RAMCHANDRA IYER C.J. - The following question has been referred to us for opinion :
'Whether, in the circumstances of the case, the Appellate Tribunal was right in holding that the entire profits on the sale of yarn accrued in the taxable territories ?'
The assessee is a private limited company incorporated, having its registered office at Usilampatti, in the erstwhile Pudukottah State, which merged with the Indian Union on August 1, 1949. In 1944, the company entered into an agreement with Thaigesaralai Mills, a spinning mill at Usilampatti, by which it became the sole distributors of all yarn produced in the mills. Some time thereafter, the sale of yarn produced in cotton mills became subject to certain regulations, under which yarn could be sold only to the nominees of the Textile Controller at Bombay. The control order did not, however, affect the agreement which the assessee had with the mills. The Textile Controller made allotments to various applicants for the purchase of yarn produced in the Thaigesaralai mills. In the instant case, the goods were dispatched on the basis of such allotments from the premises of the mills itself, as the assessee had no godowns of its own. But the transaction took the form of sale by the mills to the assessee and of a subsequent sale by the assessee to the allottee. The nearest rail-head for the dispatch of the goods to the buyers was Manaparai, which has all along been within the taxable territories. The goods from the mills were initially dispatched to Manaparai on assessees account by means of carts and lorries engaged for the purpose. At Manaparai, they were handed over to the railway. The incidental expenses were included by the assessee in the invoices, which, with the relative railway receipts, were delivered to the buyers agents in person or dispatched by post to the buyers direct or, sometimes, through banks in Pudukottah, alter duly discounting the same.
During the two years, that is, from July 1, 1947, to June 30, 1948, and July 1, 1948, to June 30, 1949, the assessees years of account corresponding to the assessment years 1949-50 and 1950-51, the control orders were in force. The Pudukottah State was then outside the taxable territories. The Income-tax Officer, who, subsequent to the merger, came to function at Pudukottah, found that the sales of yarn effected by the assessee outside the Pudukottah State were sales in respect of which profits were earned within the taxable territories during the two years of account. He held that, although the sales were effected to the nominees of the Textile Commissioner, the assessee company was free to sell, deliver and realise the goods in any manner or place it liked and that, in the instance case, the property in the goods dispatched through rail from Manaparai to the purchaser passed within the taxable territories and that profits should be held to have arisen at that place and liable to tax accordingly. With this principle in view, the officer examined the accounts and, after excluding sales with the State, assessed the profits earned within the taxable territories. The assessee filed and appeal to the Appellate Assistant Commissioner, contending that the sales to the nominees of the Textile Commissioner took place within the Pudukottah State only, and that, therefore, no part of the profits could be deemed to arise within the taxable territories. The appellant, however, was not able to produce any material by way of correspondence with the buyer to show that the delivery at the godowns of the mills was to the buyer himself and not to the assessee. The Assistant Commissioner held that the delivery of goods to the buyer was complete only when they were handed over to the railway at Manaparai Station. He then divided the profits of the two years into two categories : (1) those actually received within the taxable territories, and (2) those received within the Pudukottah State, that is, outside the taxable territories. In the former case, he brought the entire amount to tax, while, in the latter, he held that, by reason of the assessee having made purchases at Pudukottah and effected the sale outside the State but within the taxable territories, the profits should be apportioned; and, having regard to the fact that he major part of the activity for earning profits was carried on at the latter place, he allowed 15% of the profits received at Pudukottah State as arising outside the taxable territory and brought to tax the rest. He accordingly modified the assessment of the Income-tax Officer.
The assessee thereupon appealed to the Tribunal against the two assessments. The Tribunal did not share the view of the Appellate Assistant Commissioner that any part of the profits accrued in Pudukottah State. The Tribunal held that it was the assessee that took the goods from the godown of the mills and delivered them over to the railway, the public carrier appointed by the buyers, that the entire profits accrued at Manaparai within the taxable territory and that in view of the fact that all the sales in question took place only in the then British India, the entire profit therefrom should be held to have accrued or arisen within the taxable territories. Inasmuch as the department had not filed an appeal, the Tribunal sustained the assessment, although, in its view, the assessee had been assessed to something less than what it was liable to be taxed.
In this reference, Mr. Venkataraman, appearing for the assessee, first contested the finding of the Tribunal that the sales were effected by the assessee at Manaparai. From the circumstance that the goods were dispatched from the premises of the mills in pursuance of the allotment orders of the Textile Commissioner, it was argued that the property in the goods must be deemed to have passed on to the buyers at Usilampatti within the Pudukottah State and that the price in respect of those goods should be held to have been earned at threat place. There is an underlying misapprehension in the argument. The assessee is as limited company, which was formed with the definite object of purchasing and selling yarn. It had entered into a contract with the mills for the distribution of that yarn. The yarn that was dispatched to the buyers was done on behalf of the assessee who had no godown of its own. The mere fact that, in pursuance of the allotment orders, the mills themselves dispatched the goods to the buyers, cannot mean that the goods were sold by the mills directly to the specified buyers. As stated earlier, there is nothing in the control orders to invalidate the contract, which the assessee made with the mills, entitling them to be the sole distributors of the products of the mills. Therefore, even if the mills had received from the buyers on certain occasions the price of goods sold to the latter, they would be accountable to the assessee in respect of such moneys. The form of the transactions adopted by the mills in all cases where it dispatched goods in pursuance of the allotments of the Textile Commissioner was consistent with the agreement. It was the assessee that ultimately dispatched the goods from Manaparai to the buyers, adding to the invoice price the charges which were incurred for transporting goods from the mill-site to the railway station. The department as well as the Tribunal held that the assessee continued to be the owner of the goods till they reached Manaparai where from they were sent to the various buyers. On the materials available, the finding of fact arrived at by the Tribunal appears to be fully justified.
When the reference came up for hearing before us, in the first instance, Mr. Venkataraman, appearing for the assessee, submitted that there were materials placed before the Tribunal to show that the property in the goods did not pass to the buyer at Manaparai, but, instead, passed earlier at Usilampatti itself. Learned counsel prayed for time to furnish particular of materials which were available before the Tribunal on that question, but, which, it was said, unfortunately were not referred to by the Tribunal. We gave the assessee an opportunity to file an affidavit as to the material which were available with the Tribunal in regard to the question, but which were not considered by the Tribunal in its order. Although the assessee took further time for the purpose on more than one occasion, no materials have been placed before us to show that the Tribunal failed to consider any relevant to the buyers. An affidavit was, however, filed on behalf of the assessee, were transported from the premises of the Thaigesar Mills to the Manaparai Railway Station by cartmen, it would not be correct to say that the lorries which took such goods were engaged for the purpose; the lorries, on the other hand, took the goods from the mill premises to the buyer direct. In support of the averment in the affidavit, a copy of specimen invoice showing that the delivery of yarn was made ex-mill to the lorry transporters who took them directly to the buyers was filed. Objection was taken on behalf of the department to the evidence now sought to be introduced by the assessee. It was pointed out in the counter-affidavit filed on behalf of the department that there was no case before the Tribunal that any of the goods were directly sent to the purchasers but that the case proceeded on the footing that the assessee dispatched the goods to the railway station through lorrymen and cartmen. We are of opinion that the contention of the department is well founded. There can be no doubt that he material now sought to be introduced here was not place before the Tribunal. We, therefore, declined to permit the assessee to start a new case that some portion of the goods sold in pursuance of the allotments were handed over to carries at Usilampatti itself, while only the rest was transported through the railway at Manaparai. The Tribunal was, therefore, justified in the conclusion it came to in regard to the passing of title in the goods, the profits in the sale of which are concerned in this reference. The delivery of the goods to the common carrier which has been found to be specially designated by the buyer for conveyance to his place was at Manaparai and that would be the place where title to the goods would have passed to the buyer. The price of the goods would, therefore, be held to have been earned at that place, i.e., within the taxable territories.
It is next argued that, although the profits could be held to have accrued at Manaparai, they cannot be taken as wholly accrued at that place, as only a part of the business operation of the assessee was done there. It is, therefore, contended that there should be an apportionment of profits between two places, namely, Usilampatti, where the goods were got by the assessee, and Manaparai, where the goods were sold by it. The Appellate Assistant Commissioner accepted this principle in part, when he allowed, in respect of the price received at Usilampatti, a deduction of 15% of the profits earned as referable to the business operation outside the taxable territory.
Mr. Venkataraman, learned counsel for the assessee, contends that the place of sale, namely Manaparai, cannot be taken as the one where the entire income was earned or accrued, as the sale was itself dependent on an antecedent purchase of yarn by the assessee in Pudukottah State and as that purchase, in turn, was referable to the sole selling agency, which it acquired outside the taxable territory. Not being a case of a stray purchase, but an organised and regular one, it is contended that the purchase from the mills by the assessee of goods for the purpose of the sale to the ultimate buyers would be a business operation, to which some portion of the profits earned in the case should be attributed. Learned counsel relied in this connection on section 42 of the Income-tax Act, which permits an apportionment of income which is deemed to accrue in India. But the provisions of section 42 will not apply to the present case, where there is no question of deemed accrual but an actual accrual of income takes place outside the taxable territories, there being a business connection within the taxable territories. Mr. Venkataraman, however, contends that, although section 42 will not, in terms, apply to the present case, the principle recognised by that section is applicable to all cases where a part of the business is done in one place outside the taxable territory and the other part within the taxable territory. Reliance is placed in this connection on certain decisions in which the assessee was both as manufacturer and trader, the former operation being done in one place and the latter in another. It was held that the profits earned by sale should be held to have accrued in part at the place of manufacture and, as regards the rest, at the place of sale. We are not satisfied that the principle of those cases which relates to case of manufacture and sale can at all be applied to a mere case of purchase in one place and sale in another.
In Board of Revenue v. Madras Export Company a firm at Paris purchased in India through its agent certain skins, shipped them to Europe and sold them there. The agent earned no profits; but the firm received the profits by sale in Europe. The firm was sough to be assessed through its agent under section 33 of the Income-tax Act of 1918, which corresponds to the present section 42. The learned judges rejected the claim of the department on the ground that these was no business connection established in India so as to justify the application of the exception. Wallace J. observed, in the course of the judgment, thus :
'In the present case, the non-resident firm in India is merely buying raw material for shipment and sale abroad, and the profits realised from the sale are realised in Paris.....
In the present case, no profits of a non-resident firm exist in this country or pass from it through the hands of the Madras Export Company. That company transmits to the Paris firm raw material, and not profits derived thereon; it realises for the Paris firm no income made in British India which is taxable before it leaves British India. To my mind, then, there is no income chargeable with income-tax under section 5 of the Act, and section 33(1) read with section 3 does not bring within the scope of section 5 income accruing or arising wholly outside British India to the firm of which the Madras Export Company is the local agent.'
Sudalaimani Nadar v. Commissioner of Income-tax, is a case where assessment of foreign profits of the assessee was made on the basis of remittance therefrom of this country. The assessee exported animals from this country to Ceylon and sold them there at a profit. In addition to the remitted profits the department added a sum as representing profits accrued in this country where the animals were purchased. A Special Bench of this court held :
'When a business is of this simple nature - the business we have here is the buying in one place of animals for human consumption and the selling of them in another place - the profits arise only at the place of sale.'
It will be noticed that both the above cases cam directly under section 42, which statutorily provides for an apportionment of profits, where such profits are earned outside the taxable territory, there being a business connection in the taxable territory.
In Anglo-French Textile Co. Ltd. v. Commissioner of Income-tax Satyanarayana Rao and Viswanatha Sastri JJ. explained in what cases it could be held that there was a business connection in British India within the meaning of section 42. The learned judges observed that, where there is a regular agency established in British India for the purchase of the entire raw materials required for the purpose of manufacture and sale abroad, the agent in India being chosen by reason of his skill, experience, etc., it could be held that there was a business connection in India. That was a case where a textile mill situate outside the taxable territory bought raw materials within the taxable territory, took them over outside the territory, converted the raw materials into manufactured goods and sold them ultimately. It was held that the profits in such a vase must be apportioned as section 42(3) would apply. In coming to that conclusion it was observed that the decisions in Board of Revenue v. Madras Export Company and Sudalaimani Nadar v. Commissioner of Income-tax, could no longer be considered as correct exposition of the scope and effect of section 42. The same learned judges held in Commissioner of Income-tax v. Littles Oriental Balm & Pharmaceuticals Ltd., that, in respect of goods manufactured outside the taxable territory, but sold within the taxable territory, the profits made by the assessee on sales would be income arising in British India. This view, however, cannot now be sustained in view of the decision of the Supreme Court in Commissioner of Income-tax v. Ahmedbhai Umarbhai & Co. That case arose under the Excess Profits Act; but there can be no doubt and indeed it has now been settled that the principle of the decision would apply to cases arising under the Income-tax Act as well. In that case, a firm, which was resident in British India, was having a manufacturing plant in the Hyderabad State, where oil was extracted from raw materials. A part of the oil so manufactured was sold in Bombay within the taxable territory. It was held that the profits of that part of the business, namely, of oil manufactured in the Hyderabad State and sold in Bombay, should, for the purpose of income-tax, be apportioned with reference to what was attributable to the manufacture and what was attributable to the ultimate sale. Kania C.J. pointed out the distinction between receipt and accrual and stated that, while a receipt of the price might be held to be in Bombay, it could not be said that the whole of the profits of the manufacture and sale took place in Bombay, as the accrual of profits had to be determined by having due regard to the various operations that resulted in the obtaining of profits. Mahajan J. observed that, while it might be true that no profits were in fact realised till the oil was sold, the act of sale merely fixed the time and place as to receipt of profits, which could not be held to be wholly made by the act of sale alone. The learned judge further observed that the act of sale was only the culminating process in the earning of profits and, as it could not be performed unless the goods were produced, it would be wrong from a business point of view to state that all the profits resulted from the sale alone and that therefore a portion of the profits should be attributed to the manufacture of oil where such portion should be held to have accrued. Mukherjea J.s observations in that case are particularly instructive as to the reason why a portion of the profits is considered as accruing at the stage of manufacture. The learned judge observes :
'When a raw material is worked up into a new product by process of manufacture, it obviously increases in value; in other words, there is an accretion of profit to it and the increased value represents this income or profit which is the result of manufacture. As these profits accrue by reason of manufacture, the accrual, in my opinion, cannot but be located at the place where the manufacturing process is gone through. It is immaterial that the manufactured goods are sold later on at various places. If the manufacturer is himself the seller, it might be that he receives the entire profits including that of the manufacture only at the time of the sale; but in an inchoate shape, a portion of the profits does accrue at the place of manufacture, the exact amount of which is only ascertained after the sale takes place. For purposes of being carried on by two different sets of persons. As soon as the manufacture is complete, that part certainly arise at the place where the manufacture is carried on and not where the sale ultimately takes place' (page 515).
Patanjali Sastri J., who was in a minority, was, however, inclined to the view that the principle of apportionment should be confined and restricted to the cases provided for in the statute and not regarded as one of general application irrespective of specific statutory provision.
It will be seen that Ahmedbhai Umarbhai & Co.s case is one where there was manufacture outside the taxable territory. That that rule may not apply to the case of a mere purchase and sale where no question of manufacture is involved, is clear from the following passage in the judgment of Kania C.J., at page 478 :
'Several cases were cited at the Bar dealing with a traders business where he bought and sold goods. In my opinion those are not relevant to determine the question before us because in the present case the business is of a different nature. In Commissioner of Taxation v. Kirk, Lord Davey distinguished Sulley v. Attorney-General and Grainger & Son v. Gough, on this ground. The place of sale was not considered the test when the business was of manufacture and sale.'
The observations of Mukherjea J., with whose judgment Das J. agreed, and which we have extracted above, would clearly show that the principle of apportionment of profits would only apply to a case where an article an manufactured and thereby a value is added to the goods, viz., the raw materials. The decision in Anglo-French Textile Co. Ltd. v. Commissioner of Income-tax. In that case, the view of this High Court that, when there is a continuity in business relationship between the person in British India who make the profits and the person outside British India who receives and realises profits, the provisions of section 42 could be invoked, was affirmed. That, again, was a case, where there was a manufacture of goods outside the Indian territory, the purchase of raw materials also being done in India. Mahajan J. observed in the curse of his judgment that the provisions of section 42(3) would have no application, unless, according to the known and accepted business notions and usages, the particular activity was regarded as a well-defined business operation, and stated : 'Distribution of profits on different business operation or activities ought only to be made for sufficient and cogent reasons and the observation made here are limited to the facts and circumstances of this case.' The learned judge cited by ways of authority the following observations of Lord Davey while delivering the judgment of the Privy Council in Commissioner of Taxation v. Kirk :
'It appear to their Lordships that there are fur processes in the earning or production of this income (1) the extraction of the ore from the soil; (2) the conversion of the crude ore into a merchantable product, which is a manufacturing process; (3) the sale of the merchantable product; (4) the receipt of the money arising from the sale. All these processes are necessary stages which terminate in money, and the income is the money resulting less the expenses attendant on all the stages. The first process seems to their Lordships clearly within sub-section (3), and the second or manufacturing process, if not within the meaning of trade in sub-section (1), is certainly included in the words any other source whatever in sub-section (4).'
The foregoing statement of the principle makes it clear that the accrual or earning of profits, in respect of which apportionment is made, will be restricted only to a case of manufacture, which has the effect of increasing the inherent value of the goods. In Anglo-French Textiles Co. Ltd. v. Commissioner of Income-tax, the Supreme Court applied the principle of Ahmedbhai Umarbhai & Co.s case, to the case of income-tax and held that the apportionment of income, profits or gains between those arising from business operations carried on in the taxable territories and those arising from business operation carried on outside those territories was based on general principles of apportionment of income, profits and gains. That, again, was a case where raw materials were converted by manufacturing process into goods of a different kind. The rule as to apportionment of accrued profits has not, however, been applied in any decision to a mere case of purchase and sale, there being no intervening stage at which the value of the property could be said to enhanced by a manufacturing or other process. When a person purchases goods in one place and sells them at another, it may be that the value of the goods is increased and thereby he secures a profit but the profit in that case is earned by virtue of the market conditions and not by virtue of anything done to the goods themselves which can be said to earn profits at that point of time or place. The observations of Mukherjea J. in Ahmedbhai Umarbhai & Co.s case, show beyond doubt that the Supreme Court, when they enunciated the rule as to apportionment of accrued profits, had in view only the cases of goods which had been manufactured and subsequently sold.
Where a non-resident purchases goods within India by having a business connection here and earns profits by sale outside the India territory, his case would be governed by section 42 and, by virtue of the statutory fiction, the profits earned could be deemed to have accrued and liable to be apportioned in the manner specified in the section. But, where a foreigner purchases goods outside the taxable limits and sells them in India, such profits should be held to have accrued at the place of sale and there could be no apportionment of profits with reference to the activity of purchase and that of sale. An exemption to this is the case of articles which undergo the process of manufacture in the hands of the assessee. For example, if the Thaigesar Mills were themselves to sell the goods outside Pudukottah State and within the taxable territory, the profits earned by which sale could well be regarded as partly earned at the place of sale and partly at the place of manufacture. But, in the present case, the mills did not sell the goods directly to the buyers. By virtue of the contract entered into within the assessee, they have sold the goods to the assessee in the first instance within the Pudukottah State. The assessee then took those goods which he purchased in that state to the Indian territory and sold them in turn to various buyers, thus earning profit within the taxable territories. So far as the assessee is concerned, the only activity he had outside the taxable territory was the purchase of articles. To such a case, neither section 42 nor the principle of Ahmedbhai Umarbhai & Co.s case would apply. The whole of the profits earned by the sale should be held to have accrued by reason of the transaction of sale and that having taken place within the taxable territories, was liable to be taxed. We, therefore, agree with the view taken by the Tribunal and answer the question in the affirmative and against the assessee. The assessee will pay the costs of the department. Advocates fee Rs. 250.
Question answered in the affirmative.