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PETITIONER: THE COMMISSIONER OF INCOME-TAX, BOMBAY

       Vs.

RESPONDENT: S. K. F. BALL BEARING CO., LTD.

DATE OF JUDGMENT: 10/08/1960

BENCH: SHAH, J.C. BENCH: SHAH, J.C. DAS, S.K. HIDAYATULLAH, M.

CITATION:  1960 AIR 1294

ACT: Income-tax--Agent selling goods manufactured by  Principal-- Remittances  of sale Proceeds made to the  Principal  before and  after the recovery of Price of  goods--Profits--Whether include  remittances  made before recovery of Price  by  the Agent--The  Indian  Income-tax Act, 1922 (II  of  1922),  s. 4(1)(a).

HEADNOTE: A  Swedish  company  manufacturing  ball  bearing  equipment entered into an agreement with the respondent, S. K. F. Ball Bearing Co. Ltd. registered under the Indian Companies  Act, 1913,  appointing  the latter as its sole selling  agent  in India.  The material portion of the Agreement ran thus:- "  Clause  23:- The Agent shall pay to S. K.  F.  net  sales value  of the said products that are sold each month,  after deduction  of the Commission that has been agreed  upon  and the  import expenses that have been paid.  Payment shall  be made in Sweden thirty days at the latest following the  last day of the month in which the sales have been effected." During the second world war a corporation known as the  Pan- rope Corporation was incorporated in the Republic of  Panama to take over the assets and business of the Swedish  company and  the said Panrope Corporation in its turn  conveyed  the property  and business to the Swedish  company.   Thereafter the  respondent  company sold in India as the agent  of  the foreign  Corporations goods manufactured by them, and  in  a majority of the sales the respondent company remitted the  " sale  value  " to the foreign corporations after  the  goods were  sold but before the sale proceeds were recovered  from the buyers.  In some cases remittances were made even before the  goods  were sold and in others  remittances  were  made after the sale proceeds were realised from the buyers.   The Income-tax  Officer assessed the foreign corporations  under s.  4(1)(a) of the Indian Income-tax Act for payment of  tax on  the  profit  included  in  the  price  realised  by  the respondent  company without making any  distinction  between remittances  made before recovery of the sale  proceeds  and remittances made after recovery of the sale proceeds.   This order  was confirmed by the higher  income-tax  authorities. On  a  reference  made at the  instance  of  the  respondent

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company  the  High  Court came to the  conclusion  that  the foreign  corporations  had  a  business  connection  in  the taxable  territories  in  the  years  of  account  and   the respondent  company  was liable to pay tax on  their  behalf only with regard to remittances made after the sale proceeds were recovered.  On appeal by the Commissioner of Income-tax by special leave, 142 Held, that the liability to pay income-tax finder s, 4(1)(a) arose on the receipt of the income and the question  whether the  income  was  received  in  the  taxable  territory  was determined by the place where the price was received. Profits were received by the respondent company on behalf of the foreign corporations in the taxable territory in respect of all sales of consigned goods irrespective of whether  the remittances  were made either before or after the price  was received.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 9 of 1958. Appeal  by special leave from the judgment and  order  dated February  24,  1955,  of the former  Bombay  High  Court  in Income-tax Reference No. 50/X of 1954. K.   N. Rajagopal Sastri and D. Gupta, for the appellant. R.   J.  Kolah,  S. N. Andley, J. B.  Dadachanji,  Rameshwar Nath and P. L. Vohra, for the respondent. 1960.   August 10.  The Judgment of the Court was  delivered by SHAH, J.-Aktiebolaget Svenska Kullakerfabriken of Gothenburg is  a company incorporated under the laws of Sweden, and  is engaged in the manufacture of ball bearing equipment.  S. K. F.  Ball  Bearing  Co.,  Ltd.,  which  will  hereinafter  be referred to as " the S. K. F." is a company registered under the  Indian  Companies  Act, 1913.  By  an  agreement  dated January  1, 1939, the S. K. F. was appointed by the  Swedish company as its sole selling agent in India.  On account  ,of the  commencement of hostilities in the second world war,  a corporation   known   as   the   Panrope   Corporation   was incorporated in the Republic of Panama in 1940, to take over as  a war-time arrangement the assets and business  of  that Swedish company.  With effect from July 1, 1947, the Panrope Corporation  conveyed  the  property  and  business  to  the Swedish company.  In the years 1947, 1948, 1949 and 1950 the S.  K.  F. sold in India as the agent ’of  the  Swedish  and Panamian  companies-which will hereinafter  be  collectively referred  to  as  the " foreign  corporations  "  the  goods manufactured by them.  A small quantity of goods was  bought by the S. K. F. 143 and  sold  by it in India, but no question  arises  in  this appeal about the liability to pay income-tax in respect,  of sale  of  those  goods and no reference is  made  herein  in respect  of those sales.  The Income-tax Officer,  Companies Circle 11(3), Bombay, exercising powers vested in him by  s. 43 of the Indian Income-tax Act, 1922, having appointed  the S. K. F. as the statutory agent of the foreign  corporations for the assessment year 1948-49, and of the Swedish  company for  the assessment years 1949-50, 1950-51 and 1951-52,  the S. K. F. submitted returns of income for these years in  the taxable territory on behalf of the foreign corporations.  Clauses  13,  22 and 23 of the agreement dated  January  1, 1939, between the S. K. F. and the Swedish company which are material for the purpose of this appeal are as follows:-

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Clause  13:-The Agent shall render before the tenth  day  of each  month  a  true  and detailed  statement  of  the  said Products that have been sold by him or his Sub-Agents during the  preceding month.  This statement is to be  prepared  in accordance  with instructions that are to be given by S.  K. F.  and  it  shall contain the names and  addresses  of  the parties  to  whom  the said  Products  have  been  supplied, together  with a description of the Products and the  prices at which they have been sold. Clause 22:-The Agent shall sell the said Products either for cash or on credit.  Notwithstanding the fact that permission is hereby granted by S. K. F. to the Agent to sell on credit any  credit  given  by the Agent to the buyer  of  the  said Products shall be deemed to have been given by the Agent for his own account and on his own responsibility.  If the buyer has not paid the Agent the amount that is owing by the  date on which the Agent is to render a statement and make payment to  S. K. F. for such sales that have been made  on  credit, the Agent shall nevertheless be liable to effect payment  to S.  K. F. in accordance with the terms and  conditions  that are defined in this Agreement. Clause 23:-The Agent shall pay to S. K. F. the 144 net  sales  value of the said Products that  are  sold  each month,  after  deduction  of the commission  that  has  been agreed  upon (cf 20) and the import expenses that have  been paid (of. 21).  Payment shall be made in Sweden thirty  (30) days, at the latest, following the last day of the month  in which the sales have  been effected. The  Income-tax  Appellate  Tribunal  has  found  that   for rendering  accounts  of the net sales and  also  for  making payments according to the terms of el. 13 of the  agreement, the  S. K. F. maintained for the relevant periods a  current account in the names of the foreign corporations in  respect of  goods " received on consignment ". When goods were  sold by  the S. K. F., the account of the principal was  credited with  the  price and the account of the buyers to  whom  the goods  were  sold on credit was debited.  In a  majority  of cases of sales, remittances of "sale value" after  deducting commission  were made after sale of the goods to the  buyers but  before  the  sale proceeds were recovered.   In  a  few cases,  remittances  were made even before  the  goods  were sold, and in the remaining, remittances were made after  the sale proceeds were realized from the buyers. The  Income-tax  Officer assessed the  foreign  corporations under s. 4(1)(a) of the Indian Income-tax Act for payment of tax on the profits included in the price realized by the  S. K.  F. by sale of goods " received on consignment "  without making any distinction between sales in respect of which the remittances  were made after recovery of sale  proceeds  and sales in respect of which remittances were made before reco- very of the sale proceeds.  The order passed by the  Income- tax  Officer  was  confirmed  by  the  Appellate   Assistant Commissioner and also by the Income-tax Appellate  Tribunal. At  the  instance of the S. K. F., the  following  questions were  referred  to the High Court of  Judicature  at  Bombay under s. 66(1) of the Indian Income-tax Act, 1922: (1)  Whether there was evidence on which the Tribunal  could have held that the Panrope Corporation and   the        non- resident company had a business 145 connection  in  the  taxable territories  in  the  years  of account ? (2)  Whether the profits of the Panrope Corporation and  the non-resident  company  in respect of the  consignment  goods

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were received in the taxable territories on their behalf ? At  the  hearing of the reference before  the  High,  Court, counsel  for the assessee having conceded that the S. K.  F. was not a purchaser of the goods " received on consignment " from the foreign corporations, but was their agent for  sale of  the goods, an answer in the affirmative was recorded  on the first question.  On the second question, the High  Court opined  that as the remittances by the S. K. F. pursuant  to the  terms of cl. 23 of the agreement before the  sale  pro- ceeds  were  realized from the buyers were received  by  the foreign corporations outside the taxable territory, the same could  not  be taken into account under s.  4(1)(a)  of  the Indian Income-tax Act in assessing the taxable income of the foreign  corporations.  The High Court observed that the  S. K.  F.  was  liable  to pay tax on  behalf  of  the  foreign corporations  under s. 4(1)(a) only if the taxing  authority established  that the foreign corporations had received  the sale proceeds within the taxable territories; that the  sale proceeds were received by the foreign corporations when  the S. K. F. made remittances under cl. 23 of the agreement, but somewhat  inconsistently  the High Court observed  that  the remittances  made by the S. K. F. before the  sale  proceeds were realized, were remittances not of sale proceeds, but in discharge  of its obligation under el. 23 of the  agreement; and that the realizations by the S. K. F. from the buyers of the  goods  subsequent to the remittances were not  of  sale proceeds  on  behalf of the foreign  corporations  but  were receipts  on  its own behalf and in its own  right,  and  in recoupment   of   the  amounts  remitted  to   the   foreign corporations.   The  High  Court  accordingly  answered  the second question in the affirmative " to the extent that  the remittances were made after the sale proceeds were  received by the assessee company". 19 146 We   are  unable  to  agree  with  the  reasoning  and   the ,,conclusion of the High Court.  The terms of the  agreement make  it  abundantly  clear that the  goods  "  received  on consignment " from the foreign corporations were received by the  S. K. F. as their selling agent and not  as  purchaser. The goods, it is true, were sold by the  S. K. F. in its own name  and not in the name of the foreign  corporations,  but the  goods were still sold for and on behalf of the  foreign corporations and the sale proceeds received by the S. K.  F. were received not on its own behalf but for and on behalf of its principals.  Clauses 9, 12, 13, 14, 17, 18 and 20 of the agreement clearly show that the goods received by the S.  K. F.  continued  to remain the property of  the  foreign  cor- porations  till they were sold to the buyers.  In the  price received for sale of the goods, the profit of the owner  was in  truth  embedded and that profit was liable to  be  taxed under  s.  4(1)(a) of the Indian Income. tax Act if  it  was received in the taxable territory.  It is not disputed  that the  sale proceeds realized by the S. K. F. in  the  taxable territory  as  agent  of  the  foreign  corporations  before remittances under the terms of the agreement were liable  to be  taxed.  Does the circumstance that the S. K. F.  had  in discharge of an obligation undertaken by it made remittances under  the  terms of the agreement before  it  realized  the price of the goods sold alter the nature of the realizations ?  The remittances made by the S. K. F. indisputably reached the foreign corporations in respect of all sales outside the taxable  territory.   But the S. K. F. was their  agent  for sale  of  the  goods, and for receiving  the  price  in  the taxable  territory.  The relation between the S. K.  F.  and

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the  foreign  corporations was not  altered  because  before realizing the price from the buyers remittances were made to the foreign corporations.  The price of goods sold by the S. K. F. whether before or after remittance was realized as the agent of the foreign corporations.  If remittance in respect of a sale was made before the price was realized, the S.  K. F. became entitled to adjust the account and to take  credit for  the  amount  paid out of  the  realization.   What  the foreign corporations received under remittances 147 made  before or after realization of the price was  not  the sale  proceeds in respect of sales, but amounts. due by  the S.  K.  F. under an obligation expressly  undertaken  by  it under  cl. 23 of the agreement.  The price of goods sold  by the  S.  K. F. were in all cases received by it  within  the taxable  territory  ; and the S. K. F. being the  agent  for sale,  and for receiving the price, the income  embedded  in the  sale  proceeds  must be deemed to be  received  by  the foreign corporations also within the taxable territory.   It is  the receipt of income which gives rise under s.  4(1)(a) of  the Indian Income-tax Act to liability to pay  tax:  and the  place where the price is received is  determinative  of the  question whether the income is received in the  taxable territory. The  price  for the goods sold was received  only  when  the buyer  paid  it  and  not before, and  when  the  price  was received  by  the S. K. F., the income  was  received.   The remittances  by  the S. K. F. to  the  foreign  corporations before  the  price  was received  did  not  include  income, because income in fact was never received till the price was realized.  Again we are unable to agree with the  contention of  counsel  for the S. K. F. that there was a  contract  of suretyship between the foreign corporations and the S. K. F. and the receipt by the former of the remittances amounted to receipt of the price of the goods.  It is not pretended that there was a tripartite contract and the foreign corporations sold  the goods directly to the purchasers in India, the  S. K.  F. having guaranteed payment of the price by the  buyers to whom the goods had been sold. The price received by the S. K. F. being received within the taxable   territory  for  and  on  behalf  of  the   foreign corporations in respect of goods sold, we are unable to hold that  the realization of the price in which is embedded  the profit  is  not  liable to tax under s.  4(1)(a)  as  income received,  merely because under an  independent  obligation, the  S. K. F. has rendered itself liable to pay  the  amount equivalent  to the price (less commission) even  before  the price has been realized and has discharged that obligation. In the view taken by us, the second question will be 148 answered in the affirmative in respect of sale of all ,goods where  the  price  has been received by the  S.K.F.  in  the taxable   territory,   and  irrespective  of   whether   the remittance has been made in respect of the goods sold before or after the price was received. The  appeal is accordingly allowed to the extent  indicated. The  appellant will be entitled to his costs in  this  court and also the costs of the reference in the High Court.                                 Appeal partly allowed.                       -----------------