Sankar Prasad Mitra, C.J.
1. This reference under Section 256(1) of the I.T. Act, 1961, arises out of 56 applications regarding assessments of T.I. & M. Sales Ltd., hereinafter called the 'Indian company', treating it as an agent of a number of non-resident companies. Here we are concerned witheight companies, six of them have been described as 'Group A' companies, and two as 'Group B' companies. The Indian company had no direct agreement with the Group 'A' companies but had dealings with them by virtue of an agreement with T.I. Export Ltd., hereinafter referred to as the 'Export Company'.
2. The Group 'B' companies are those with whom the Indian company had direct agreements. When the Tribunal heard the appeal, there were three Group B companies. We now have before us only two of them. The third company, viz., M/s. Geo Tucker Eyelet Co. Ltd., has been found by the Tribunal to be non-taxable in India and the Tribunal's decision is accepted by the Department. The Tribunal has also dealt with the consequences of the agreement with the Export company as well. But that does not form the subject-matter of the present reference.
3. Let us at the outset set out the relevant provisions of the statute. Section 3 of the Indian I.T. Act, 1922, is the charging section. Under Section 4, incomes which are received or which accrue or arise or are deemed to be received, to accrue or to arise in taxable territories during a year are taxable. In the instant case, it is common ground that, so far as the assessee is concerned, no income was received nor did any income accrue in India. The question is whether any income should be deemed to have been received or deemed to accrue. Section 4(1)(c) also provides that if the person to be assessed is a non-resident in the taxable territories during the assessment year in question, the income which arises or accrues or is deemed to accrue or arise to him in the taxable territories would also be taxed here.
4. We now come to Section 42 of the 1922 Act. The relevant provisions are as follows:
' 42. Income deemed to accrue or arise within the taxable territories.--All income, profits or gains accruing or arising, whether directly or indirectly, through or from any business connection in the taxable territories.........shall be deemed to be income accruing or arising within thetaxable territories and where the person entitled to the income, profits or gains is not resident in the taxable territories, shall be chargeable to income tax either in his name or in the name of his agent, and in the latter case such agent shall be deemed to be, for all the purposes of, this Act, the assessee in respect of such income-tax.........
(3) In the case of a business of which all the operations are not carried out in the taxable territories, the profits and gains of the business deemed under this section to accrue or arise in the taxable territories shall be only such profits and gains as are reasonably attributable to that part of the operations carried out in the taxable territories.'
5. Then comes Section 43, which runs as follows :
'43. Agent to include persons treated as such.--Any person employed by or on behalf of a person residing out of the taxable territories, or having any business connection with such person, or through whom such person is in the receipt of any income, profits or gains upon whom the Income-tax Officer has caused a notice to be served of his intention of treating him as the agent of the non-resident person shall, for all the purposes of this Act, be deemed to be such agent.......'
6. Now, the problems that arise for our consideration in this reference are :
(a) whether the Indian company had any business connections within the meaning of Section 42(1), (i) with Group A companies, and (ii) with Group B companies, and
(b) whether, if such business connections existed, any part of the operations of such business was carried out in the taxable territories to which the non-residents' incomes are reasonably attributable.
7. The sections corresponding to Sections 4, 42 and 43 of the 1922 Act are Sections 5, 9 and 163 of the 1961 Act.
8. The Tribunal, upon examining the agreement between the parties and other facts and circumstances, has come to the conclusion that the Indian company had business connections both with the Group A companies and the Group B companies. The Tribunal has further found that part of the operations were carried out in India and, as such, the provisions of Section 42(3) of the 1922 Act corresponding to Explanation (a) to Section 9(1)(i) of the 1961 Act would be attracted to the facts of the case.
9. The Tribunal has referred to this court the following questions :
'1. Whether, on the facts and in the circumstances of the case and on a proper construction of the agreement between the Indian company and the export company, the Tribunal was right in holding that the six non-resident companies in Group A had a business connection with the Indian company and, therefore, that the Indian company was correctly treated as an agent of the said non-resident companies under Section 163 of the Income-tax Act, 1961 ?
2. If the answer to question No, 1 is in the affirmative, then, whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that any profit could be deemed to accrue or arise in India to the six non-resident companies in U.K. in respect of the goods sold by them to customers in India ?
3. Whether, on the facts and in the circumstances of the case and on a proper construction of the agreement dated March 22, 1955, between the Indian Company and Crane Packing Ltd, (company in Group B), the Tribunal was right in holding that the non-resident company had a business connection with the Indian company and, therefore, that the Indian company was correctly treated as an agent of the said non-resident company under Section 163 of the Income-tax Act, 1961 ?
4. If the answer to question No. 3 is in the affirmative, then, whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that any profit could be deemed to accrue or arise in India to the aforesaid non-resident company in respect of the goods sold by it to customers in India ?
5. Whether, on the facts and in the circumstances of the case and on a proper construction of the agreement dated June 1, 1954, between the Indian company and Bundy Tubing Co. (Australia) Pvt. Ltd. (non-resident company in Group B), the Tribunal was right in holding that the nonresident company had a business connection with the Indian Company and, therefore, that the Indian company was correctly treated as an agent of the said non-resident company under Section 163 of the Income-tax Act, 1961 ?
6. If the answer to question No. 5 is in the affirmative then, whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that any profit could be deemed to accrue or arise in India to the aforesaid non-resident company in respect of the goods sold by it to customers in India '
10. Before proceeding any further, we may state that the assessee's contention is that with, the Group A companies, it never had any privity of contract at all. Contracts were entered into with the Group A companies by the export company only pursuant to orders for which the assessee had canvassed in India. Moreover, the assessee had no authority to accept offers on behalf of the Group A companies or bind them in any manner whatsoever.
11. So far as the Group B companies are concerned, the assessee's contention is that it was acting in India as the sole agent of those companies only for the purpose of canvassing for goods. The orders which the Indian company secured were communicated to the Group B companies in England and it was for the Group B companies either to accept the offers or to reject them. In other words, there was a privity of contract between the assessee company and the Group B companies but the assessee company had no authority either to accept offers on behalf of the Group B companies or to bind them in law.
12. Mr. Balai Pal, on behalf of the Department, has argued before us that the assessee was not a mere canvassing agent or a freelance broker either for the Group A or the Group B companies. The assessee was the sole authorised agent of the export company in India with full power to enterinto contracts. The agreement with the export company was not an agreement on principal to principal basis but an agreement of agency only.
13. With regard to the Group A companies, Mr. Pal says that though these companies had no direct agreement with the Indian company, they accepted the terms of the agreement between the Indian company and the export company and by reason of this acceptance, the Indian company became the sole selling agent of the Group A companies as well.
14. With respect to the Group B companies, according to Mr. Pal, there were not only direct contracts between these companies and other Indian concerns but the Indian company was also acting as their sole agent in India having the authority to enter into contracts on their behalf.
15. Mr. Pal submits that the affidavit of Mr. Carol Stuart Cameron, Secretary of the Indian company, affirmed on the 27th December, 1965, which was filed before the Appellate Tribunal contains facts which must be read in the light of the agreement between the parties. These facts, inter alia, are :
(a) T.I. & M. Sales Ltd. places orders with either T.I. Export Ltd. or directly with one or other of the nine non-residents for their requirements of goods. These orders in some cases relate to the requirement of goods by T.I. & M. Sales Ltd. and in some other cases by some Indian customers. Sometimes the Indian customers place such orders directly with either T.T. Export Ltd. or with one or other of the nine non-residents for the goods manufactured by them.
(b) In all cases, the aforesaid orders are accepted by the non-residents in their country and intimation of such acceptance is communicated to T.I. & M. Sales Ltd. and/or the Indian customers.
(c) The aforesaid orders become binding contract only after being accepted in the manner indicated in (b) above.
16. Mr. Pal submits that 'business connection' is a question of fact depending on each case and does not always necessitate an ' agency '. It is enough if there is only a relation between the business of the non-resident and the activity in the taxable territory which facilitates or assists the carrying on of the business.
17. Lastly, Mr. Pal drew our attention to pages 57 and 58 of the paper book. This is a copy of a letter dated March 22, 1955, addressed by Crane Packing Ltd. (a company in Group B) to the Indian company. The opening paragraph of this letter reads thus :
' We confirm that we appointed you as our sole Agent in India in December, 1949, under the terms of the standard Agency Agreement of T.I. (Export) Ltd. whereby the Agent accepts del credere, and that you are still acting as our sole Agent in India. '
18. Mr. Pal's contention is that the Indian company was a del credere agent and, as such, it had necessarily the authority to accept offers on behalf of the principal. We would discuss the position in law of del credere agents at the appropriate time. But at the moment, we merely observe that only in the letter referred to above, the expression 'Agent accepts del credere' appears. In other words, assuming that a del credere agent has the requisite authority to bind the principal by accepting offers, the Indian company was the del credere agent of Crane Packing Ltd. only and of no other companies either in Group A or in Group B as we find from the documents on record.
19. On the facts and in the circumstances of this case, the only relevant decision of the Supreme Court that requires consideration is the case reported in CIT v. Aggarwal & Co. : 56ITR20(SC) . In this case, the assessee canvassed orders from dealers in Amritsar for the supply of goods and communicated them to certain non-resident exporters. The assessee had no authority to accept the orders on behalf of the nonresidents. The orders were accepted by the non-residents, price was received by them and delivery was also given outside the taxable territories. No operation such as procuring raw materials or manufacture of finished goods took place within the taxable territories. The assessee was entitled to certain commission on these sales. The Supreme Court has held that there was no business connection within the meaning of Section 42(1) of the Indian I,T. Act, 1922, of the assessee with the non-resident, and the assessee could not be treated as the agent of the non-residents for the purpose of taxing the profits that accrued to them from their export business. In the last but one paragraph of this judgment, at page 28, it was observed : ' Turning to the facts of the present case, as found by the revenue authorities, contracts for the sale of goods took place outside the taxable territories, price was received by the non-residents outside the taxable territories, and delivery was also given outside the taxable territories. No operation such as procuring raw materials, manufacture of finished goods, sale of goods or delivery of goods against price took place within the taxable territories : the assessee merely procured orders from merchants in Amritsar for purchase of goods from the non-resident companies. The orders were offers which the assessees had no authority to accept on behalf of the nonresidents. Some commercial activity was undoubtedly carried on by the assessees in the matter of procuring orders which resulted in contracts for sale by the non-residents of goods to merchants at Amritsar. But on this account no business connection of the assessees with the non-residents within the taxable territories resulted. The activity of the assessees in procuring orders was not as agents of the non-residents in the matter of sale of goods manufactured by the latter, nor of procuring raw materials in the taxableterritories for their manufacturing process. Their activities led to the making of offers by merchants in the taxable territories to purchase goods manufactured by the non-residents which the latter were not obliged to accept. The expression ' business connection ' postulates a real and intimate relation between trading activity carried on outside the taxable territories and trading activity within the territories, the relation between the two contributing to the earning of income by the non-resident in his trading activity. In this case, such a relation is absent.'
20. In our case, the facts as they appear from the documents on record and the affidavit of Mr. Cameron referred to above (which incidentally has not been traversed by the Department) are (a) procuring of raw materials and manufacture of finished goods took place outside the taxable territories,(b) contracts for sale of goods were entered into outside the taxable territories,(c) price was received by the non-residents outside the taxable territories, and (d) delivery was also made outside the taxable territories. Moreover, Cameron in his affidavit categorically states that the orders which were sent from India were accepted by the non-resident in London and intimation of such acceptance was communicated either to the Indian company or to the Indian customers and the orders became binding contracts only after being accepted in this manner. In other words, the Indian company had no authority to accept any offers on behalf of any of these non-residents whether they belonged to Group A or Group B. The Department, as we have stated, has not adduced any evidence to contradict the facts stated by Cameron either from the course of dealings between the parties or otherwise.
21. The position, therefore, is that in a case like this there can be no ' business connection' unless the Indian assessee has the authority to accept offers or to enter into contracts on behalf of the non-residents. The Tribunal has found that in the case of one company only there was an express prohibition against the acceptance of offers. But in the other contracts, there was no such express prohibition. The Tribunal has granted relief in the case of express prohibition but has taken a different view with regard to those contracts in which there was no such prohibition. In our opinion, having regard to the facts stated by Cameron and the course of dealings between the parties, absence of express prohibition, in the instant case, is immaterial.
22. It is true that the Indian company was the sole agent of the Group B companies. But, it appears, from the evidence on record that in spite of being the sole agent, the Indian company had no authority given to it by the Group B companies to accept offers on their behalf. So far as Group A companies are concerned there was no privity of contract at all either ofagency or of any other variety. In these premises, we cannot but hold that the Indian assessee had no 'business connections' with the non-resident companies belonging either to Group A or Group B within the meaning of Section 42 of the 1922 Act corresponding to Section 9 of the 1961 Act.
23. We would now deal with the point raised by the Department with respect to del credere agents. We have already stated that only in one contract we find that the Indian assessee was treated as a del credere agent.
24. In Cheshire and Fifoot's Law of Contract, 6th edition, p. 163, it is stated : 'A del credere agent is one who, for an extra commission, undertakes responsibility for the due performance of their contracts by persons whom he introduces to his principal.' This definition of a del credere agent has been repeated in other text books to which we shall presently refer. In Bowstead On Agency, 13th edition, page 1, a del credere agent is said to be : 'An agent who, in consideration of extra remuneration, called a del credere commission, guarantees to his principal that third persons with whom he enters into contracts on behalf of the principal shall duly pay any sums becoming due under those contracts.' In Chitty On Contracts, 22nd edition, page 5, it is stated ; 'An agent for the sale of goods sometimes acts under del credere commission, that is, for a higher reward than is usually given ; he becomes responsible to his principal for the solvency of the buyer ; or, in other words, he guarantees, in every case of sale, the payment of the price of the goods sold, when ascertained and due. He does not become responsible to the buyer for the due performance of the seller's contract and the principal may not litigate with a del credere agent for disputes arising out of contracts made by him. A del credere agency may be implied, or inferred from a course of conduct, but an agreement between stock-brokers by which one party agreed in consideration of receiving half commission of business introduced by him to bear half of any loss sustained by the other in connection with such business was held to constitute not a del credere agency, but a contract of indemnity. A del credere agency does not need to be in writing because being merely incidental to another transaction, it is not a promise to answer for the debt, default or miscarriage of another within Section 4 of the Statute of Frauds.' In Anson's Law of Contract, 21st edition, page 517, a del credere agent has been described as ' an agent employed for the purpose of sale, but who, in return for extra remuneration, also becomes responsible to his principal for payment by the buyer. He undertakes that the parties with whom his principal is brought into contractual relations will pay the money which may become due under the contract into which they enter. He does not, however, become responsible to the buyer for the due performance of the contract by his principal.' Lastly, in Halsbury's Laws of England, 3rdedition, Article 362, at page 152, it is stated : 'A del credere agent is one who, usually for extra remuneration, undertakes to indemnify his employer against loss arising from the failure of persons with whom he contracts to carry out their contracts.'
25. From the above authorities, it seems to us that a del credere agent is an agent who gets an extra remuneration for the extra responsibility that he undertakes. Like any other agent, he is to sell according to the instructions of his principal, he is to make such contracts as he is authorised to make for his principal and he is bound as soon as he receives the money, to hand it over to the principal. He is distinguished from other agents simply in this that he guarantees that those persons to whom he sells shall perform the contracts which he makes with them (vide in Nevill [187I] LR 6 Ch App. 397 at p. 403).
26. This being the position of a del credere agent, in law, we are unable to accept the contention of Mr. Pal for the Department that the moment a person is appointed a del credere agent he carries with him the authority to accept offers or make binding contracts on behalf of his principal. Mr. Pal, for the Department, pointed out certain distinctions between the instant case and the case which was before the Supreme Court reported in CIT v. Aggarwal & Co. : 56ITR20(SC) . But these differences do not appear to us to be material. As we have stated, the crux of the matter in a case like the present one is the agent's authority to accept offers or to bind the principal. If that element is absent, it cannot be said that there was any ' business connection ' as contemplated by Section 42 of the 1922 Act corresponding to s. 9 of the 1961 Act.
27. Our answers to questions Nos. 1, 3 and 5 in this reference are, therefore, in the negative. And in view of these answers, questions Nos. 2, 4 and 6 do not arise.
28. Each party will bear and pay its own costs.