued or arisen in India.

HEADNOTE:      Dismissing the  Revenue appeal  by special  leave,  the Court ^      HELD: (1)  The credit  entries made  in the  books of a statutory agent  do not  by themselves  amount to receipt by assessees who  are non-residents  as long  as the amounts so credited in  their favour  are  not  at  their  disposal  or control. [592 F]      The  non-resident   assessees  in   this  case  neither received nor  could be  deemed to  have received the sums in question when  their accounts  with the statutory agent were credited,  since   a  credit   balance  without   more  only represents a  debt and a mere book entry in the debtor’s own books  does   not  constitute   payment  which  will  secure discharge from  the debt. They cannot, therefore, be charged to  tax  on  the  basis  of  receipt  of  income  actual  or constructive in  the taxable territories during the relevant accounting period. [592 F-G]      P. V.  Raghava Reddi  & Anr. v. Commissioner of Income- tax [1962] Supp. 2 S.C.R. 596, distinguished.      (2) Under  clause (a)  of the Explanation to clause (i) of sub-section  (1) of  section 9  of the Income Tax Act. in the case of the business of which all the operations are not carried out  in India,  the income  of the  business  deemed under that  clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried  out in India. If all such operations are carried out  in India,  the entire income accruing therefrom shall be  deemed to  have accrued in India. If, however, all

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 6  

the  operations   are  not   carried  out   in  the  taxable territories, the  profits and  gains of  business deemed  to accrue in  India through  and from  business  connection  in India shall be only such profits and gains as are reasonably attributable to  that part  of the operations carried out in the taxable  territories. If  no operations  of business are carried out  in the taxable territories, it follows that the income accruing  or  arising  abroad  through  or  from  any business connection  in India  cannot be deemed to accrue or arise in India. [593 B-D] 588      In the  instant case the non-resident assessees did not carry on any business operations in the taxable territories. They acted  as selling  agents outside India. The receipt in India of  the sale proceeds of tobacco remitted or caused to be remitted by the purchasers from abroad does not amount to an operation  carried out  by  the  assessees  in  India  as contemplated by  clause (a)  of the  Explanation to  section 9(1)(i) of the Act. The commission amounts which were earned by the  non-resident assessees for services rendered outside India cannot,  therefore, be deemed to be incomes which have either accrued or arisen in India. [593 E-G]      Commissioner of  Income-tax, Punjab v. R. D. Aggarwal & Co. &  Anr. 56  I.T.R. 20 and M/s. Carborandum Co. v. C.I.T. Madras [1977] 3 S.C.R. 475, referred to.

JUDGMENT:      CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 782-783 of 1973.      Appeals by  Special Leave  from the  Judgment and Order dated 18-11-1972  of the  Andhra Pradesh High Court in Cases Referred Nos. 50 and 52 of 1970.      P. A. Francis, K. C. Dua and Miss A. Subhashini for the Appellant.      L. A. Subba Rao for the Respondent.      The Judgment of the Court was delivered by      VENKATARAMIAH, J.-These  two appeals  by Special  Leave are filed  against a common judgment dated November 18, 1971 delivered by  the High  Court  of  Andhra  Pradesh  in  Case Referred Nos. 50 and 52 of 1970.      Sri Bommidala  Kotiratnam (hereinafter  referred to  as ’the statutory  agent’) is  a dealer in tobacco at Guntur in the State  of  Andhra  Pradesh.  During  the  previous  year relevant to the assessment year 1962-63, the statutory agent purchased tobacco  in India  and exported it to Japan, where it was sold through M/s. Toshoku Ltd. (the assessee involved in Civil  Appeal No.  782 of  1973 a  Japanese  Company  and admittedly non-resident.  Under the  terms of  the agreement between the  statutory agent  and the  assessee referred  to above, the latter was appointed the exclusive sales agent in Japan for  selling  tobacco  exported  by  the  former.  The assessee was  entitled to  a commission of 3% of the invoice amount. The  sale price  received on  the sale of tobacco in Japan was remitted wholly to the statutory agent who debited his commission account with the amount of commission payable to the Japanese company and credited the same in the account of the  Japanese company  in his books on December 31, 1961. The amount was remitted to the Japanese company on 589 February 1,  1962 on  which date  an appropriate debit entry was made  in the  account of  the Japanese  company with the statutory agent.      The statutory  agent had  similarly sold  some  tobacco

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 6  

during the  same  accounting  period  through  another  non- resident  business  house  by  name  ’M/s  Societe  Pour  Le Commerce International Des Tobacs’ (the assessee involved in Civil Appeal  No. 783  of  1973)  carrying  on  business  in France. The  terms of agreement were the same as in the case of  the   Japanese  Company  referred  to  above,  the  only difference being the geographical area in which each of them had to  render service as a selling agent. In this case also the statutory  agent  made  similar  entries  in  his  books regarding  the   commission  payable  to  the  assessee  and ultimately made a debit entry in the account of the assessee in  his  books  when  the  amount  was  transmitted  to  the assessee.      During the  assessment year  the question  whether  the commission amounts  sent to  the Japanese  company  and  the French business  house (hereinafter referred to collectively as ’the  assessees’) were assessable in terms of section 161 of the Income-tax Act, 1961 (hereinafter referred to as ’the Act’) arose for consideration before the Income-tax Officer. The statutory  agent contended  that the amounts in question were not  taxable in  view of the clarification of the legal position by  the Board  Circular  (XXVII-I)  of  53  No.  26 (II/53) dated July 17, 1953 which stated:           "A foreign agent of an Indian exporter operates in      his own  country and  no part  of his  income arises in      India. Usually  his commission  is remitted directly to      him and  is therefore  not received by or on his behalf      in India. Such an agent is not liable to Indian Income-      tax."      The Income-tax Officer, however, came to the conclusion that the  sums in  question were  taxable  in  view  of  the decision of  this Court  in P.  V. Raghava  Reddi &  Anr. v. Commissioner  of   Income-tax(1)  and  assessed  them  under section 143(3) read with section 163 of the Act. The appeals preferred by  the statutory  agent  against  the  orders  of assessment before  the Appellate  Assistant Commissioner  of Income-tax  and   the  Income-tax  Appellate  Tribunal  were unsuccessful. Thereafter  the following  common question  of law was  referred to  the High Court of Andhra Pradesh under section 256(1) of the Act:-           "Whether on  the facts and in the circumstances of      the case  the assessment on the appellant under section      161 of the Income-tax, Act, 1961 is justified?" 590      The High  Court held  that  the  assessments  were  not justified and  answered the question against the Department. Hence these appeals under Article 136 of the Constitution.      The relevant provisions of the Act on which reliance is placed before  us are  sections 5(2),  9(1)(i), 160, 161 and 163.  Section   5(2)  of   the  Act  which  deals  with  the chargeability of  the income  of a  person  who  is  a  non- resident  under   the  Act  provides  that  subject  to  the provisions of the Act, the total income of any previous year of a  person who  is a non-resident includes all income from whatever source  derived (a)  which is received or is deemed to be received in India in such year by or on behalf of such person, or  (b) accrues  or arises or is deemed to accrue or arise in  India during  such year.  Explanation 1 to section 5(2) of  the Act  declares that an income arising abroad can not be  deemed to  be received  in India  for the purpose of that section  by reason only of the fact that it is included in a balance sheet prepared in India. Section 9(1)(i) of the Act provides  that all  income accruing  or arising  whether directly  or   indirectly,  through  or  from  any  business connection in  India, or  through or  from any  property  in

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 6  

India, or  through or  from any asset or source of income in India, or through the transfer of a capital asset situate in India shall  be deemed  to accrue  or arise  in  India.  The explanation to  this clause  provides that  in the case of a business of  which all the operations are not carried out in India, the  income of  the business deemed under this clause to accrue  or arise  in India shall be only such part of the income as  is  reasonably  attributable  to  the  operations carried out  in India  and in  the case of a non-resident no income shall  be deemed  to accrue  or arise in India to him through  or  from  operations  which  are  confined  to  the purchase of  goods in  India for  the purpose  of export. An agent of a non-resident including a person who is treated as an agent  under section 163 of the Act becomes, according to section 160(1)  of the  Act, the  representative assessee in respect of  the income  of a  non-resident specified in sub- section (1)  of section 9 of the Act. Section 161 of the Act makes a  representative assessee,  who is an agent of a non- resident personally  liable to  assessment in respect of the income of  the non-resident.  Section 163 of the Act defines persons who  may be  regarded as agents of non-residents for the purposes  of the  Act. Sections  160, 161 and 163 of the Act  are   merely  enabling  provisions  which  empower  the authorities at  their option  to make  assessment on  and to recover tax  due  under  the  Act  from  the  representative assessee. It  is not  disputed in  these cases  that if  the incomes in  question  of  the  assessees  are  taxable,  the statutory agent  is liable to pay the tax. The real question which falls  for determination  is whether  the said incomes are taxable.  The facts  found in these appeals are that the statutory agent exported his goods to Japan and 591 France where  they were  sold  through  the  assessees.  The entire sale  price was  received in  India by  the statutory agent who made credit entries in his account books regarding the commission amounts payable to the assessees and remitted the commission  amounts  to  them  subsequently.  One  extra feature in  the case  of the Japanese company is that it had been appointed  as an  exclusive agent  for Japan. It is not disputed that  the assessees  rendered  service  as  selling agents  to   the  statutory   agent  outside   the   taxable territories.      In  order  to  establish  its  case,  the  Revenue  has strongly relied on the decision of this Court in the case of P. V.  Raghava Reddy  (supra). A  perusal of  that  decision shows that  the said  case is  distinguishable on  facts. In that case the assessee had exported in the years 1948-49 and 1949-50 certain  quantity of  mica to  Japan. Mica  was  not exportable directly to Japanese buyers during those years as Japan  was   under  military   occupation  but  to  a  State organisation called Boeki-Cho (Board of Trade). To negotiate for order  and to  handle its  other  affairs  in  Japan  in connection therewith the assessee engaged San-Ei Trading Co. Ltd.,  Tokyo   as  its   agent.  The  Japanese  Company  was admittedly a  ’non-resident’ company.  Under the  agreements the assessee  under-took to  pay certain percentage of gross sale proceeds  as commission  to the  Japanese Company. With regard to  the mode of payment of commission, the agreements provided a term which read thus:           "In view of the difficulties in this country it is      requested  that  the  first  party  credits  all  these      amounts to  the account  of the  second party with them      without remitting  the same until definate instructions      are received by the first party."      The first  party to  the agreement was the assessee and

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 6  

the second  party was  the Japanese  Company. During the two accounting years  a total amount of Rs. 13,319-12-4 was paid to the Japanese Company either directly or through others to whom the  assessee was instructed by the Japanese Company to pay the  amount. The  Court rejected  the contention  of the assessee that the Japanese Company was not in receipt of the amount in  the taxable  territories and  the amount  was not income within  the meaning  of section 4(1)(a) of the Indian income-tax Act, 1922 with the following observations:-           "This leaves over the question which was earnestly      argued,  namely,   whether  the   amounts  in  the  two      accounting years  can be  said to  be received  by  the      Japanese  Company   in  the  taxable  territories.  The      argument is  that the  money was not actually received,      but the  assessee firm  was a debtor in respect of that      amount and  unless the  entry can  be deemed  to  be  a      payment or  receipt cl.  (a) cannot  apply. We need not      consider the fiction, 592      for it  is not necessary to go into the fiction at all.      The agreement,  from which  we have quoted the relevant      term, provided  that the  Japanese Company desired that      the assessee firm should open an account in the name of      the Japanese  Company in their books of account, credit      the amounts  in  that  account,  and  deal  with  those      amounts according  to the  instructions of the Japanese      Company. Till the money was so credited, there might be      a relation  of  debtor  and  creditor;  but  after  the      amounts were  credited,  the  money  was  held  by  the      assessee firm  as a  depositee. The money then belonged      to the  Japanese Company and was held for and on behalf      of the  Company and  was at its disposal. The character      of the  money changed  from a debt to a deposit in such      the same  way as  if it  was credited  in a Bank to the      account of  the Company. Thus, the amount must be held,      on the terms of the agreement, to have been received by      the Japanese Company, and this attracts the application      of s. 4(1)(a). Indeed, the Japanese Company did dispose      of a  part of those amounts by instructing the assessee      firm that  they be  applied in a particular way. In our      opinion, the  High Court  was right  in  answering  the      question against the assessee."      The Court,  as it is obvious from the portion extracted above, proceeded  to hold  that the  amount in  question was received by  the Japanese  Company in  India and  hence  was taxable on that basis.      In  the   cases  before   us  there   were   no   terms corresponding to the term extracted above which was found in the agreements between the assessee and the Japanese Company in P.  V. Raghava  Reddi’s case  (supra). It  cannot be said that the  making of  the book  entries in  the books  of the statutory agent  amounted to  receipt by  the assessees  who were non-residents  as the  amounts  so  credited  in  their favour were  not at  their disposal  or control.  It is  not possible to  hold that  the non-resident  assessees in  this case either  received or  can be deemed to have received the sums in  question when  their accounts  with  the  statutory agent were  credited, since  a credit  balance without  more only represents a debt and a mere book entry in the debtor’s own books  does not  constitute payment  which  will  secure discharge from  the debt. They cannot, therefore, be charged to  tax  on  the  basis  of  receipt  of  income  actual  or constructive in  the taxable territories during the relevant accounting period.      The second  aspect of  the same question is whether the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 6  

commission amounts  credited in  the books  of the statutory agent can  be treated  as incomes accrued, arisen, or deemed to have  accrued or  arisen in  India  to  the  non-resident assessees during the relevant year. This takes us to section 9 of the Act. It is urged that the commission amounts 593 should be  treated as  incomes deemed  to  have  accrued  or arisen in  India as  they, according  to the Department, had either accrued  or arisen  through  and  from  the  business connection in  India that  existed between  the non-resident assessees and the statutory agent. This contention overlooks the effect of clause (a) of the Explanation to clause (i) of sub-section (1)  of section 9 of the Act which provides that in the  case of  a business  of which all the operations are not carried  out in India, the income of the business deemed under that  clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried  out in India. If all such operations are carried out  in India,  the entire income accruing therefrom shall be  deemed to  have accrued in India. If, however, all the  operations   are  not   carried  out   in  the  taxable territories, the  profits and  gains of  business deemed  to accrue in  India through  and from  business  connection  in India shall be only such profits and gains as are reasonably attributable to  that part  of the operations carried out in the taxable  territories. If  no operations  of business are carried out  in the taxable territories, it follows that the income accruing  or  arising  abroad  through  or  from  any business connection  in India  cannot be deemed to accrue or arise in  India. (See  Commissioner of Income-tax, Punjab v. R. D.  Aggarwal &  Co. & Anr.(1) and M/s. Carborandum Co. v. C.I.T., Madras(2)  which are decided on the basis of section 42 of  the Indian Income-tax Act, 1922, which corresponds to section 9(1)(i) of the Act.)      In the  instant case the non-resident assessees did not carry on any business operations in the taxable territories. They acted  as selling  agents outside India. The receipt in India of  the sale proceeds of tobacco remitted or caused to be remitted by the purchasers from abroad does not amount to an operation  carried out  by  the  assessees  in  India  as contemplated by  clause (a)  of the  Explanation to  section 9(1)(i) of the Act. The commission amounts which were earned by the  non-resident assessees for services rendered outside India cannot,  therefore, be deemed to be incomes which have either accrued  or arisen  in India.  The  High  Court  was, therefore, right  in  answering  the  question  against  the Department.      For the  foregoing reasons,  the appeals  fail and  are hereby dismissed with costs. (Hearing fee one set). V.D.K.                                    Appeals dismissed. 594