REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTON

CIVIL APPEAL NOS. 3844-3847 OF 2003

M/S. KANCHANGANGA SEA FOODS LTD.     …APPELLANTS

VERSUS

COMMISSIONER OF INCOME TAX        …RESPONDENT

WITH

CIVIL APPEAL NOS. 3849-3852 OF 2003

M/S. KANCHANGANGA SEA FOODS LTD.     …APPELLANTS

VERSUS

INCOME TAX OFFICER,  Ward I & ORS.            …RESPONDENTS

J U D G M E N T

C.K. PRASAD, J.

1. All these appeals arise out of a common judgment dated  

7th June, 2002 passed by the Division Bench of the Andhra  

Pradesh High Court in Referred Case No.144 of 1995 and Writ

Petition  No.1103  of  1998  and  as  such  they  were  heard  

together and are being disposed of by this judgment.  

2. Facts  giving  rise  to  the  present  appeals  are  that  the  

appellant  M/s.  Kanchanganga  Sea  Foods  Limited  is  a  

company incorporated in India and engaged in sale and export  

of sea food and for that purpose obtained permit to fish in the  

exclusive economic zone of India. To exploit the fishing rights,  

the  appellant-company  (hereinafter  referred  to  as  the  

“assessee”) entered into an agreement dated 7th March, 1990  

chartering two fishing vessels i.e., two pairs of Bull Trawlers,  

with Eastwide Shipping Co. (HK) Ltd. a non-resident company  

incorporated in Hong Kong. Clause 4 of agreement which is  

relevant for the purpose reads as follows :-

“4. Deponent Owners to provide:

The  Deponent  Owners  will  provide  fishing  vessels, as approved by Government of India, for all   inclusive charter fee of US $ 600,000.00 per vessel   per annum. The charter fee is inclusive of fuel cost,   maintenance repairs,  wages, food for the crew and  any other expenses incurred in connection with  the   operation of the vessel.  They will provide training to  the Indian crew in all aspects of fishing techniques,   maintenance and running of the engine. In addition:

a) The  Deponent  Owners  should  pay  the  charterers  Rs.75,000/-  or  15%  of  the  gross  value of  the catch whichever is more.  

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b) Annual charter fee shall be maximum of US $  600,000 per vessel per annum payable by way  of  85%  of  gross  earning  from  the  fish  sales  subject to the condition that this will not exceed  85% of the sales value of the catch per vessel   per  annum  on  voyage  to  voyage  basis.   Minimum 15% of the earning by way of sales  value  of  catch  of  fish  should  accrue  to  the  charterer.   Payment  to  the  Deponent  Owners  should not exceed the above charter fee.

c) Export value of catch from the chartered vessels  should  not  be  lower  than  the  prevailing  international market price at the time of export.”

Thus, according to the terms of the agreement the Eastwide  

Shipping  Co.(HK)  Ltd.,  the  owner  of  the  fishing  Trawlers  

(hereinafter referred to as the “non-resident company”) was to  

provide  fishing  Trawlers  to  the  assessee  for  all  inclusive  

charter fee of  US $ 600,000 per vessel per annum. In terms of  

the agreement the assessee was to receive Rs.75,000/- or 15%  

of the gross value of catch,  whichever is more.  The charter  

fee was payable from earning from the sale of fish and for that  

purpose 85% of the gross earnings from the sale of fish was to  

be paid to the non-resident company.

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3. Necessary permission to remit 85% of the gross earning  

from the sale of fish towards charter-fee was granted by the  

Reserve Bank of India. As per agreement the Trawlers were to  

be  delivered  at  Chennai  Port  for  commencement  of  fishing  

operation. Clause 4 of the terms and conditions of permission  

granted by the Reserve Bank of India reads as follows:

“4. In case you are required to deduct tax at   source while  paying charter  hire charges, you  have to produce documentary evidence showing   the  payment  of  taxes  by  deduction  at  source  from  the  charter  hire  charges  paid  by  you.  However, if no tax is to be deducted at source  as above, a clearance to that effect should be  obtained  from  the  Ministry  concerned  and  submitted to us before payment of charter hire  charges.”  

4. Trawlers  were  delivered  to  the  assessee  with  full  

equipment and complement of staff at Chennai Port.  Actual  

fishing operations were done outside the territorial waters of  

India  but  within  the  exclusive  economic  zone.  The  voyage  

commenced and concluded at Chennai Port. The catch made  

at  high  seas  were  brought  to  Chennai  where  surveyor  of  

Fishery Department verified the log books and assessed the  

value of the catch over which local taxes were levied and paid.  

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The  assessee  after  paying  the  dues  arranged  Customs  

clearance for the export of the fish and the Trawlers, which  

were used for fishing, carried the fish to destination chosen by  

non-resident company. The Trawlers reported back to Chennai  

Port after delivering fishes to the destination and commenced  

another voyage. The assessee did not deduct the tax from the  

non-resident company nor produced any clearance certificate  

during  the  Assessment  Years  1991-92  to  1994-95.   Notice  

under Section 201(1) of the Income Tax Act was issued to it to  

show  cause  as  to  why  it  should  not  be  deemed  to  be  an  

assessee  in  default  in  relation  to  tax  deductible  but  not  

deducted.  The  assessee  filed  objection  contending  that  the  

non-resident  company  did  not  carry  out  activities  or  

operations  in  India  which  have  the  effect  of  resulting  in  

accrual  of  income in India and hence it  was not obliged to  

make any deduction. Alternatively, it was contended that even  

if the operation of bringing the catch to India Port for Customs  

appraisal and export to the non-resident company results in  

an operation, it was an operation for mere purchase of goods  

and, therefore, there was no income liable for assessment.   It  

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was also contended that even if 85% of the catch is considered  

as charter fee to the non-resident company it was paid outside  

India.  Accordingly the plea of the assessee is that where the  

entire income is not taxable there is no obligation to deduct  

tax  at  source.  The  Income  Tax  Officer  considered  the  

objections raised by the assessee and finding the same to be  

untenable rejected the same and while doing so observed as  

follows:

“In  the  light  of  the  above,  I  have  no  hesitation  in  holding  that  the  income  earned  by  the  non-resident  company was  chargeable  to  tax  u/s. 5(2) of  the Income  Tax  Act.   The  assessee  made  payment  to  the  foreign- company,  the  sums  representing  hire  charges,  without   deducting  taxes  at  source,  thereby  committed  default   under the provisions of Section 195.  This is, therefore, a   fit  case to deem it  to be an assessee in default  as  laid   down in Section 201(1) of the Income Tax Act, 1961.”

5. Ultimately,  it  held  the  assessee  to  be  in  default  of  

Rs.1,66,91,962/-, which included interest due under Section  

201(1A) of the Income Tax Act.  The Income Tax Officer further  

held the assessee liable to pay interest @ 15% on the taxes  

payable and interest accrued at a rate of Rs.1,55,872/- per  

month  from  1st October,  1992  onwards  till  the  date  of  

payment.  

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6. On  appeal  by  the  assessee,  the  Deputy  Commissioner  

(Appeals)  declined to interfere and affirmed the order of the  

Income Tax Officer on its following findings:

“It  is commercial  venture of the appellant.  For  giving assistance to it, Eastwide is paid hire charges.   Actual payment is made at an Indian Port, that is, in   India.  Only  when  the  catch  is  brought  in,  its   suitability  is  certified on inspection  its  valuation  is  made, and customs and port clearance is given, that   Eastwide  effectively  receives  its  payment.   Simultaneously the appellant also credits Eastwide’s   account.  Therefore,  Eastwide  actually  receives  the   hire charges in India. In this connection it has to be  remembered that for the purpose of Income Tax Act  the nature of a receipt is to be considered from the   commercial  point of view and is not to be confused  with  its  nature  under  the  general  law.  (C.I.T.  vs.   Scindia Worshop Ltd. – 119 I.T.R. 526, 331 Bom.).”

7. However, the Deputy Commissioner reduced  the  liability  

to  Rs.8,34,597/-.  The  assessee  unsuccessfully  preferred  

appeal  before   Income  Tax  Appellate  Tribunal  (hereinafter  

referred to as the “Tribunal”)  and on its following finding it  

dismissed the appeal :

“The  entire  catch  of  fish  belonged  to  the  assessee.  It  was  shown  as  sale  by  the  assessee,   85%  of  such  fish  catch  was  adjusted  against  the  liability  of  the  assessee  towards  hire  charges  for  chartering the vessels from the non-resident. It was   thus in discharge of the assessee’s liability against   hire charges and therefore, it would be receipt in the  

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hands of the non-resident under Section 5(2) of the   Act.”

8. The  Tribunal  on  an  application  filed  before  it  by  the  

assessee had referred to the Andhra Pradesh High Court, the  

following questions of law:

“1. Whether on the facts and in the circumstances  of the case the Appellate Tribunal is correct in  law  in  holding  that  payment  is  made  to  the  Non-Resident by the assessee in India ?

2. Whether on the facts and in the circumstances  of the case the Appellate Tribunal is correct in  law in holding that  the  receipt  in  the  form of  85% of  the  catch  of  fish by the  Non-Resident  was  in  India  since  all  the  formalities  are   completed in India ?

3. Whether on the facts and in the circumstances  of the case the Appellate Tribunal is justified in  rejecting the claim that there is no payment to  the non-resident by the assessee but there was   only a receipt of 15% of the value of fish catch  from the non-resident to the assessee ?

4. Whether on the facts and in the circumstances  of the case the Appellate Tribunal is correct in  law in  holding  that  the  assessee  is  liable  to   deduct tax at source under section 195 of the  Act on the alleged payment made to the Non- Resident towards hire charges even though the  alleged payment is not in cash ?

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5. Whether on the facts and in the circumstances  of the case the Appellate Tribunal is correct in  law in holding that the assessee was in default  under Section 201 of the Income Tax Act, 1961,  for the failure to deduct tax under section 195  of the Act ?”

9. The assessee, then filed application before the Tribunal  

for stay of collection which was rejected and the writ petition  

and special  leave  petition  preferred  against  that  order  were  

dismissed by the High Court and this Court.   The assessee  

had  also  filed  application  for  rectification  of  the  order  

dismissing the appeals dated 14th February, 1995 but the said  

application was also dismissed.   

10. Aggrieved  by  the  same  assessee  filed  Writ  Petition  

No.1103 of 1998 and both the Reference and the Writ Petition  

were  heard  together  by  the  High  Court  and  have  been  

answered and disposed of together by the common judgment  

impugned in these appeals. The High Court answered all the  

questions referred to it against the assessee and in favour of  

the Revenue, same read as follows:-

“On the facts and in the circumstances of the  case,  the  Tribunal is  correct in  law in holding that   

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payment is made to the non-resident by Assessee in   India.

On the  facts and  in  the  circumstances  of  the  case, the Tribunal is correct in law in holding  that   the receipt in the form of 85% of the catch of fish by  the non-resident was in India since all the formalities   are completed in India.

On the  facts and  in  the  circumstances  of  the  case,  the Tribunal is  justified in rejecting the claim   that there is no payment to the non-resident by the   Assessee but there was only a receipt of 15% of the  value  of  fish  catch  from  the  non-resident  to  the  Assessee;

On the  facts and  in  the  circumstances  of  the  case, the Tribunal is correct in law in holding that the   Assessee  is  liable  to  deduct  tax  at  source  under  Section 195 of the Act on the alleged payment made  to the non-resident towards hire charges even though  the alleged payment is not in cash; and

On the  facts and  in  the  circumstances  of  the  case, the Tribunal is correct in law in holding that the   Assessee was in default under Sec.201 of the Income  Tax Act,  1961  for  the  failure  to  deduct  tax  under  Section 195 of the Income Tax Act.”

11. Mr. A. Subba Rao, learned Counsel appearing on behalf  

of the appellant-assessee submits that there was no income  

chargeable which resulted to the non-resident company as no  

payment  of  any  sum  by  the  assessee  to  the  non-resident  

company  took  place  in  India  and  therefore,  the  liability  to  

deduct tax at source under Section 195 of the Income Tax Act  

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or the liability under Section 201 of the Act did not arise. It  

has also been pointed out by the learned Counsel that there  

was no receipt of income at all in India as the 85% of the fish  

catch, which was given to the non-resident company, was sold  

outside India and the sale proceeds thereof were also realized  

outside India. In his submission, the non-resident company,  

therefore,  had  no  receipts  in  India.  In  support  of  the  

submission  reliance  has  been  placed  on  a  decision  of  this  

Court in the case of  Commissioner of Income-Tax, A.P. v.  

Toshoku Ltd. (125 I.T.R. 1980 525)  and our attention has  

been drawn to the following passage from the said judgment:

“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 cl.(a) of the Explanation to s.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.”

Reliance has also been placed on a decision of this Court in  

the case of  Ishikawajima-Harima Heavy Industries Ltd. v.  

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Director  of  Income-Tax,  Mumbai  [(2007)  288  I.T.R.  408  

(SC)] and  our  attention  has  been  drawn  to  the  following  

passage at pages 443-444:

“Therefore, in our opinion, the concepts profits  of business connection and permanent establishment   should  not  be  mixed  up.  Whereas  business  connection is relevant for the purpose of application  of Section 9; the concept of permanent establishment  is relevant for assessing the income of a non-resident  under  the  DTAA.  There,  however,  may  be  a  case  where  there  can be overlapping  of  income;  but  we   are not concerned with such a situation.  The entire   transaction having been completed on the high seas,   the profits on sale did not arise in India, as has been  contended  by  the  appellant.  Thus,  having  been  excluded from the scope of  taxation  under the Act,   the  application  of  the double taxation  treaty  would  not  arise.  The  Double  Tax  Treaty,  however,  was  taken recourse to by the appellant only by way of an   alternate  submission  on  income  from services  and  not in relation to the tax of offshore supply of goods.”

12. Mr.  R.P.  Bhatt,  learned  Senior  Counsel  appearing  on  

behalf of the respondent, however, contends that income had  

accrued to the non-resident company in India and admittedly  

the assessee having not  carried out  its  obligations to make  

deductions, the authorities and the Tribunal rightly held the  

assessee in default.

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13. We have considered the submissions advanced and we do  

not find any force in the submissions of the Counsel for the  

appellant  and  the  authorities  relied  on  are  clearly  

distinguishable  and  those  in  no  way  support  assessee’s  

contention. Section 5(2) of the Income Tax Act provides, what  

would be the total income of a non-resident, same reads as  

follows:

“5(1) xxxx xxxx xxxx

 (2) Subject to the provisions of this Act, the total   income of any previous year of a person who is a  non-resident  includes  all  income  from  whatever   source derived which--

(a) 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 to him in India during such year.

Explanation 1.—Income accruing or arising outside  India shall  not be deemed to be received in India  within the meaning of this section by reason only of  the fact that it is taken into account in a balance  sheet prepared in India.

Explanation  2.—For  the  removal  of  doubts,  it  is  hereby  declared  that  income  which  has  been  included  in  the  total  income  of  a  person  on  the  basis that it has accrued or arisen or is deemed to  have accrued or arisen to him shall not again be so  included on the basis that it is received or deemed  to be received by him in India.”

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14. From  a  plain  reading  of  the  aforesaid  provision  it  is  

evident  that  total  income  of  non-resident  company  shall  

include all  income from whatever source derived received or  

deemed to be received in India. It also includes such income  

which either accrues, arises or deem to accrue or arise to a  

non-resident company in India.  The legal fiction created has  

to be understood in the light of terms of contract. Here,  in the  

present case the chartered vessels with the entire catch were  

brought to the Indian Port, the catch were certified for human  

consumption,  valued,  and after  customs and port  clearance  

non-resident company received 85% of the catch.   So long the  

catch was not apportioned the entire catch was the property of  

the assessee and not of non-resident company as the latter did  

not have any control over the catch. It is after the non-resident  

company was given share of its 85% of the catch it did come  

within its control.  It is trite to say that to constitute income  

the recipient must have control over it. Thus the non-resident  

company  effectively  received  the  charter-fee  in  India.  

Therefore, in our opinion, the receipt of 85% of the catch was  

in India and this being the first receipt in the eye of law and  

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being in India would be chargeable to tax.  In our opinion, the  

non-resident company having received the charter fee in the  

shape of 85% of fish catch in India, sale of fish and realization  

of sale consideration of fish by it outside India shall not mean  

that there was no receipt in India.  When 85% of the catch is  

received after valuation by the non-resident company in India,  

in  sum  and  substance,  it  amounts  to  receipt  of  value  of  

money.  Had it not been so, the value of the catch ought to  

have been the price for which non-resident company sold at  

the  destination  chosen  by  it.  According  to  the  terms  and  

conditions  of  the  agreement  charter  fee  was  to  be  paid  in  

terms of money i.e. US Dollar 600,000/= per vessel per annum  

“payable by way of 85% of gross earning from the fish-sales”.  

In the light of what we have observed above there is no escape  

from the conclusion that income earned by the non-resident  

company  was  chargeable  to  tax  under  Section  5(2)  of  the  

Income Tax Act.

15. Now referring to the decisions of this Court in the case of  

Toshoku Ltd.(supra), same is clearly distinguishable. In the  

said case the amount credited in favour of the assessee was  

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not at its disposal and in the background of the said fact it  

was held that making entries in the books would not amount  

to receipt of income, actual or constructive, which would be  

evident from the following passage of the judgment:

“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.”

Here  the  non-resident  company  had  received  charter-fee  in  

India in the shape of 85% of the catch after its valuation, over  

which  it  had  alone  control  and  therefore  receipt  was  

chargeable to tax.

16. In the case of  Ishikawajima-Harima Heavy Industries  

Ltd.(supra) the  entire  transaction  was  completed  on  high-

seas, and in this background, it was held that profit did not  

arise in India.  In the case in hand, undisputedly the catch  

was brought to an Indian Port, where it was valued and after  

paying the local taxes, charter fee in the shape of 85% of the  

catch was given to the non-resident company.   

17. Both the decisions, therefore, do not lend any support to  

the contention of the assessee.  

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18. From  the  conspectus  of  discussion  aforesaid,  it  is  

obvious  that  the  assessee  was  liable  to  deduct  tax  under  

Section 195 of +the Income Tax Act on the payment made to  

the  non-resident  company  and  admittedly  it  having  not  

deducted and deposited was rightly held to be in default under  

Section 201 of the Income Tax Act.  

19. We do not find any merit in these appeals and they are  

dismissed accordingly, but without any order as to costs.

………………………………….J.                           ( D.K. JAIN )

………………………………….J.                                ( C.K. PRASAD )

New Delhi, July 7, 2010.

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