1. In this reference under s. 256(1) of the I.T. Act, 1961, the following question is referred for our opinion :
'Whether, on the facts and in circumstances of the case and on a proper interpretation of the agreement dated 9th September, 1957, the situs of the contract was in India, and as such profit on sales of bearing materials made by Glacier (that is, Glacier Metal Co. Ltd. of England) to the assessee-company actually accrued in India for the assessment years 1963-64 to 1968-69 ?'
2. We are concerned with the assessment years 1963-64 to 1968-69. The assessee-company, Kirloskar Oil Engines Ltd. (hereinafter referred to as 'KOEL'), is the statutory agent of a non-resident U. K. Company, Glacier Metal Ltd. (hereinafter referred to as 'Glacier'). KOEL had been manufacturing bearings in India. However, in order to develop their business and to manufacture better quality bearings and for furthering their business, KOEL entered into a collaboration agreement with Glacier on 9th September, 1957. The said agreement provided, under cl. 5 thereof, for the sale of certain materials by Glacier to KOEL. The said cl. 5 provided :
'5(i) Kirloskar (that is, Kirloskar Oil Engines Ltd. - the respondent herein), shall have the exclusive right to purchase in India bearing materials made by Glacier (that is, Glacier Metal Ltd.) and Glacier undertakes not to supply bearing materials to any person, firm or company in India other than Kirloskar.
(ii) Until such time as Kirloskar (that is, Kirloskar Oil Engines Ltd. - the respondent herein) manufactures all its requirements of bimetallic strip and partly processed materials made from bimetallic strip required for the manufacture of bearings or bearing materials hereunder in its own factory, Kirloskar undertakes to purchase all its requirements or any requirements in excess of its own manufacture of bimetallic strip from Glacier (that is, Glacier Metal Ltd.). In the event of Glacier being confronted by Kirloskar with prima facie evidence of better prices, deliveries or quality regarding bimetallic strip from another source, and Glacier being unable to match these, Kirloskar shall be free to purchase such bimetallic strip or materials from such other source.'
3. In pursuance of the said clause, KOEL bought bearing materials, etc. from Glacier during all the relevant years. The ITO estimated that on these sales by Glacier a profit of 2 1/2% net (Rs. 22,150) accrued or arose to Glacier in India from its business connection in India for the assessment year 1963-64, and brought it to charge. In the remaining years also similar profit was estimated and taxed. The assessee in their letter dated 15th March, 1968, urged before the ITO that no profit accrued to the foreign collaborator taxable in India on the sale of material.
4. The ITO rejected the contention of the assessee relying on the decision of the Tribunal dated 27th May, 1965, in the assessee's own case for the assessment years 1958-59 to 1962-63, wherein the Tribunal had held that on the sale of bearings by the Glacier a net profit of 2 1/2% should be assessed as arising in India to Glacier.
5. The assessee appealed to the AAC. There were two such appeals, one was filed in respect of the order for the assessment year 1963-64, and the other was for the assessment years 1964-65 to 1968-69. It was contended on behalf of the assessee before the AAC that the Tribunal's decision for the earlier years should not be mechanically followed, because at the time of the said decision all the material evidence on the point at issue was not placed before the Tribunal. The AAC accepted the said contention and went into the whole case de novo on the fresh material produced by the assessee showing the modus operandi adopted by the assessee in selling material to KOEL. On such fresh material he came to the conclusion that no profit was taxable in respect of the purchase of bearing materials made by KOEL from Glacier, and ordered the deletion of the additional amount of Rs. 22,150 charged as profit.
6. The order of the AAC for the assessment year 1963-64, dated 25th October, 1968, showed that after carefully considering all the documents produced by the assessee before him, such as invoices, advice to retire documents and correspondence regarding opening of irrevocable letter of credit which was valid only in England, etc., the AAC found that the terms of the letter of credit left no doubt that Glacier received payment only in England, that KOEL only placed an order with Glacier and paid them the market price, and that the said orders were in no way different from the orders placed by other people buying the goods. He further observed :
'After examination of the documents produced, I have no hesitation in holding that the transactions for the purchases of bearing materials are only between principal and principal and Kirloskar Oil Engines Ltd. do have a business connection with this party because of their collaboration agreement.'
7. In the other appeal for the assessment years 1964-65 to 1968-69, another AAC also passed similar orders after going through the relevant material and adopting the observations of the AAC mentioned above in the earlier order.
8. From the said orders of the AAC, the revenue appealed to the Tribunal.
9. The Tribunal found that, earlier, another Tribunal in its decision had held that (1) Glacier had business connection in India, and (2) profit of 2 1/2% on sales should be attributed to selling operations and charged to tax in India. Subsequently, the assessee had filed a miscellaneous application before the same Tribunal urging that the evidence on record showed that no operations were carried out by Glacier in India and so even if there was a business connection no profit accrued to Glacier in India. The said Tribunal had, however, dismissed the said petition, observing that when the appeals were heard, the assessee did not bring to the Tribunal's notice evidence to show that all the selling operations were carried on from outside. The present Tribunal also found that in the case of its earlier order the Tribunal in the absence of any material had only addressed itself to the quantum of profit.
10. The Tribunal, therefore, found in this case that the AAC was right in examining the question de novo as the earlier order of the Tribunal was not based on all the relevant materials. The Tribunal rejected the contention of the assessee that in the matter of supply of bearing material to KOEL, Glacier carried out no operations in India. However, the Tribunal, while considering the said cl. 5(ii) of the agreement, negatived the contention of the department that the agreement between KOEL and Glacier dated 9th September, 1957, consisted of two parts, namely, one as regards the technical assistance and the other as contained in cl. 5(ii) which stood by itself, and it should be construed as an offer by Glacier to sell goods to KOEL, that this offer was accepted by the said KOEL in India and that since the contract of sale was concluded in India, the profit, therefore, accrued in India. In doing so, the Tribunal observed :
'So it is necessary of us only to deal with the department's submission that the situs of the sale contract was in India. In making this submission, the department has urged that clause 5 of the agreement of 9-9-1957 was an independent sale contract, accepted by KOEL in India. Such a submission has not even the merit of being a farfetched argument. It is a completely wrong proposition to say that a collaboration agreement for rendering technical service, of which one clause casts an obligation on the manufacturer in India to buy raw material from the non-resident in certain circumstances, operates as a contract of sale of raw material by the non-resident to the resident manufacturer, accepted in India. The operation for acquisition of raw material, as rightly contended by the assessee's counsel, started with KOEL placing specific orders on Glacier for supply of specific quantities of material, and clause 5 of the collaboration agreement was not a contract of sale of raw material accepted in India as argued by the department.'
11. The Tribunal, accordingly, dismissed the revenue's said appeal.
12. We do not find any reason, to interfere with the said finding of the Tribunal upholding the order of the AAC which we find being based on cogent reasons.
13. Firstly, the main question is as to whether cl. 5(ii) of the collaboration agreement for technical service between the parties could be considered as an independent contract for the sale of material by Glacier to KOEL so as to constitute an offer by Glacier to KOEL and accepted by KOEL in India, as distinct from the other part of the collaboration agreement.
14. The wording of the said cl. 5(ii) itself shows only an obligation on the part of Glacier to supply to KOEL certain material mentioned therein of the Glacier manufacture if and when required by KOEL and KOEL's obligation to purchase the same from Glacier. However, the said clause 5 also keeps open the right of KOEL to purchase the said material from other sources, if KOEL were to confront Glacier with prima facie evidence of better prices, deliveries or quality regarding the material from other sources and Glacier being unable to match the same. On the wording of the said clause, therefore, it cannot be said that the said clause by itself constituted a distinct and independent contract between the parties for the sale and purchase of the material. Particularly the right of KOEL to buy the said material from others under certain circumstances itself negatived the said clause being a contract of sale between the parties. Apart from that, the material produced by the assessee does show that the modus operandi for the purchase of the said material by KOEL from Glacier was that KOEL placed orders with Glacier in a manner as any other customer would do and paid market price and Glacier accepted the said offer (to purchase) in England and received money for the said material also in England. The said documents also showed that the contract of sale of the said material was between principal and principal. The said mode of operation would firstly show that cl. 5(ii) of the agreement of collaboration could not by itself be construed as being a contract of sale and purchase between KOEL and the assessee and that the situs for such a contract of sale of material to the assessee was outside India.
15. In the result, we answer the question in the negative on both parts and in favour of the assessee.