Civil Appeal Nos
1449 1456 of 1974
From the Judgment and Order dated 152191972 of the Calcutta High Court in ITR Nos 128 and 160 of 1967
SC Manchanda VGauri Shankar MB Rao and Ms A Subhashini for the Appellants
Dr Devi Pal HK Dutt Ms section Seal and DN Gupta for the Respondent
The Judgment of the Court was delivered by RANGANATH MISRA J
These are appeals by the Revenue by special leave and are directed against the decision of the Calcutta High Court dated 1591972 rendered upon references made under section 2561 of the Income tax Act of 1961
The Tribunal referred the following six questions for opinion of the Court 1
Whether on the facts and in the circumstances of the case and on a proper construction of the agreement between the Indian Company and the Export Company the Tribunal was 886 right in holding that the six non resident companies in Group A had a business connection with the Indian Company and therefore that the Indian Company was correctly treated as an agent of the said non resident companies under section 163 of the Income tax Act 1961 2
If the answer to question No 1 is in the affirma tive then whether on the facts and in the circumstances of the case the Tribunal was justified in holding that any profit could be deemed to accrue or arise in India to the six non residents in the United Kingdom in respect of the goods sold by them to customers in India 3
Whether on the facts and in the circumstances of the case and on a proper construction of the agreement dated 223
1955 between the Indian Company and Crane Packing Ltd company in Group B the Tribunal was right in holding that the non resident company had business connection with the Indian Company and therefore the Indian Company was cor rectly treated as an agent of the said non resident company under section 163 of the Income tax Act 1961 4
If the answer to question No 3 is in the affirma tive then whether on the facts and in the circumstances of the case the Tribunal was justified in holding that any profit could be deemed to accrue or arise in India to the aforesaid non resident company in respect of the goods sold by it to customers in India 5
Whether on the facts and in the circumstances of the case and on proper construction of the agreement dated 161954 between the Indian Company and Budy Tubing Co Australia Pvt
Ltd non resident company in Group B the Tribunal was right in holding that the non resident company had business connection with the Indian Company and there fore the Indian Company was correctly treated as an agent of the said nonresident company under section 163 of the Income tax Act 1961 6
If the answer to question No 5 is in the affirma tive then whether on the facts and in the circumstances of the case the Tribunal was justified in holding that any profits could be deemed to accrue or arise in India to the aforesaid non resident company in respect of the goods sold to the customers in India 887 The short facts relevant for appreciating the background in which these questions arose are these TI M Sales Ltd assesseerespondent was assessed to income tax as a representative assessee of ten non resident companies
The Tribunal grouped the ten nonresident companies under three heads six in Group A three in Group B and one in Group C
In regard to the companies under Group A the assesee had no direct agreement but had dealings by virtue of its agreement with the exporting company
So far as the three companies under Group B are concerned the assessee had no business connection with them and so far as the only company under Group C is concerned the assessee s stand was that it had an agreement dated 16121948 with the export company but no liability accrued under the law in respect of the trans actions
The Income tax Officer referred specifically to the agreement of 1948 and refuted the stand of the assessee by saying The agreement of 6121948 referred to above which continued during the relevant years is clear authority that the non resident had employed the Indian Company for selling its goods in India on commission
The agreement certainly brings into existence a business connection between the two
The Indian Company is in receipt of commission calculated with reference to the aforesaid values of goods sent not only by the non residents but also by some manufacturers of the TI Group in the United Kingdom with which the Indian Company had no direct contract but which supply goods to India as per orders placed by the Indian Company through the non residents   
The Income tax Officer also found that the Group A companies belonging to the TI Group were connected with the Indian Company through the export company
Appeals challenging the assessment were taken to the Appellate Assistant Commissioner
Before him the assessee tried to establish the actual course of dealing between the Indian Company and the ten non residents and contended that no liability under the Act accrued
The Appellate Authority dismissed the contentions of the assessee by holding that the assessee has produced no proof of its assertions and on the contrary has blocked the enquiry by me thereon
Along with the grounds of the appeal filed before the Tribunal an affidavit dated 27121965 of Carol Sturart Cameron was filed
Cameron stated in that affidavit that he was the Secretary of the assessee and was in superin 888 tendence of the proceedings relating to the assessments of the assessee as representative assessee of the ten non residents
In that affidavit he denied the fact that before the Appellate Assistant Commissioner any obstruction was offered to an attempted probe by the said Appellate Authori ty
On the other hand the affidavit stated that several documents were made available before the Appellate Authority and were available and actually placed before him and in case the Appellate Authority wanted any information or further documents to be produced Cameron was prepared to do so
We shall again refer to the affidavit in its appropriate place later
Before the Tribunal some argument was raised with reference to the affidavit but ultimately the Tribunal upheld the assessments but referred the questions indicated above for the opinion of the High Court
The High Court by the impugned judgment reported in referred to the provisions of sections 4 42 and 43 of the Income tax Act of 1922 corresponding to sections 5 9 and 163 respec tively of the Income tax Act of 1961
In the light of the affidavit of Cameron it took note of the fact that no attempt had been made by the Revenue to traverse the facts stated therein referred to and relied upon the decision of this Court in the case of Commissioner of Income tax Punjab vs RD Aggarwal  Co and came to hold that there was no element of business connection and therefore the assessee was not liable
Questions 1 3 and 5 were thus answered in the negative and against the Revenue and there fore Questions 2 4 and 6 which were required to be an swered only if the answer to the other three questions was in the affirmative did not arise
In  this Court held A relation to be a business connec tion must be real and intimate and through or from which income must accrue or arise whether directly or indirectly to the nonresident
The expression business connection undoubtedly means something more than business
A business connection in section 42 involves a relation between a business carried on by a non resi dent which yields profits or gains and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits or gains
It predi cates an element of continuity between the business of the non resident and the activity in the taxable territories a stray or isolat ed transaction is normally not to be regarded as a business connection
Business connection may take several forms it may include carrying on a part of 889 the main business or activity incidental to the main business of the non resident through an agentor it may merely be a relation be tween the business of the non resident and the activity in the taxable territories which facilitates or assists the carrying on of that business
In each case the question whether there is a business connection from or through which income profits or gains arise or accrue to a nonresident must be determined upon the facts and circumstances of the case A relation to be a business connec tion must be real and intimate and through or from which income must accrue or arise whether directly or indirectly to the nonresident
But it must in all cases be remembered that by section 42 income profit or gain which accrues or arises to a non resident outside the taxable territories is sought to be brought within the net of the Income tax law and not income profit or gain which accrues or arises or is deemed to accrue or arise within the taxable territories
Income re ceived or deemed to be received or accruing or arising or deemed to be accruing or arising within the taxable teritories in the previous year is taxable by section 41a  c of the Act whether the person earning is a resident or non resident
If the agent of a non resident receives that income or is enti tled to receive that income it may be taxed in the hands of the agent by the machinery provision enacted in section 402
Income not taxable under section 4 of the Act of a non resident becomes taxable under section 421 if there subsists a connection between the activity in the taxable territories and the business of the non resident and if through or from that connection income directly or indirectly arises
 Whether a relationship would amount to business connec tion as provided in section 1631b of the Income tax Act of 1961 for the purpose of giving rise to liability under section 91 of the Act would depend upon a set of facts arising in a particular case
The High Court relying upon the facts stated in the affidavit of Cameron has found that during the hearing or the appeals before the Appellate Assistant Commissioner Court had produced certain records to show the manner in which the business had been carried on and the nature of the transactions
The Appellate Assistant Commissioner in his order indicated 890 The assessee submits that the contracts for the supply of goods ordered by the Indian buyers are accepted in the foreign country that the property in the goods shipped passes to the Indian buyers at the port of shipment in the foreign country that the payment for the goods is received by the non residents in the foreign country that the sale and pur chases are as between principal and principal and therefore cannot be said that the non residents have either a business connection in India or have any income which could be deemed to accrue or arise in India as attributable to any operation carried out in India
I may here touch briefly on that the assessee has pro duced no proof of these assertions and on the contrary has blocked enquiry by me therein The assessee is aggrieved that in the orders under section 143 the Income tax Officer assumed ipsi dixit that the sales were made in India
It submits that while it is true that the non residents  products were sold to persons in India that does not con clude the question and on the facts of this case the property in the goods sold passed to the Indian buyers outside India and there fore the Income tax Officer s axiomatic assumption that there were any sales in India is incorrect and if there were no sales in India there is no income which could be deemed to accrue or arise in India by invoking the provisions of section 9 as no operation is carried out in India
 The order of the Appellate Assistant Commissioner shows that Cameron appeared before him at the hearing on 391965 and 491965 and the appeals were dismissed by order dated 1791965
This Court s judgment in CITv
RD Aggarwal  Co supra was pronounced on 6th of October 1964
The order of the Appellate Assistant Commissioner makes casual reference to this judgment but the ratio thereof had not been put to use in any manner and the same does not appear to have had any perceptible effect on the decision of the Appellate Assistant Commissioner
Along with the memoranda of appeal filed before the Tribunal the assessee filed the affidavit of Cameron
That affidavit is dated 27121965
The Revenue had notice of it and the Tribunal in its decision has stated along with the grounds of appeal before us there is an 891 affidavit by Shri Cameron setting out the course of dealing and alleging that several of these representatives files were inspected by the Appellate Assistant Commissioner at the time of hearing of the appeals
 The Tribunal however did not dealt with the affidavit by saying For the purpose of a decision as to whether the Indian company could be appointed agent under section 163 by virtue of business con nection with the non resident companies it is not necessary to go into the terms of the affidavit
These facts might have a bearing on the quantum of the income deemed to arise to the non resident companies from the business connection
 The Tribunal obviously fell into an error in brushing aside the affidavit for the reason it indicated
The facts stated in the affidavit had a direct bearing on the point in issue namely whether there was any business connection between the assessee and the non resident companies
In course of the argument of the matter before the High Court sumptuous reference was made by the counsel for the Revenue to the affidavit of Cameron
The judgment of the High Court says Mr Pal for the department submits that the affidavit of Mr Carol Stuart Cameron Secre tary of the Indian Company affirmed on 27121965 which was filed before the Appel late Tribunal contains facts which must be read in the light of the agreement between the parties 
This would indicate that there was no objection to the acceptance of the affidavit and use of its content while dealing with the matter and the High Court relied upon the affidavit and stated In our case the facts as they appear from the documents on record and the affidavit of Mr Cameron referred to above which inciden tally has not been traversed by the department are a procuring of raw materials and manu facture of finished goods took place outside the taxable territories b contracts for sale of goods were entered into outside the taxable territories c price was received by the non residents outside the taxable territo ries and d delivery was also made outside the taxable territories
Moreover Cameron in his affidavit categorically states that the orders which were sent from India were accept ed by the 892 non residents in London and intimation of such acceptance was communicated either to the Indian company or to the Indian customers and the orders became binding contracts only after being accepted in this manner
In other words the Indian company had no authority to accept any offers on behalf of any of these non residents whether they belonged to Group A or Group B The department as we have stated has not adduced any evidence to contradict the facts stated by Cameron either from the course of dealings between the parties or otherwise The position therefore is that in a case like this there can be no business connection unless the Indian assessee has the authority to accept offers or to enter into contracts on behalf of the non residents
The Tribunal has found that in the case of one company only there was an express prohibition against acceptance of offers
But in the other contracts there was no such express prohibi tion
The Tribunal has granted relief in the case of express prohibition but has taken a different view with regard to those contracts in which there was no such prohibition
In our opinion having regard to the facts stated by Cameron and the course of dealings between the parties absence of express prohibition in the instant case is immaterial
It is true that the Indian company was the sole agent of the Group B companies
But it appears from the evidence on record that in spite of being the sole agent the Indian company had no authority given to it by the Group B companies to accept offers on their behalf
So far as Group A companies are concerned there was no privity of contract at all either of agency or of any other variety
In these premises we cannot but hold that the Indian assessee had no business connections with the non resident companies belonging either to Group A or Group B within the meaning of section 42 of the 1922 Act corresponding to section 9 of the 1961 Act
 Learned counsel for the appellant was very critical about the manner in which the High Court utilised the affidavit and came to its conclusions regarding the facts in dispute
The criticism is not without force
Ordinarily the High Court should have declined to use the assertions in the affidavit for the purpose of recording findings of fact and if at all in its opinion the affidavit was to be utilised the matter should 893 have gone before the Tribunal for a fresh disposal of the appeals
The facts of this case are however somewhat peculiar
Rule 10 of the Income Tax Appellate Tribunal Rules 1963 provides Where a fact which cannot be borne out by or is contrary to the record is alleged it shall be stated clearly and concisely and supported by a duly sworn affidavit
 It is the stand of the respondent that Cameron s affida vit came within the ambit of Rule 10 and had therefore been filed along with the memoranda of appeals before the Tribunal
We are satisfied that the Revenue had full notice of the affidavit and as pointed out by the High Court it did not dispute the facts stated in the affidavit by filing objection or counter thereto
The affidavit had not been rejected by the Tribunal but had only been brushed aside by saying that it was not relevant
Before the High Court counsel for the Revenue also used the affidavit
We do not think it would be appropriate at this stage to accept the submission made at the Bar on behalf of the appellant and put back the matter to the stage of the second appeal before the Tribunal
The assessments relate to a period about a quarter of a century back and by its conduct the Revenue appears to have waived its fight to dispute the facts as serted in the affidavit on one hand by not challenging its admissibility and on the other by not disputing the con tents thereof
We have been told during the hearing of the appeals that Cameron is now dead
Once the facts stated in the affidavit are accepted the ratio of the decision of this Court in C LT
RD Aggarwal  Co supra would be fully applicable and the High Court has utilised the ratio in that decision to find out whether any business connection between the assessee and the non resident companies had been established
There is no dispute that unless the matter comes under section 1631a of the Act there will be no liability for assessment
In that view of the matter these appeals have to fail
The appeals are therefore dismissed but without any order for costs
NPV Appeals dis missed


Summary:
The assessee respondent was assessed to income tax as a representative assessee of ten non resident companies
The companies were grouped under three heads six in Group A three in Group B and one in Group C
In regard to the companies under Group A the assessee had no direct agree ment but had dealings by virtue of its agreement with the exporting company as regards the three companies under Group B the assessee had no business connection with them and so far as the only company under Group C was concerned the assessee s stand was that it had an agreement dated December 16 1948 with the export company but no liability accrued under the law in respect of the transactions
The Income tax Officer referred specifically to the agreement of 1948 and refuted the stand of the company
He held that the agreement was a clear authority that the non resident had employed the Indian Company for selling its goods in India on commission and that it brings into exist ence a business connection between the two companies
He also held that the Group A companies were connected with the Indian Company through the export company
Appeals were filed by the assessee challenging the assessments before the Appellate Assistant Commissioner
The assessee tried to establish the actual course of dealing between the Indian Company and the ten non residents and contended that no liability under the Act accrued
The Appellate Authority dismissed the contentions of the asses see by holding that the assessee had produced no proof of its assertions and on the contrary had blocked the inquiry
Before the Tribunal an appeal was filed by the asses see
Along with the grounds an affidavit dated December 27 1965 of the Secretary of the assessee was also filed and it was stated therein that there was no 884 obstruction to the proceedings before the Appellate Assist ant Commissioner with regard to the attempted probe by the Appellate Authority and that several documents were made available before the Appellate Authority and were actually placed before him and in case the Appellate Authority wanted any information or further documents to be produced the Secretary was prepared to do so
The Tribunal did not deal with the aforesaid affidavit on the ground that it was not necessary for the purpose of determining whether the Indian Company could be appointed agent under Section 163 of the Act
It upheld the assess ments and referred to the High Court the questions whether the non resident companies had business connection with the Indian Company and whether the Indian Company was correctly treated as an agent of the said non resident companies under Section 163 of Income tax Act 1961
The High Court held that the Indian assessee had no business connections with the non resident companies within the meaning of Section 9 of the Act
Dismissing the appeals of the Revenue this Court HELD 1
The High Court was right in holding that the Indian assessee had no business connections with the non resident companies within the meaning of Section 9 of the 1961 Act
Unless the matter comes under Section 1631a of the Act there will be no liability for assessment
893F 2
Whether a relationship would amount to business connection as provided in Section 1631b of the Income tax Act of 1961 for the purpose of giving rise to the li ability under Section 91 of the Act would depend upon a set of facts arising in a particular case
889F G 3
The order of the Appellate Assistant Commissioner shows that the Secretary appeared before him at the hearing on September 3 and 4 1965 and the appeals were dismissed by order dated September 17 1965
890F 4
Ordinarily the High Court should have declined to use the assertions in the affidavit for the purpose of recording findings of fact and if at all in its opinion the affidavit was to be utilised the matter should have gone before the Tribunal for a fresh disposal of the ap peals
892H 885 5
In the instant case the High Court relying upon the affidavit of the Secretary of the assessee had found that during the hearing of the appeals before the Appellate Assistant Commissioner the Secretary had produced certain records to show the manner in which the business had been carried on and the nature of the transactions
The Tribunal obviously fell into an error in brushing aside the affida vit
The facts stated therein had a direct bearing on the point in issue namely whether there was any business connection between the assessee and the non resident compa nies
889G H 891C D 6
The assessments relate to a period about a quarter of a century back and by its conduct the Revenue appears to have waived its right to dispute the facts asserted in the affidavit on one hand by not challenging its admissibility and on the other by not disputing the contents thereof
It would not be appropriate at this stage to put back the matter to the stage of the second appeal before the Tribu nal
893D El Commissioner of Income Tax Punjab vs
RD Aggarwal and Company and another  referred to