Case: Anglo-French Textile Co. Ltd Vs. Commissioner Of Income-Tax,Madras

Raichur even though the manufactured oil was sold in Bombay and the price was received there, and accordingly, that part of the profits derived from sales in Bombay which was attributable to the manufacture of the oil in Raichur was exempt from excess profits tax under the proviso to S. 5 of the Act, Reference in this case was made to the decision of the House of Lords in -In re Commrs. of Taxation v. Kirk, (1900) AC 588, wherein it was held that where income was in part derived from the extration of ore from the soil of New South Wales Colony, and from the conversion in the latter Colony of the crude ore into a merchantable product, this income was assessable under the New South Wales Land and Income-tax Assessment Act of 1895, S. 15, sub-ss. 3 and 4, notwithstanding that the finished products were sold exclusively outside the colony, Lord Davey while delivering the judgment of the privy Council observed as follows : "It appears to their Lordships that there are four processes in the earning or production of this income - (1) the extraction of the ore from the soil; (2) the conversion of the crude ore into a merchantable product, which is a manufacturing process; (3) the sale of the merchantable product; (4) the receipt of the moneys arising from the sale All these processes are necessary stages which terminate in money, and the income is the money resulting less the expenses attendant on all the stages. The first process seems to their Lordships clearly within sub-s., (3), and the second or manufacturing process, if non within the meaning of trade in sub-s. (1), is certainly included in the words any other source whatever in sub-s. (4). So far as relates to these two processes, therefore, their Lordships think that the income was earned and arising and accruing in New South Wales." On a parity of reasoning, it can well be said in this case that the profits accrue of arise to the appellant from three business processes or operations, those being (1) the purchase of cotton in British India; (2) its conversion by the process of manufacture in Pondicherry, into yarn or cloth; and (3) the sale of the merchantable product, and those have to be apportioned between these three operations. The same line at reasoning was adopted by the Madras High Court in -Bangalore Woollen, Cotton and Silk Mills Co. Ltd. v. Commr. of Income-tax. Madras, 1950-18 ITR 423 (Mad). There it was held that the purchase of raw materials by the managing agents in British India would be an operation within the meaning of S. 42 (3) and it was reasonable to attribute a portion of the profits to such purchases in British India.(7) After a careful consideration of the decided cases on the subject and in view of the insertion of S. 42 (3) in the Act of 1922 by the amending Act of 1939, we have reached the conclusion that in the present state of the law there is hardly any scope for maintaining the view contended for by the learned counsel for the appellant and we therefore agree with the High Court in repelling it. While maintaining the view taken by the High Court in the case we wish to point out that it is not every business activity of a manufacturer that comes within the expression "operation" to which the provisions of S. 42 (3) are attracted. These provisions have no application unless according to the known and accepted business notions and usages the particular activity is regarded as a well defined business operation. Activities which are non well defined or are of a casual or isolated character would non ordinarily fall within the ambit of this rule. Distribution of profits on different business operations or activities ought only to be made for sufficient and cogent reasons and the observations made here are limited in the facts and circumstances of this case. In a case where all that may be known is that a few transactions of purchase of raw materials have taken place in British India, it could non ordinarily be said that the isolated acts were in their nature "operations" within the meaning of that expression. In this case the raw materials were purchased systematically and habitually through an established agency having special skill and competency in selecting the goods to be purchased and fixing the time and place of purchase. Such activity appears to us to be well within the import of the term "operation" as used in S. 42 (3) of the Act. It is non in the nature of an isolated transaction of purchase of raw materials. The first contention of the assessee is therefore negatived.(8) The learned counsel argued in a rathar half-hearted manner that there was no business connection of the assessee in British India. This contention does not require serious consideration. An isolated transaction between a non-resident and a resident in British India without any course of dealings such as might fairly be described as a business connection does not attract the application of S. 42, but when there is a continuity of business relationship between the person in British India who helps to make the profits and the person outside British India who receives or realizes the profit, such relationship does constitute a business connection. In this case there was a regular agency established in British India for the purchase of the entire raw materials required for the manufacture abroad and the agent was chosen by reason of his skill, reputation and experience in the line of trade. The terms of the agency stated in the earlier part of this judgment fully establish that Messrs. Best and Co. Ltd., were carrying on something almost akin to the business of a managing agency in India of the foreign company and the latter certainly had a connection with this agency. We therefore negative this contention of the learned counsel as well.

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

Explanation:
0[ds](7) After a careful consideration of the decided cases on the subject and in view of the insertion of S. 42 (3) in the Act of 1922 by the amending Act of 1939, we have reached the conclusion that in the present state of the law there is hardly any scope for maintaining the view contended for by the learned counsel for the appellant and we therefore agree with the High Court in repelling it. While maintaining the view taken by the High Court in the case we wish to point out that it is not every business activity of a manufacturer that comes within the expression "operation" to which the provisions of S. 42 (3) are attracted. These provisions have no application unless according to the known and accepted business notions and usages the particular activity is regarded as a well defined business operation. Activities which are non well defined or are of a casual or isolated character would non ordinarily fall within the ambit of this rule. Distribution of profits on different business operations or activities ought only to be made for sufficient and cogent reasons and the observations made here are limited in the facts and circumstances of this case. In a case where all that may be known is that a few transactions of purchase of raw materials have taken place in British India, it could non ordinarily be said that the isolated acts were in their nature "operations" within the meaning of that expression. In this case the raw materials were purchased systematically and habitually through an established agency having special skill and competency in selecting the goods to be purchased and fixing the time and place of purchase. Such activity appears to us to be well within the import of the term "operation" as used in S. 42 (3) of the Act. It is non in the nature of an isolated transaction of purchase of raw materials. The first contention of the assessee is thereforecontention does not require serious consideration. An isolated transaction between aand a resident in British India without any course of dealings such as might fairly be described as a business connection does not attract the application of S. 42, but when there is a continuity of business relationship between the person in British India who helps to make the profits and the person outside British India who receives or realizes the profit, such relationship does constitute a business connection. In this case there was a regular agency established in British India for the purchase of the entire raw materials required for the manufacture abroad and the agent was chosen by reason of his skill, reputation and experience in the line of trade. The terms of the agency stated in the earlier part of this judgment fully establish that Messrs. Best and Co. Ltd., were carrying on something almost akin to the business of a managing agency in India of the foreign company and the latter certainly had a connection with this agency. We therefore negative this contention of the learned counsel as well.