JUDGMENT
Per P. Pradhan, Accountant Member – These two appeals by the revenue are directed against common order of CIT (Appeals), Visakhapatnam dated 26-9-1990, relating to assessment year 1985-86. Since common points are involved in these two appeals, these are taken up together and disposed of by this consolidated order for the sake of convenience.
2. The Assessing Officer has treated M/s V. B. C. Exports Pvt. Ltd., as the agent of M/s Guan Wah Enterprises of Singapore (non-resident company) and completed the assessments under section 143 (3) of the Act. The assessee took up the issues in appeal before the CIT (Appeals), and the CIT (Appeals) by an order dated 26-9-1990, has allowed both the appeals and hence the present appeals are by the revenue before the Tribunal.
3. To appreciate the case better, it is necessary to discuss in brief the background of the case. M/s. V. B. C. Exports Pvt. Ltd. is engaged in the business of processing and export of sea-foods. On 28-6-1983, it entered into a contract with the said non-resident firm for chartering of some fishing vessels of the non-resident. The contract was signed at Singapore. The chartered vessels were to be delivered at Madras and the operational expenses of the vessels including wages and food for the operating personnel were to be borne by the non-resident company. The terms and the conditions of charter are regulated by the conditions laid down by the Government of India while permitting conclusion of the charter agreement.
4. Actual fishing operations were to be done outside the territorial waters of India. Hire charges per charter was US$ 7,50,000 per vessel per annum. Actual monetary payments were not to be made. On completion of each voyage of Fishing operation, the vessels were to be brought to an Indian port and the catch of fish was to be processed and thereafter valued. 85% of the value of the catch was to be paid as hire charges and the payment was to be made by actual handing over of the catch. The total payment thus made in kind, was not to exceed US$ 7,50,000. After processing and valuation of the catch and its handing over to the non-resident, the fishing vessels leave Indian waters to the destination of their choice. This process continues repeatedly. The Assessing Officer treated these operations as business connection between the non-resident and the assessee and invoked the provisions of sections 5, 9 and section 163 of Income-tax Act and taxed accordingly.
5. On appeal, the CIT (Appeals) has cancelled the order passed under section 163 of Income-tax Act, and also the assessment made under section 143(3) with the following observations :
“6. I am inclined to allow both the appeals. A non-resident may be directly taxed or may be taxed through a representative assessee. The choice rests with the Assessing Officer to pick-up either of them for fixation of liability under the Income-tax Act. In case of direct assessment on the non-resident, all incomes as mentioned in sub-section (2) of section 5 can be brought to tax. Assessment of income of a non-resident in the hands of representative assessee is regulated by the provisions of section 160(1) (i), section 161, section 162 and section 163 of the Act. Under section 160(1) (i), an agent of a non-resident, including a person who is treated as an agent under section 163, is a representative assessee only in respect of the income of the non-resident specified in section 9(1) of the I.T. Act (T.I. & M Sales Ltd. v. CIT 21 ITR 258 (Cal.). Such agent cannot be said to be a representative assessee in respect of any other income of the non-resident (CIT v. Toshoku Ltd. 125 ITR 525). The Liabilities of a representative assessee are governed by the provisions of sections 161 and 162 of the I.T. Act, whereas section 163 provides for circumstances under which a person can be treated as an agent. The mere appointment of an agent under section 163 provides for circumstances under which a person can be treated as an agent. The mere appointment of an agent under section 163 would be of no consequence, unless tax can be levied under section 160(1) (i) /161, for section 163 is merely a procedural section (Turner Morrison & Co. Ltd. v. CIT 23 ITR 152-162 (SC) and Jadavji Narshidas and Co. v. CIT 31 ITR 1 (Bom).
Therefore, to repeat, a representative assessee, a per the provisions of section 160(1) (i), can be taxed only in respect of an income of a non-resident as specified in section 9(1) and not in respect of all the incomes of a non-resident as specified in section 5(2) of the Act.
7. The provisions of section 9(1) deal with incomes deemed to accrue or arise in India. These provisions do not apply to income accruing or arising in India or to income received in India. That is, if on analysis of the facts and circumstances of a case, one comes to the conclusion that income has accrued or has arisen in India, or has been received in India, the provisions of section 9(1) cannot be invoked for bringing to tax such income, even though applicability of the provisions of section 9(1) can be argued for – CIT v. R. D. Agarwal & Co. 56 ITR 20 (SC) and Anglo French Textile Co. Ltd. v. CIT 25 ITR 27 (SC). Once an item of income is held as accruing, arising, or has received in India, provisions of section 9(1) cannot be invoked, and, therefore, in respect of such an item of income, a representative assessee cannot be made liable under section 160(1) (i) of the Act for the tax liability of the non-resident.
8. The above analysis of the provisions of I.T. Act have been made for facilitating appreciation of the facts in the appellants case. In this case, before the agreement has been concluded outside India and the business operations have been carried on outside the taxable territories. May be that the appellant has its business operations based in India, but for appreciating taxability of any income arising to the non-resident situs of the business operation, has to be taken into consideration. It has to be particularly remembered that the business operation with which the non-resident has been connected, was carried on outside the taxable territories as per mutual agreement between it and the appellant. Therefore, this is certainly not a case where income can be said to have accrued or arisen in India.
9. But the non-resident certainly has a business connection in India. The Indian Company had entered into an agreement with the non-resident for assisting it in its business operations (though the particular operations are carried out outside the taxable territories). The agreement is subject to limitations prescribed by the Govt. of India, disputes arising under the agreement are subject to the jurisdiction of Indian Courts, the fishing vessels of the non-resident are to submit to Indian laws and regulations and the consideration under the Agreement is received in India. Therefore, the income, if any, of the non-resident is taxable as per the provisions of section 9 w.r.s. 5(2) of the I.T. Act.
10. But, as has been stated under paragraph 3 above, the charter hire charges are received in kind in an Indian Port i.e., in India. Therefore, this is a case where the income of the non-resident is received in India and is also deemed to accrue or arise in India. But once it is a case of income received in India, the provisions of section 9(1) cannot be invoked and, therefore, the non-residents income, if any, is to be taxed only with reference to the provisions of section 5 of the I.T. Act, without further reference to the provisions of section 9(1) of the Act.
11. Since the non-residents income is not taxable as per the provisions of section 9(1) of the I.T. Act none of its agent, whether contractual or statutory, would have the character of representative assessee under the provisions of section 160(1) (i) of the I.T. Act and as such, not subject to the liabilities as provided under section 161 of the Income-tax Act. That being the case, there is no question of passing an order under section 163 of the I.T. Act.
12. To sum up, the appellant cannot be regarded as an agent of the non-resident since the latter does not have any income taxable as per the provisions of section 9(1). The impugned order under section 163 is, therefore, cancelled. Turning to the impugned order under section 143(3), I find that the assessment proceedings have been initiated against the appellant right from the beginning. It is not a case of assessment proceedings being initiated against the non-resident and the Indian agent being brought in as a representative assessee therefor. The impugned order of assessment is, therefore, cancelled.”
The revenue is in appeals against the said findings of the CIT (Appeals).
6. The appeals were fixed for hearing on 7-2-1995, on which date, the learned DR relied on the orders of the Assessing Officer and submitted that sections 5, 9 and 163 of the Act are clearly applicable to the instant case and the Assessing Officer has rightly invoked those provisions of the Act, and the CIT (Appeals) is not justified in cancelling both the orders. In this connection, the learned DR relied on the decision of Bharat Heavy Plate & Vessels Ltd. v. Addl. CIT [1979] 119 ITR 986 (AP). The learned AR of the assessee, on the other hand, relied on the order of the CIT (Appeals) and also brought to our notice the latest edition of Chaturvedi and Pithisarias Income-tax Law, particularly with reference to pages 115, 117, 119, 123 and 133 of Volume 1 and page 3875 of Vol. 3.
7. The learned authorised representative of the assessee also took us through the agreement between the parties and licence issued by the Government.
8. We have considered the submissions of the parties, gone through the orders of Assessing Officer, first appellate authority, copy of the agreement, licence issued by the Government and the double taxation agreement and are not inclined to agree with the findings of the CIT (Appeals). From the appellate order, the extract of which is given above, it appears that CIT (Appeals) has not properly appreciated sections 5, 9 and 163 of the Income-tax Act, 1961, and confused himself regarding the applicability of those sections. In this connection, we may extract the provisions of section 5(2) and its explanations which are as follows :-
“5(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 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.”
Section 9 of Income-tax Act, 1961 also reads as follows :-
“(1) The following incomes shall be deemed to accrue or arise in India –
(i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India or through the transfer of a capital asset situate in India.
Explanation : For the purposes of this clause –
(a) 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;
(b) 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;”
From the above, it is more than clear that the CIT (Appeals)s finding that non-resident has no business connection in India or income is not accruing or arising in India to non-resident is not correct. Section 9 clearly states that the charge of tax on accrual or arisal basis had significance only in relation to non-residents. Therefore, it may be stated that it is only in respect of income accruing within India alone is chargeable, but not income accruing or arising outside India. This principle is the basis and the basic economic truth and needs no statutory support for its application. The circumstances that the Explanation (a) to clause (i) of section 9(1), which embodies this principle is made applicable by its language only to cases of deemed accrual or arisals of income dealt with in the said clause (i), does not negative the applicability of its principle. The principle of apportionment of the income has to be determined keeping in view the rule 10 of the IT Rules and the decision of the Supreme Court in the case of Anglo-French Textile Co. Ltd. v. CIT [1954] 25 ITR 27. Section 9 gathers in one place practically all types of income from all possible sources which non-resident may have in this country. In this connection, reference may be made to the decision of the Madras High Court in the case of CIT v. Carborundum Co. [1973] 92 ITR 411. If any kind of income has been left out, such income, obviously, cannot be taxed in the hands of non-resident. The fiction created by section 9 is important in the assessment of income of the non-resident as per section 5(1) (b) and (c), the income of a resident, it is immaterial whether the place of accrual or arisal is within or without India, since in either event, is liable to be charged to tax on such income. There is no clause in section 5(2) corresponding to clause (c) of section 5(1) of the Income-tax Act, 1961. This shows that in the case of non-resident unless the place of accrual or arisal of his income is within India, it cannot be subjected to tax i.e., only to the extent to which any income accruing or arising within India is fictionally deemed to accrue or arise in India, the income of non-resident will be made liable to be taxed by reasons of section 5(2) (b) of Income-tax Act. The fiction thus created comes into play only when the income is not chargeable to tax on the basis of the receipt in India as receipt of income in India by itself attracts tax, whether the recipient is a resident or non-resident, or whether the income accrues or arises in India or outside India -Raghava Reddi v. CIT [1962] 44 ITR 720 (SC) and CIT v. Toshoku Ltd. [1980] 125 ITR 525 (SC).
10. In paras 10 and 11 of its order, the CIT (Appeals) has given finding that hire charges are received in India and therefore this is a case where the income of the non-resident is “received in India”, and is also deemed to accrue or arise” in India. So he held that once it is a case of income received in India, the provisions of section 9 cannot be invoked and section 5 only can be made applicable and provisions of sections 160/161 only could have been invoked and not section 163. But, this finding of the CIT (Appeals) is not correct and contrary to the facts on record. The Assessing Officer has not taxed the hire charges, he has taxed the deemed income because of its business connection, and that portion of income attributable to the operations carried out in India which is clear from the facts stated above and assessment order for the year under appeal. If the Assessing Officer treated the hire charges as income liable to tax, then he would have taxed the entire amount of Rs. 27,73,251, but it is not so, he has taxed only Rs. 13,86,626 as its income being 50% because of business connection which is attributable to the operations carried out in India. The A.O. has further given allowance for expenses and fixed the balance.
11. In this connection, we may also mention that the Board has issued Circular No. 23 of 1969 dated 23-7-1969, stating therein that section 9 of the Income-tax Act provides that income accruing or arising directly or indirectly through or from any business connection in India shall be deemed to be income accruing or arising in India and hence, where the person is entitled to such income as non-residant, it will be includible in this total income. In the case of Toshoku Ltd. (supra), it has been held that the income of the business deemed under section 9 to accrue or arise in India shall be only such part of the income, as is reasonably attributed to the operations carried out in India. If, however, all the operations are not carried out in 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 either reasonably attributable to that part of operations carried out in the taxable territories. It follows if no operations are carried out in the taxable territories, the income accruing or arising abroad through or from any business connection in India cannot be deemed to accrue or arise in India. The ambit used in section 5 has been explained and defined in section 9 of the Act in the case of the CIT v. Littles Oriental Balm & Pharmaceuticals Ltd. [1950] 18 ITR 849 at 859 (Mad.). From the foregoing discussion, it is more than clear that though the fishing operations were carried out in the international waters, yet the catches were regularly brought to the Indian Ports and basic operations were done, their value determined, and the custom duty was also paid on such value. One of the grounds on which the CIT (Appeals) has cancelled the Assessing Officers findings was that the payments have been made not in cash but in kind in an Indian Port. This finding of the CIT (Appeals) is obviously wrong as the catch, after bringing to the Indian Ports and after basic operations, its value is determined and 85% of the catch in each voyage is given to the non-resident and the upper limit fixed for payment of US $7,50,000 per annum. We may also usefully extract the para 26 of the agreement :
“26. The fishing vessels and their appurtenances, fish catches, exports, fuel, lubricants, spare parts, packing materials, fishing materials etc. will be subject to duties and taxes as may be applicable under the Indian Laws. If the fuel charges are to be borne by the foreign collaborator, payment shall be made in foreign exchange by the foreign collaborator.”
It is not disputed that custom duty is paid and we hold that this clearly go to show that the assessee is paying custom duty and the said non-resident is liable to pay income-tax.
12. As regards CIT (Appeals)s finding that it cannot be treated as an agent of non-resident, we hold that the said findings of the CIT (Appeals) are also not in order. In this connection, we may extract the provisions of section 163 for better appreciation of the case :
“163(1) For the purposes of this Act, Agent in receipt of any income, whether directly or indirectly; or . . .”
The above discussion clearly go to show that the assessee who has been treated as an agent on account of business connection with non-resident and non-resident also received income from the said agent. The Assessing Officer, in this connection, has issued show-cause notice for treating the assessee as an agent and there is no dispute about it. The Assessing Officer has jurisdiction to decide the question whether a particular person can be treated as an agent of non-resident or not and this issue has been decided by the Calcutta High Court in Barendra Prosad Roy v. ITO [1973] 9 1 ITR 82 at 89 and affirmed by the Supreme Court in Barendra Prosad Roy v. ITO [1981] 129 ITR 295.
13. It is not disputed that unless some income arose to the non-resident, the question of treating anyone as an agent under section 163 of the Income-tax Act does not arise. In the instant case, the income has arisen because of business connection which is clear from the facts of the present case. The non-resident is in receipt of income from the agent. In this connection, the decision of the jurisdictional High Court in the case of Bharat Heavy Plate & Vessels Ltd. (supra) is relevant and worthnoting which is very instructive and applies to the facts of the present case before us. In the said case, their Lordships have held that 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 his trading activity. The non-resident company had made the services personnel worked not merely under the control of the assessee-company and the terms of the agreement would clearly show that both the assessee and the nonresident company had control over the personnel. Both the companies had the authority to change the composition and the number. In the circumstances, it was held that there was a business connection between the non-resident company and the assessee which would justify the assessee-company being treated as the agent of the non-resident company within the meaning of section 163(1) (b) and (c) of Income-tax Act.
14. Before we conclude, we should state that a few days after the hearing of this appeal was over, the learned counsel for the assess brought to our notice that another case involving similar issues was decided by ITAT, Hyderabad Bench B on 30-1-1995 in the case of DCIT, Special Range, Visakhapatnam M/s. South Glory International Pvt. Ltd. represented by M/s. Srinivasa Sea-Foods Pvt. Ltd., Visag and that the said order may also be considered while deciding the present appeal. He filed a copy of the order in the said appeal (ITA Nos. 156 and 570/Hyd. /91). We have carefully considered the said order dated 30-1-1995, rendered in the case of M/s. Srinivasa Sea-foods Pvt. Ltd. In order to rope in, the income of a non-resident under the deeming provisions of section 9(1) of Income-tax Act, it must be shown by the department that at least some of the operations were carried out in India in respect of which the income is sought to be assessed. In the case of Srinivasa Sea-foods (P.) Ltd. (ITA No. 570/Hyd./91), the Tribunal on a consideration of the facts of that case, has recorded a finding of fact that no part of the business operations were carried out in India. On the basis of that finding of fact that not even a single operation was carried out in India and all the operations of business were carried out outside India, the Tribunal held that no assessment against the agent of non-resident as a “representative assessee” can be made in respect of the income deemed to accrue or arise as specified in section 9(1)(i) of Income-tax Act. Accordingly, the Tribunal upheld the cancellation of the assessment in that case.
15. From the material brought to our notice by the department in this appeal, we are fully convinced and satisfied that some of the operations were in fact carried out, in the taxable territories of India. It is this finding of fact recorded by us that tilts the final decision. No doubt, it is true the catching of fish which constitutes a major operation took place outside India. However, mere catching of fish in the mid-sea itself does not result in any income. The catch was brought to the Indian-shore for processing and preservation and also for the purpose of payment of custom-duty and for division of profits. By no stretch of imagination, it can be said that no part of the operations took place in the taxable territories of India. In our considered opinion, some of the operations were in fact carried out in India also. The expression “business operation” connotes a series of continual transactions in a systematic manner. As we have already observed, mere catching of fish in mid-sea does not by itself produce any income. It is the cumulative effect of the all operations carried out in and outside India that produced the income. “Business connection” and “business operations” are linked and reflect on one another. The Explanation to section 9(1)(i) applies where anyone part of the business activities is carried out in India though that part of the activity itself may not be capable of producing income. It is the totality of the operations carried out in and outside India that produced income in this case. No case can be a precedent for another on facts. In that view of the matter, the decision of the ITAT, Hyderabad Bench-B (mentioned supra) which is based on the finding that not even a single operation was carried out in India, can have no application to the facts on hand.
16. In view of the facts and the circumstances of the case, and the case laws and the discussions made above and when section 5 and section 9 being not contradictory, and when they are complementary, it cannot be said that the non-resident had no business connection, and it is also not disputed that the assessee having rendered services in India which amounts to business activity and income has arisen or accrued because of that connection and the non-resident is in receipt of income from the agent, and, therefore, the Assessing Officer has rightly apportioned attributing the portion of income to the operations carried on in India. In view of these facts, the action of the CIT (Appeals) in cancelling the orders of the Assessing Officer by his order dated 26-9-1990, is not in order, and they are accordingly reversed and the revenues appeals are allowed.