RAJAGOPALAN, J. - The question referred to his court under section 66 (2) of the Indian Income-tax Act was :
'Whether, on the facts and in the circumstances of the case, there is justification for the apportionment made by the Tribunal of the profits between British India and Cochin State ?'
The findings of the Tribunal, with reference to which we have to answer this question, lie within a comparatively brief compass : (1) it was within British India that the assessee entered into the contract with the Government of India; (2) all the other trading operations of the assessee in all the relevant years were undertaken only within Cochin State; and (3) all the profits were realised and received by the assessee in Cochin State, that is, outside British India. The Tribunal held that, though the profits of the contract business actually accrued to the assessee wholly outside British India, the provisions of section 42 of the Act applied, and that the assessee was liable to be taxed on 50 per cent. of his share of the profits of that contract.
Annexure 'A' to the statement of the case was taken as evidence of the contract which the assessee entered into with the Government of India. The learned counsel for the assessee urged that the finding of the Tribunal, that the assessee and the Government of India entered into that contract at Delhi, was erroneous, as annexure 'A' was only in the nature of a final offer from the Government which was addressed to the assessee at his place of business in Cochin. The further contention of the learned counsel for the assessee was that, if that offer had been accepted only at Cochin, that would have been the place where the parties entered into the contract. The learned counsel relied on Rajkumar Mills Ltd. v. Commissioner of Income-tax where the Supreme Court laid down that the question where contract was concluded would be a question of law for the court to determine in proceedings under section 66 of the Act. Of course, if all the findings of fact were available, what should be the inference to be drawn from those facts would be a question of law. In this case, however, without a further investigation of facts we cannot reopen the question concluded by the finding of the facts we cannot reopen the question concluded by the finding of the Tribunal, where was the contract concluded. Therefore, it is not wholly question of law that the counsel for the assessee could be allowed to raise at this stage. The parties proceeded all along on the basis that the contract was concluded within British India, and it is not open to the assessee to contend that the place of contract itself is a matter for investigation at this stage. Even in paragraph 14 of annexure 'A' what the assessee was asked to do was to confirm the contents of that letter, which purported to set out what the parties had agreed upon at Delhi. We shall, therefore, proceed on the basis, that the Tribunal was not in error when it held that the assessee has negotiated and concluded the contract in British India.
It should be taken as well settled now that where the contract was entered into is really immaterial in cases of this kind of decide where the profits of the contract accrued or arose : see Commissioner of Income-tax v. Anamallais Timber Trust Ltd. the principles laid down in which were followed by the Mysore Engineering Co., by the Andhra High Court in Rupajee Ratnachand v. Commissioner of Income-tax, by the Nagpur High Court in Bhopal Textiles Ltd. v. Commissioner of Income-tax. The Tribunal rightly held that the profits of the assessee accrued wholly in Cochin where all the operation under that contract were carried out that contract. The learned counsel for the Department referred us to that contract. The learned counsel for the Department refereed us to Ltd. v. Commissioner of Income-tax, where the learned judges explained the scope of their earlier decision in Commissioner of Income-tax v. Ahmedbhai Umarbhai and Co., that the need for apportionment of profits might arise independent of section 42. Whether, if the profits accrued or arose within British India, which constituted the taxable territories, those profits should be apportioned independent of section 42 of the Act does not arise for consideration in this case. Section 42 of the Act, it should be taken as well settled now, applies only if the profits are deemed to have accrued or arisen within the taxable territories, and now when they actually accrued or arose within them.
So the real question of determination is whether section 42 (1) of the Act applies. If it does, there has to be an apportionment under section 42 (3).
The learned counsel for the assessee referred to the observation of the Supreme Court in Anglo-French Textile Co. Ltd. v. Commissioner of Income-tax :
'........ 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 section 42 (3) are attracted. Those 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 not well defined, or are of a casual or isolated character would not 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.....'
The learned judges, however, added that the observations made in that judgment were limited to the facts and circumstances of that case. Even applying that test, it should be obvious that negotiations and concluding the contract in question in this case was one of the trading operations of the assessee. We shall advert a little latter to the special features of that contract. In the off-quoted passage in Commissioner of Income-tax v. Chunilal B. Mehta their Lordships of the Privy Council observed :
'Their Lordships are not laying down any rule of general application to all classes of foreign transactions, or even with respect to the sale of goods. To do so would be nearly impossible and wholly unwise - to use the language of Lord Esher in Erichsen v. Last. They are not saying that the place of formation of the contract prevails against everything else. In some circumstances if a may be so, but other matters - acts done under the contract, for example-cannot be ruled out a priori.'
As we said, that in the circumstances of this case the negotiation and conclusion of the contract constituted on of the trading operations of the assessee can admit of no doubt.
The learned counsel for the Department relied on the observations of Satyanarayana Rao, J., in Commissioner of Income-tax v. Rodriguez and Co. and contended that the contract itself should be viewed as a source of profit that the assessee made, and as that source lay within British India, however, prefer to rest our decision in this case on the basis that the contract the assessee obtained evidenced by annexure 'A' was one of his essential trading operations. That is sufficient to bring it within the scope of section 42 (1) of the Act, and that, in its turn, in the circumstances of this case, attracts the application of section 42 (3).
The question that remains for consideration is whether the Tribunal was right in apportioning 50 per cent. of the assessees share of the profits to the only trading operation of his assessee before the Tribunal was that not more than 5 per cent. should be attributed to the trading operation carried out within British India, that is, the conclusion of the contract. The contract that the assessee obtained had special features. We should like to guard ourselves at his stage by emphasising that all our observation are only with reference to the contract before us. We are not to be understood as laying down as a proposition of law of general application to all cases where a contract for execution of works takes place within the taxable territories and all the other operations take place outside the taxable territories. The contract that the assessee obtained was obviously the subject-matter of considerable negotiations, including tripartite conference at Delhi, in which the assessee, a representative of the Bombay Burmah Trading Corporation and the Government of India participated. The assessee was entitled to some special rights under the contract, and the contract provided for close collaboration between the assessee and the Government of India at all stages in the work to be carried out under the contract within the State of Cochin. The assessee was entitled to ten per cent. of the cost of production as his profit, which, of course, it had to share with the Bombay Burmah Trading Corporation, which provided trained personnel to supervise the execution of the works. Taking the special features of the contract into consideration, we are of opinion that a share of the assessees profits should be attributed to that trading operation, and that the share to be so attributed should be something more than nominal. The learned counsel for the assessee pointed out that in Anglo French Textile Co Ltd. v. Commissioner of Income-tax ten per cent. was considered reasonable, where the trading operations consisted of purchase of raw material within the taxable territories, while the rest of the trading operations were in Pondicherry outside the taxable territories. We can see considerable force in his contention, that there will be no justification for allowing a higher percentage than ten per cent. in this case, where the only trading operation within British India was to negotiate and conclude the contract. In the unreported decision in Royal Talkie Distributors, Madurai v. Commissioner of Excess Profits Tax to which one of us was a party, this court pointed out that the apportionment of profits should not be arbitrary but should be on a rational basis. In this case the Tribunal fixed 50 per cent, as the shares attributable to the trading operation carried out in British India, but on what basis the Tribunal considered 50 per cent. was a fair share, the Tribunal did not explain either in the order of appeal or in the statement of the case. As we said, in the circumstances of this case, where the contract alone is to be taken as having been concluded in British India, a contract which no doubt had special features, we think that the shares to be attributed to that should not be in excess of ten per cent.
Our answer to the question is that there was justification for apportionment under section 42 (3) of the Act, but there was no justification for apportioning 50 per cent. to the operation carried out in British India; there was justification only for apportioning ten per cent. of the assessees share of the profits to the trading operations he carried out in British India.
As neither side has wholly succeeded there will be no order as to costs of this reference
Reference answered accordingly.