Case: M/S.Kanchanganga Sea Foods Ltd Vs. Commnr. Of Income Tax

Facts giving rise to the present appeals are that the appellant M/s. Kanchanganga Sea Foods Limited is a company incorporated in India and engaged in sale and export of sea food and for that purpose obtained permit to fish in the exclusive economic zone of India. To exploit the fishing rights, the appellant-company (hereinafter referred to as the "assessee") entered into an agreement dated 7th March, 1990 chartering two fishing vessels i.e., two pairs of Bull Trawlers, with Eastwide Shipping Co. (HK) Ltd. a non-resident company incorporated in Hong Kong. Clause 4 of agreement which is relevant for the purpose reads as follows. Deponent Owners to provide:The Deponent Owners will provide fishing vessels, as approved by Government of India, for all inclusive charter fee of US $ 600,000.00 per vessel per annum. The charter fee is inclusive of fuel cost, maintenance repairs, wages, food for the crew and any other expenses incurred in connection with the operation of the vessel. They will provide training to the Indian crew in all aspects of fishing techniques, maintenance and running of the engine. In addition:a) The Deponent Owners should pay the charterersor 15% of the gross value of the catch whichever is more.b) Annual charter fee shall be maximum of US $ 600,000 per vessel per annum payable by way of 85% of gross earning from the fish sales subject to the condition that this will not exceed 85% of the sales value of the catch per vessel per annum on voyage to voyage basis. Minimum 15% of the earning by way of sales value of catch of fish should accrue to the charterer. Payment to the Deponent Owners should not exceed the above charter fee.c) Export value of catch from the chartered vessels should not be lower than the prevailing international market price at the time ofThus, according to the terms of the agreement the Eastwide Shipping Co.(HK) Ltd., the owner of the fishing Trawlers (hereinafter referred to as the "non-resident company") was to provide fishing Trawlers to the assessee for all inclusive charter fee of US $ 600,000 per vessel per annum. In terms of the agreement the assessee was to receiveor 15% of the gross value of catch, whichever is more. The charter fee was payable from earning from the sale of fish and for that purpose 85% of the gross earnings from the sale of fish was to be paid to the non-resident company.3. Necessary permission to remit 85% of the gross earning from the sale of fish towards charter-fee was granted by the Reserve Bank of India. As per agreement the Trawlers were to be delivered at Chennai Port for commencement of fishing operation. Clause 4 of the terms and conditions of permission granted by the Reserve Bank of India reads as follows:"4. In case you are required to deduct tax at source while paying charter hire charges, you have to produce documentary evidence showing the payment of taxes by deduction at source from the charter hire charges paid by you. However, if no tax is to be deducted at source as above, a clearance to that effect should be obtained from the Ministry concerned and submitted to us before payment of charter hire charges."4. Trawlers were delivered to the assessee with full equipment and complement of staff at Chennai Port. Actual fishing operations were done outside the territorial waters of India but within the exclusive economic zone. The voyage commenced and concluded at Chennai Port. The catch made at high seas were brought to Chennai where surveyor of Fishery Department verified the log books and assessed the value of the catch over which local taxes were levied and paid. The assessee after paying the dues arranged Customs clearance for the export of the fish and the Trawlers, which were used for fishing, carried the fish to destination chosen by non-resident company. The Trawlers reported back to Chennai Port after delivering fishes to the destination and commenced another voyage. The assessee did not deduct the tax from the non-resident company nor produced any clearance certificate during the Assessment Years 1991-92 to 1994-95. Notice under Section 201(1) of the Income Tax Act was issued to it to show cause as to why it should not be deemed to be an assessee in default in relation to tax deductible but not deducted. The assessee filed objection contending that the non-resident company did not carry out activities or operations in India which have the effect of resulting in accrual of income in India and hence it was not obliged to make any deduction. Alternatively, it was contended that even if the operation of bringing the catch to India Port for Customs appraisal and export to the non-resident company results in an operation, it was an operation for mere purchase of goods and, therefore, there was no income liable for assessment. It was also contended that even if 85% of the catch is considered as charter fee to the non-resident company it was paid outside India. Accordingly the plea of the assessee is that where the entire income is not taxable there is no obligation to deduct tax at source.

Court's reasoning:
n the facts and in the circumstances of the case, the Tribunal is correct in law in holding that the receipt in the form of 85% of the catch of fish by the non-resident was in India since all the formalities are completed in India.On the facts and in the circumstances of the case, the Tribunal is justified in rejecting the claim that there is no payment to the non-resident by the Assessee but there was only a receipt of 15% of the value of fish catch from the non-resident to the Assessee;On the facts and in the circumstances of the case, the Tribunal is correct in law in holding that the Assessee is liable to deduct tax at source under Section 195 of the Act on the alleged payment made to the non-resident towards hire charges even though the alleged payment is not in cash; andOn the facts and in the circumstances of the case, the Tribunal is correct in law in holding that the Assessee was in default underof the Income Tax Act, 1961 for the failure to deduct tax under Section 195 of the Income Tax Act."11. Mr. A. Subba Rao, learned Counsel appearing on behalf of the appellant-assessee submits that there was no income chargeable which resulted to the non-resident company as no payment of any sum by the assessee to the non-resident company took place in India and therefore, the liability to deduct tax at source under Section 195 of the Income Tax Act or the liability under Section 201 of the Act did not arise. It has also been pointed out by the learned Counsel that there was no receipt of income at all in India as the 85% of the fish catch, which was given to the non-resident company, was sold outside India and the sale proceeds thereof were also realized outside India. In his submission, the non-resident company, therefore, had no receipts in India. In support of the submission reliance has been placed on a decision of this Court in the case of Commissioner of Income-Tax, A.P. v. Toshoku Ltd. (125 I.T.R. 1980 525) and our attention has been drawn to the following passage from the said judgment:"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 cl.(a) of the Explanation toof 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."Reliance has also been placed on a decision of this Court in the case of Ishikawajima-Harima Heavy Industries Ltd. v. Director of Income-Tax, Mumbai [(2007) 288 I.T.R. 408 (SC)] and our attention has been drawn to the following passage at pages 443-444:"Therefore, in our opinion, the concepts profits of business connection and permanent establishment should not be mixed up. Whereas business connection is relevant for the purpose of application of Section 9; the concept of permanent establishment is relevant for assessing the income of a non-resident under the DTAA. There, however, may be a case where there can be overlapping of income; but we are not concerned with such a situation. The entire transaction having been completed on the high seas, the profits on sale did not arise in India, as has been contended by the appellant. Thus, having been excluded from the scope of taxation under the Act, the application of the double taxation treaty would not arise. The Double Tax Treaty, however, was taken recourse to by the appellant only by way of an alternate submission on income from services and not in relation to the tax of offshore supply of goods."