Case: Commissioner of Income Tax, Andhra Pradesh Hyderabad Vs. Toshoku Limited, Guntur Etc

Sri Bommidala Kotiratnam (hereinafter referred to as the statutory agent) is a dealer in tobacco at Guntur in the State of Andhra Pradesh. During the previous year relevant to the assessment year 1962-63, the statutory agent purchased tobacco in India and exported it to Japan, where it was sold through M/s. Toshoku Ltd. (the assessee involved in Civil Appeal No. 782 of 1973 a Japanese Company and admittedly non-resident. Under the terms of the agreement between the statutory agent and the assessee referred to above, the latter was appointed the exclusive sales agent in Japan for selling tobacco exported by the former. The assessee was entitled to a commission of 3% of the invoice amount. The sale price received on the sale of tobacco in Japan was remitted wholly to the statutory agent who debited his commission account with the amount of commission payable to the Japanese company and credited the same in the account of the Japanese company in his books on December 31, 1961. The amount was remitted to the Japanese company on February 1, 1962 on which date an appropriate debit entry was made in the account of the Japanese company with the statutory astatutory agent had similarly sold some tobacco during the same accounting period through another non- resident business house by name M/s Societe Pour Le Commerce International Des Tobacs (the assessee involved in Civil Appeal No. 783 of 1973) carrying on business in France. The terms of agreement were the same as in the case of the Japanese Company referred to above, the only difference being the geographical area in which each of them had to render ser vice as a selling agent. In this case also the statutory agent made similar entries in his books regarding the commission payable to the assessee and ultimately made a debit entry in the account of the assessee in his books when the amount was transmitted to the assessee.During the assessment year the question whether the commission amounts sent to the Japanese company and the French business house (hereinafter referred to collectively as the assessees) were assess able in terms of section 161 ofthe Income-tax Act, 1961 (hereinafter referred to as the Act) arose for consideration before the Income-tax Officer. The statutory agent contended that the amounts in question were not taxable in view of the clarification of the legal position by the Board Circular (XXVII-I) of 53 No. 26 (II/53) dated July 17, 1953 whichforeign agent of an Indian exporter operates in his own country and no part of his income arises in India. Usually his commission is remitted directly to him and is therefore not received by or on his behalf in India. Such an agent is not liable to IndianIncome-tax Officer, however, came to the conclusion that the sums in question were taxable in view of the decision of this Court in P. V. Raghava Reddi &Anr. v. Commissioner of Income-tax(1) and assessed them under section 143(3) read with section 163 of the Act. The appeals preferred by the statutory agent against the orders of assessment before the Appellate Assistant Commissioner of Income-tax and the Income-tax Appellate Tribunal were unsuccessful. Thereafter the following common question of law was referred to the High Court of Andhra Pradesh under section 256(1) of theon the facts and in the circumstances of the case the assessment on the appellant under section 161 of the Income-tax, Act, 1961 isHigh Court held that the assessments were not justified and answered the question against the Department. Hence these appeals under Article 136 of the Constitution.

Court's reasoning:
The Court, as it is obvious from the portion extracted above, proceeded to hold that the amount in question was received by the Japanese Company in India and hence was taxable on thatthe cases before us there were no terms corresponding to the term extracted above which was found in the agreements between the assessee and the Japanese Company in P. V. Raghava Reddis case (supra). It cannot be s aid that the making of the book entries in the books of the statutory agent amounted to receipt by the assessees who were non-residents as the amounts so credited in their favour were not at their disposal or control. It is not possible to hold that the non-resident assessees in this case either received or can be deemed to have received the sums in question when their accounts with the statutory agent were credited, since a credit balance without more only represents a debt and a mere book entry in the debtors own books does not constitute payment which will secure discharge from the debt. They cannot, therefore, be charged to tax on the basis of receipt of income actual or constructive in the taxable territories during the relevant accountingall such operations are carried out in India, the entire income accruing therefrom shall be deemed to have accrued in India. If, however, all the operations are not carried out in the taxable territories, the profits and gains of business deemed to accrue in India through and from business connection in India shall be only such profits and gains as are reasonably attributable to that part of the operations carried out in the taxable territories. If no operations of business are carried out in the taxable territories, it follows that the income accruing or arising abroad through or from any business connection in India cannot b e deemed to accrue or arise in India. (See Commissioner of Income-tax, Punjab v. R. D. Aggarwal &Co. &Anr.(1) and M/s. Carborandum Co. v. C.I.T., Madras(2) which are decided on the basis of section 42 of the Indian Income-tax Act, 1922, which corresponds to section 9(1)(i) of the Act.)In the instant case the non-resident assessees did not carry on any business operations in the taxable territories. They acted as selling agents outside India. The receipt in India of the sale proceeds of tobacco remitted or caused to be remitted by the purchasers from abroad does not amount to an operation carried out by the assessees in India as contemplated by clause (a) of the Explanation to section 9(1)(i) of the Act. The commission amounts which were earned by the non-resident assessees for services rendered outside India cannot, therefore, be deemed to be incomes which have either accrued or arisen in India. The High Court was, therefore, right in answering the question against the Department.