Case: The Commissioner Of Income-Tax, Bombay Vs. S. K. F. Ball Bearing Co., Ltd

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 realised, were remittances not of sale proceeds, but in discharge of its obligation under cl. 23 of the agreement; and that the realisations 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". 6.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 sell-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 corporations 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 realised 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 realised the price of the goods sold alter the nature of the realisations? 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 the foreign corporations was not altered because before realising 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 realised as the agent of the foreign corporations. If remittance in respect of a sale was made before the price was realised, the S. K. F. became entitled to adjust the account and to take credit for the amount paid out of the realisation. What the foreign corporations received under remittances made before or after realisation 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. 7. 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 realised. Again we are unable to agree with the contention of counsel for the S. K. F. that there was a contract of surety-ship 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. 8. 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 realisation 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 realised and has discharged that obligation. 9. In the view taken by us, the second question will be 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.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]e 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 sell-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 corporations 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 realised 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 taxedThe 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 the foreign corporations was not altered because before realising 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 realised as the agent of the foreign corporations. If remittance in respect of a sale was made before the price was realised, the S. K. F. became entitled to adjust the account and to take credit for the amount paid out of the realisation. What the foreign corporations received under remittances made before or after realisation 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 territory7. 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 realised. Again we are unable to agree with the contention of counsel for the S. K. F. that there was a contract of surety-ship 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 sold8. 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 realisation 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 realised and has discharged that obligation9. In the view taken by us, the second question will be 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