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

(2) The appellant is a public limited company incorporated in the United Kingdom and owns a spinning and weaving mill located at Pondicherry in French India. The year of account of the appellant of the calendar year. In the year 1939, no sales of yarn or cloth manufactured by the Company were effected in British India, though in the previous year such sales were effected. All the purchases of cotton required for the mills were made in British India by Messrs. Best and Co. Ltd. Under an agreement between the appellant and Messrs. Best and Co. Ltd., Madras, dated 11/7/l939, Messrs. Best and Co. Ltd., were constituted the agents of the appellant for the purposes of its business in India. Messrs. Best and Co. Ltd., have under the terms of the agreement full powers in connection with the business of the appellant in the matter of purchasing stock, signing bills and other negotiable instruments and receipts and settling, compounding or compromising any claim by or against the appellant. The agents are empowered to borrow money on behalf of the appellant and to make advances. They are also expected to secure the best commissions, brokerages, rebates, discounts and other allowances in respect of and in connection with the business of the appellant. They are enjoined to keep proper accounts of the appellant and to pay over to the appellant the sum standing to its credit. They are remunerated by a salary of Rs. 6,500.00 per month and a percentage commission on the profits made. During the relevant year all the purchases of cotton required for the mill at Pondicherry were made by the agents in British India and no purchases were made though any other agency. The agents exercised their judgment and skill and purchased such qualities and quantities of cotton and at such prices as they In their expenence considered most advantageous in the interests of the company.(3) Prior to 193940 the appellant was assessed toin British India on the profits computed on a turnover basis earned by the sales in British India of the goods manufactured by the appellant. In the course of the assessment yearthe appellant stated that it discontinued its business in British India with effect from 1/04/1939 and claimed relief under Sec.25 (3) which was granted. In the course of his further enquiries theOfficer found that though the appellant was not selling its goods in British India and earning a profit thereby, it continued to have an active business connection in British India having regard to the way in which the business of purchasing goods and materials for the mills was carried on. Thereupon theOfficer held that such purchases of cotton in British India constituted a business connection in British India and that the profits attributable to the purchases were liable to tax under Ss. 42(1) and 42 (3) of the Act. The net income of the company was computed to be Rs. 2,81,176.00 and ten per cent. of this sum was apportioned under S. 42(3) of the Act as being the profits and gains reasonably attributable to that part of the business operations which were carried out in British India. The appellant appealed against the said order of theOfficer to the Appellate Assistant Commissioner, who confirmed the order at theOfficer. A further appeal by the appellant to the Tribunal was unsuccessful.(4) At the instance of the appellant, the Tribunal stated a case and referred the following questions for the decision of the High Court under S. 66(1) at the Act: "1. Whether, in the circumstances of this case the assesseecompany had any business connection in British India within the meaning of Ss. 42(1) and 43 (3),Act?2. Whether any profits could reasonably be attributed to the purchase of entire cotton made in British India by the secretaries and agents of thewithin the meaning of Ss. 42(1) and 43(3),Act?" The High Court answered both these questions in the affirmative and in our opinion rightly.

Reasoning: (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.