THE HON’BLE SRI JUSTICE V.V.S.RAO AND THE HON’BLE SRI JUSTICE B.N.RAO NALLA REFERRED CASE No.256 of 1996 29.11.2011 Between: Far Eastern Shipping Services, Singapore, represented by Coastal Trawlers Limited, Vizag … Petitioner AND The Commissioner of Income-tax, Vizag … Respondent THE HON’BLE SRI JUSTICE V.V.S.RAO AND THE HON’BLE SRI JUSTICE B.N.RAO NALLA REFERRED CASE No.256 of 1996 ORDER: (Per Hon’ble Sri Justice V.V.S.Rao) The assessee, namely, Far Eastern Shipping Services, Singapore, represented by Coastal Trawlers, Visakhapatnam got the following four questions referred to this Court under Section 256(1) of the Income Tax Act, 1961 (the Act). 1) Whether on the facts and circumstances of the case, the finding of the Hon’ble Tribunal that the non-resident principal of the assessee had carried on certain operations in Indian Taxable Territory resulting in the accrual of income was based on any material or evidence? 2) Whether on the facts and circumstances of the case, the Tribunal was correct in recording as a fact that though the operation of catch of fish took place outside the taxable territory, such catch was brought to the Indian Shore for processing and preservation, when the facts as found by the Assessing Authority and the first appellate authority show otherwise and the facts as found by the first appellate authority were not questioned by the department in its appeal? 3) Whether on the facts and the circumstances of the case, the Tribunal having noted the provisions of the Agreement for avoidance of Double Taxation between India and Singapore, was right in not holding that no income accrued or arose to the non-resident principal of the assessee in India which fact was conceded by the appellant department in one of the grounds urged in its appeal? 4) Whether having regard to the actual facts and circumstances of the case, the Tribunal was correct in holding that income is deemed to have accrued or arisen to the non-resident assessee in India during the previous year relevant to the assessment year under the consideration under the provisions of Section 9(1) of the Income-tax Act? The background facts as stated by the Income-tax Appellate Tribunal, in brief, are as follows. The assessee is a non-resident company of Singapore which is represented by an Indian company. Under an agreement between the two companies during the assessment year 1987-88 the non-resident company chartered their fishing trawlers to the Indian company. There is no dispute that the consideration for the charter is payment of hire charges in kind i.e., 85% of the value of the catch to be given by the Indian company and non-resident company again pay back 15% of the value to the Indian company. Be that as it is, the assessing officer passed orders on 09.3.1998 appointing the Indian company as the agent of non-resident company and raised demand for the tax insofar as 7.5% of 85% of the catch received by the assessee. The Commissioner of Income-tax (Appeals), however, allowed the appeal taking a view that income could not be said to arise or accrue in India as all the operations resulting in the accrual of income were carried out by non-resident outside India. This view was, however, reversed by the Tribunal. It is contended by the assessee that the agreement between the parties was entered into at Singapore, that no part of the accruals arose in India and that and that when the operation of catch of fish took place outside taxable territory the income cannot be charged to tax. The Revenue relies on the decision of this Court in Kanchanganga Sea Foods Ltd v CIT[1] which was affirmed by the Supreme Court in Kanchanganga Sea Foods Ltd v CIT[2] (II). In Kanchanganga Sea Foods Ltd five questions were referred to this Court. The first three of them being similar to the questions referred to in this referred case. Therein the assessee was engaged in the sale of export of sea food. After obtaining permission to fish in the exclusive economic zone, they entered into agreement for chartering two fish vessels with East Wide Shipping Company (Hongkong) Limited. The Reserve Bank of India granted permission to remit 85% towards hire charges and the agreement was also permitted by the Government of India. The fishing trawlers were delivered at Madras Port for commencement of fishing operations and 85% of gross earnings in the sale of fish was paid as chartering fee. The assessing officer levied interest under Section 201(1A) of the Act on the ground that the assessee while making payment to non-resident within the meaning of Section 195 of the Act failed to deduct tax at source. The contention of the assessee that there was no chargeable income at all which resulted to the non-resident company as no payment of any sum by the assessee to the non- resident and that as the operations were carried on beyond twelve nautical miles on the seashore beyond the taxable territory, no income agreed to the non-resident company. The appellate Commissioner agreed with the view but the Tribunal having regard to Section 5(2) of the Act reversed the CIT (A) and at the instance of assessee refer the questions to this Court. This Court considered the scope of Section 195, 201 and 201(1A) of the Act and answered the questions against the assessee and in favour of the Revenue holding that demand is made to the non-resident in India; the receipt in the form of 85% of the catch of fish by the non-resident was in India after completion of all formalities and that the Tribunal was correct in holding that the assessee ought to have deducted tax at source. Before the Supreme Court in Kanchanganga Sea Foods (II) it was submitted that there was no income chargeable which resulted to the non-resident assessee as no payment of any sum by the assessee took place in India and, therefore, liability to deduct tax at source did not arise. The plea was rejected by the Supreme Court and it was held as follows. From a plain reading of the aforesaid provision it is evident that the total income of a 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 deemed to accrue or arise to a non-resident company in India. The legal fiction created has to be understood in the light of the terms of contract. Here, in the present case the chartered vessels with the entire catch were brought to the Indian port, the catch was certified for human consumption, valued, and after customs and port clearance the 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 the 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 the law and 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 realisation 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 the 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 $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. In view of the decision of the Supreme Court, the questions 1 to 4 referred to this Court are answered in the affirmative in favour of the Revenue and against the assessee. The Referred Case shall stand disposed of accordingly. _______________ (V.V.S.RAO, J) ____________________ (B.N.RAO NALLA, J) November 29, 2010. YS [1] (2004) 265 ITR 644 (AP) [2] (2010) 11 SCC 144 : (2010) 325 ITR 540 (SC)