1. This is a reference by the Commissioner of Income-tax under Section 66(2), Mysore Income tax Act. The assessee is a company registered under the Indian Company's Act which has its head office in Calcutta and is engaged in the manufacture and sale of cigarettes. The manufacturing establishment is at Calcutta but the sales are effected all over India including Mysore the Company does not sell the goods directly in the market and has provided a special machinery for carrying on the business. It has depots in several towns or cities one of which is at Madras to cater to the demands of the surrounding area for portions of which a 'distributor' or 'customer' as he is called since 1941 is appointed. During the period between 1st August 1935 and 15th November 1944, the depot in Madras was shifted to Bangalore C and M Station. In the year relevant to the case there were 43 'customers' of the company in Mysore each of whom had to operate within a particular, defined 'territory'. These 'customers' purchased the goods in the C and M Station depot at wholesale prices and sold tem with a margin of profit to the 'dealers' and these in turn sold the goods to the 'retailers' from whom the smoker or consumer brought the articles. In some cases the 'customer' also sold the goods to the 'retailer' and had an additional profit. The goods were paid for by the 'customers' in the C and M station and if taken on credit a deposit was necessary. The prices at which the sales had to be effected by each of these, the places within which the 'customers' are to function are fixed by the company.
2. The exact relations between the company and the 'customers' the nature and extent of the control the company exercises over them and the consideration therefor are all matters of oral understanding. At any rate no written agreement touching these has been produced. In the affidavit filed before the Commissioner the Manager of the depot at Madras refers to the instruction from the Head Office that 'No written agreement or rules should be issued to now distributors. All arrangements with distributors to be made verbally' and to the terminable without notice, and says that there were 'no arrangements with 'customers' having legal effect or having binding obligations on either side'. Nevertheless in some of the letters by the company to the customers, it is written 'whilst the arrangements are subject to termination without notice we trust in actual practice they will prove to be the prelude to a long and profitable period of mutual trading co-operation'. Instances of termination as a matter of fact are found to be rare and with the exception of one all the 'customers' have remained undisturbed. In addition to the limitations as regards the area and the prices to which the 'customers' were subject, they were not free to sell other goods or goods from others which may interfere with the sales of the company's products. They had also to furnish thrice a month a statement of the existing stock to the company. The intimation was to be made and orders placed for fresh supplies in the forms supplied by the company when goods became stale or were found excessive the 'customers' could return the same and receive payment from the company. The company had employed a special staff of Inspectors for the purpose of checking whether these instructions or conditions are adhered to and report to the company the need for changes, appointment of additional 'customers', and other steps to be taken for expansion and improvement of the business. This in brief was the modus operandi of the business.
3. The Manager of the company's depot was served on 3rd April 1944 with a notice under the Income-tax Act by the Additional Deputy Commissioner of Income-tax, Companies Circle, calling upon him to make a return of the total income of the company during the year ending on 30th June 1943. The depot Manager denied liability and on the information obtained after enquiries in the matter the Deputy Commissioner passed an order holding that the company had business connection in Mysore and was liable to pay the tax. The order of assessment was upheld by the Commissioner on appeal by the company. The assessment it is mentioned relates to the year beginning with 1st April 1942 and ending on 1st April 1943. The company sought for and obtained the present reference. the question formulated by the Commissioner for determination is:
'Whether on the facts and circumstances of the ease the applicants can be held to have any income accruing or arising to them directly or Indirectly through or from any business connection in Mysore under Sections 4 ad 42(1), Mysore Income-tax Act.'
Section 4 (1) of the Act reads:
'Save as hereinafter provided, this Regulation shall apply to all income, profits or gains, as described or comprised in Section 6, from whatever source derived, accruing or arising, or received in Mysore, or deemed under the provisions of this Regulation to accrue, or arise or to be received in Mysore.'
Section 6 of the Act enumerates the heads of income, profits or gains of which No. (iv) is business and (iv) is other sources chargeable to income tax.
Section 42 (1) states:
'In the case of any person residing out of Mysore all profits, or gains accruing or arising to such person, whether directly or indirectly through or from any business connection in Mysore.....shall be deemed to be income accruing or arising within Mysore and shall be chargeable to income-tax either in his name or in the name of his agent....'
4. The assessment is objected to on the sole ground that the company had no business connection in Mysore during the year of assessment, and since the question is whether the facts make out such a connection or not, it is necessary to consider at first as to what is meant by 'Business Connection'. The expression is not defined in the Act and the construction of the term in cases in which it had to be considered is not definite or uniform. This is partly because of definition of 'Business' in Section 2 (3) as including any trade, commerce, manufacture or any adventure or concern in the nature of trade, commerce or manufacture. Though the term includes these, it does not follow that nothing else can be business. The definition is therefore enumerative and not exhaustive. What other categories of work, occupation or activity can be regarded as 'Business' for the purpose of the Act is therefore a matter on which the Act is silent. Similar considerations apply to 'Business connection' which though different from is not unrelated to 'Business': Commr. of Income-tax, Bombay Presidency and Aden v. Currimphoy Ebrahim and Sons, Ltd. . The words being thus of wide and Indefinite import have given scope for varying view about the facts necessary for application of the section in which they appear. In Rogers Pratt Shellac Co. v. Secy. of State : AIR1925Cal34 , Mukerji J. observes:
'Business is used in the Act is the sense of an occupation continuously carried on for the purpose of profits. A concern by reason of which one can be said to have connection with such an occupation is business occupation.'
That was a case in which an American Company had a branch office in Calcutta and a factory in United Provinces. The company was held liable to be taxed though there were no sales by the Agents in India and their business was to buy materials here and export them to company.
5. In Commr. of Income-tax v. Steel Brothers & Co., A.I.R. (13) 1926 Rang. 97: (3 Rang. 614 F.B.) 'business connection' was considered to be a 'compendious expression to cover such concerns in the nature of trade, commerce or manufacture as arise through a branch, factorship, agency, receivership or management.' According to Mackney J. in Commr. of Income-tax, Burma v. Vasalakshi Achi, A.I.R. (24) 1937 Rang. 258 AT P. 261: (1937 Rang. L.R. 174, S.B.) 'connection' is used in the sense of 'that with which one is connected' so that the expanded meaning of 'Business connection' in the light of definition of 'Business' is any light of definition of 'Business' is any adventure or concern in the nature of trade, commerce or manufacture being a business with which the non-resident is connected. Roberts C.J. and Leach J. do not say anything about the interpretation of the term but all of them held that 'Business connection' does not arise from an isolated transaction.
6. In Commr. of Income-tax v. National Mutual Association of Australasia, Ltd., A.I.R. (20) 1933 Bom. 427 : (57 Bom. 519), the construction of Rangoon High Court was not accepted, Beaumont C.J. said that definition of 'Business' is not exhaustive and Rangnekar J. observed that 'Business connection' is a comprehensive expression which includes not only the kinds of things specifically described as being included in the term 'Business' but also the kinds of things which are specifically mentioned in Section 3, English Finance Act, viz., 'through or from any branch, factories, agency, receivership or management.' It was held that profits made by a company outside India on premiums of participating policies collected and sent by its branch in India, by investment outside India are profits liable to tax in India by virtue of Sections 3, 4 and 42 of the Act. The point to be noticed is that for purpose of Section 42 the profits need not be made in India. This has been clearly laid down in Bank of Chettinad Ltd. v. Commr. of Income-tax Madras while considering the relations of a Bank outside India with a Bank in Rangoon.
7. The argument advanced on behalf of the non-resident Bank is stated thus:
'In order to bring the case within Section 42 is must be shown that the non-resident Bank had a business connection is India is relation to actual transactions in question, that a business connection arises out of business transactions, that the transactions in the case... were made not in India but in the Malay States and moneys were to be repaid in Malay States in Malay States currency and therefore the profits which accrued to the non-resident Bank from the transactions did not accrue through a business connection in India'.
The argument was not accepted with the observation
'The terms of Sections 42, are very wide and their Lord-ships are not prepared to place upon them the limitation for which the appellant contends.'
One of the factors taken into account in the decision is that the non-resident Bank and the Bank in India were controlled by the same person and particular mention is made of Commr. of Income-tax v. Remington Typewriter, Co., Ltd. where an American company was held liable on account of sale of its typewriters in India by two Indian companies. The following portion of what is quoted from this judgment is instructive:
'Although no contractual obligation exists by which the Bombay company is compelled to purchase any of the manufactures of the American company, the flow of business between the two companies secured by the fact that the ultimate and complete control of the Bombay company is vested in the American company which owns all its shares'.
This enunciates that if the flow of business is secured by the non-resident exercising control over the person doing business in the place of assessment the non-resident will have a 'business connection' in that place and that it is not necessary that there should be a contract for this. Nandlal Bhandari Mills Ltd., Cawnpore v. Commr. of Income-tax C.P. and U.P. : AIR1939All593 relates to a company of Indore having Branch in Cawnpore to sell the goods for which commission was payable at Indore. It was held that the company had 'Business connection' in India under Section 42 of the Act as the right to the commission accrued on the sales effected at Cawnpur between the branch at Cawnpore and company at Indore and that the former was the agent of the company under Section 43. As to what is needed to constitute 'Business connection' Collister, J. says
'In order to show that a non-resident has a business connection with a resident in India it must be established that the two persons have some sort of association in a business, that is to say, in a profit making occupation or activity in India'.
The words 'some sort of association' are important as showing that it need not be of any particular or special kind or form.
8. In a later case, Hira Mills Ltd., Cawnpore v. Income-tax Official, Cawnpore : 14ITR417(All) a Bench of the same Court has accepted the view expressed in this case and preferred the construction in Commr. of Income-tax v. National Mutual Association of Australasia Ltd., A.I.R. (20) 1933 Bom. 427 : (57 Bom. 519) to that in Commr. of Income tax v. Steel Brothers & Co., A.I.R. (13) 1926 Rang. 97 : (3 Rang 614 F.B.) of the term 'Business connection and added
'It may be that the use of the words 'business connection in' (as opposed to with) in Section 42 (1) of the Act lays some slight emphasis on the more concrete meanings of the word 'connection' but nevertheless we think it limits it too much to confine it to some organization, establishment or entity being in the nature itself of an operating business branch or agent of the potential assessee'.
It is therefore seen that there is preponderant authority for interpreting 'Business' as not being confined to what is mentioned in the definition. As regards 'connection' too there is no standard or formula with reference to which it has to be determined. The difficulty to apply a uniform rule as a test arises by reason of the varying conditions and kinds of business carried on, the difference in the methods employed for extending the range of the activities and the attempts sometimes subtle and sometimes apparent made to earn profits. To a large extent these depend on the intelligence and intention of the organisers the facilities available and conditions of the place. The question whether any one has 'Business connection' in any place has to be answered on a consideration of the facts peculiar to each case and as such the views expressed in other cases can only be of help for ascertaining the guiding principles. From the case which are referred to, it may be gathered that the exercise of control over the business by the non-resident is a means of the non-resident having business connection. It may be by the non-resident opening a branch in the place having an agent, salesman or representative but not necessarily or only by this. What is required is 'some sort of association' as Collister, J. put it in Nandlal Bhandari, Mills Ltd., Cawnpore v. Commr. of Income-tax C.P. and U.P. : AIR1939All593 .
9. The existence of a business in Mysore is not disputed. But the assessee contends the business is that of 'customer', 'dealers' or 'Retailers' in the company's products with which the company itself has nothing to do. It is argued that the sale was effected in C and M station and completed, that the price for the goods was also paid there and therefore connection with the business in Mysore cannot be imputed to the company. Elliman Sons & Co. v. Corrington & Son Ltd., (1901) 2 ch. D. 275 : (70 L.J. ch. 577) was cited by Mr. Nambiar to show that the stipulation that the buyer should not sell the goods except at a particular rate is not a restraint of trade and does not effect the validity of the sale. No question of liability for income-tax arose in that case and the point now for examination is not whether the terms of the sale are enforceable but whether the company did not exercise control cover the business in Mysore notwithstanding the sale. The case is therefore of no help to decide this. It was said that the employment of Inspectors for supervising the dealings of customers and others was meant only to study the conditions and make report and not to have connection with the business.
10. If as alleged, transactions between the company and 'customers' were finally closed or ended in the C and M station there was apparently no reason for the 'customers' subjecting themselves to restrictions for disposal of what was their property, or submitting themselves to the condition of sending thrice a month reports of stock and not dealing in competitive goods; and for the company to provide forms and books to the 'customers,' engage salaried Inspectors to check whether the requirements are complied with. The 'repurchase' of stocks found unfit for sale or excessive is also not explicable on the hypothesis of the company being unconnected with the business. The arrangement is deliberately and designedly made oral and is the absence of any satisfactory explanation, both parties must be deemed to have entered into it on consideration of mutual advantage. There can be no doubt that the obligations imposed upon the customers though not shown to be contractual have the effect of vesting the effective and ultimate control over the business in Mysore in the hands of the company for the purpose of securing the flow of business in Mysore. In such a case as held in Commr. of Income-tax v. Remington Typewriter Co. Ltd. , Section (1) does apply.
11. Jessel M.R. whose statement as to what 'business' means is quoted in cases under the Income-tax Act, says in Erichsen v. Last, (1881) 8 Q.B.D. 414 at p. 416: (51 L.J.Q. B. 86) with reference to the term 'Exercise of trade' in the English Act.
'There is not, I think, any principle of law which lays down what carrying on trade is. There are a multiple of things which together make up the carrying on of trade but I know no one distinguishing incident for it is a compound fact made up of a variety of things.' The term 'business' having a more extensive signification than 'trade' these remarks apply to a larger extent to 'Business connection.'
12. An important feature of the restriction imposed by the company is that it is not limited to any particular area or 'customers' in Mysore, or for only a temporary period. The fact that these are operative over all 'customers' throughout Mysore is regard to the business as a whole carried on here signifies that the business is under the sway of the company and though the sale to the 'customer' appears outright is attended with the followed by conditions of having to act in accordance with the directions and dictates of the company, when the sale is hedged in with conditions which fetter the purchaser from freely dealing with the goods as he likes at any place and when in all material respects the company has the option to insist systematic compliance on pain of removing the 'customers' and a special staff of inspectors on behalf of the company to work in Mysore, there is hardly reason for doubt that the company has a patent and patent 'Business connection' in Mysore. As stated in Commr. of Income-tax, Bombay v. Metro Goldwyn (India) Ltd., A.I.R. (26) 1939 Bom. 257: (183 I.C. 540.) 'The adoption of descriptions (such as that of vendor and vendee) does not affect the nature of transactions and does not turn the transactions into a sale if in fact it is not a sale.' That was a case of written agreement between a non-resident and resident in which they were described as vendor and vendee with a clause that nothing in the document is to be construed as constituting a partnership. The Court held that the relationship was in the nature of licence and that there was 'business connection' under Section 42 of the Act. Hira Mills Ltd. Cawnpur v. Income-tax Officer, Cawnpur : 14ITR417(All) relied upon in support of the contention to the contrary is distinguishable. That was a case of sale through brokers who could sell the goods not only of the non-resident company but also of others. They were as remarked 'freelance brokers' unlike the 'customers' in this case who are enjoined from not selling competitive goods. Further the brokers in that case wee not the employees of the assessee whereas only those selected by the company are 'customers' while special forms are prescribed and furnished in this case by the company for placing orders by customers there were no such for the brokers.
13. The learned Advocate General cited the case in Weiss Biheller and Brooks Ltd., v. Farmer, (1923) 1 K.B. 226 : (92 L.J.K.B. 179) the facts of which were : An English company carried on business in London as manufactures and sellers of incandescent and other mantles and under an agreement with a Dutch Company called the Ramie Union were the sola sellers in the United Kingdom of the goods manufactured by the Ramie Union which had its head office in Holland where its books were kept and its general business transacted. The transactions of the English Company with the Ramie Union formed only a small part of the business of the English Company. Under the agreement the Ramie Union manufactured mantles and added to the cost ten per cent. for expenses and the English Company sold the mantles in England at the best possible price. The English Company was entitled to 5 per cent. commission for their expenses and del credere and profits were divided. The English Company kept a separate day book showing the selling price and this book was open to directors of the Ramie Union. The name of the Ramie Union did not appear on the invoices sent by the English Company to their customers in England but the provisions of the England Company had on them the same as agent of the Dutch Company though it was not proved that this had been authorised by the Ramie Union.
14. It was held that the Ramie Union was exercising a trade within the United Kingdom within the meaning of Section 2, Scheduled of the Act of 1853 and on which they would find that the English Company were the agents of the Ramie Union within the meaning of Section 41 of the Act of 1842 which is
'.....Any person not resident is Great Britain whether a subject of Her Majesty or not shall be chargeable in the name of.....any factor, agent or receiver having the receipt of any profits or gains arising as herein mentioned and belonging to such person in the like manner and to the like amount as would be charged if such person were resident in Great Britain and in the actual receipt thereof'.
15. The words 'exercising a trade' do not appear in Section 42 and the Commissioner has held that 'customers' are not agents of the assessee in the legal sense. Section 43 no doubt provides for a person to be 'deemed' an agent for the purpose of the Act, that is to treat him as such though he is not. But the applicability of the section is not explicitly raised in the reference. Apart from this, the grounds on which the foreign Company was considered to have exercised trade in England are instructive. It was contended that the foreign Company was merely selling to the English Company as in this case to the 'customers' who in their turn resold and that all the provisions of the agreement were merely for the purpose of defining the terms up on which there was to be an actual sale by the Ramie Union was principal to the English Company as Principals to do what they liked so far as selling was concerned with the mantles which they had bought. Another contention was that there was no privity between Ramie Union and ultimate purchaser and no contract binding on Ramie Union was made by the English Company. The further point raised was that the property in the goods did not remain in the Ramie Union but passed to the English Company and therefore the latter cannot be an agent. Lord Sterndale M.R. regarded these as not being conclusive and held that the assessment was justified. Atkin, L.J. expressed that 'A person may not through an agent even though that agent does not make contracts that bind him' and as regards the question of the passing of property in the goods
'It appears to me that a foreign principal may well as part of his trade send his goods to this country to be sold for and on his behalf and yet so conduct that business that the property in the goods for the purpose of the trade passed to the agent.....I see no such substantial inconsistency in that fact as to cause this Court to come to the conclusion that where the property has passed to a so-called agent the relation of principal and agent must necessarily cease'.
The Dutch Company was held liable even though the contracts of sale to customers from which the profits arose were contracts to which it was not a party.
16. Though as I have mentioned the words in the English Act, are different from those in S. 42, these observations are useful for holding that the assessee in this case had 'business connection' in Mysore. The answer to the question is accordingly in the affirmative. The assessee should pay the costs of the reference. Advocate's fee is Rs. 50/-.
17. Reference answered in the affirmative.