Andhra Pradesh H.C : Whether, on the facts and in the circumstances of the case, any profits or gains accrued or had arisen to the non-resident in India on account of the supply of machinery and documentation to M/s Bharat Heavy Plate and Vessels Ltd. for the asst. yrs. 1969- 70 and 1970-71 ?

Counsel Appeared

M.S.N. Murthy, for the Revenue : S. Parvatha Rao, for the Assessee

B.P. JEEVAN REDDY, J.:

The question referred in this case under s. 256(2) of the IT Act, 1961, reads thus :

” Whether, on the facts and in the circumstances of the case, any profits or gains accrued or had arisen to the non-resident in India on account of the supply of machinery and documentation to M/s Bharat Heavy Plate and Vessels Ltd. for the asst. yrs. 1969- 70 and 1970-71 ? “

On November 24, 1959, an agreement on economic co-operation was entered into between the Government of India and the Government of Czechoslovakia, Socialist Republic, concerning the establishment of certain industrial plants in India. On November 30, 1965, another agreement was entered into between the President of India and the Technoexport, Praha, Czechoslovakia, for the establishment of a plate and vessels plant in India. Bharat Heavy Plate & Vessels Ltd., Visakhapatnam, a Government of India undertaking, was incorporated in June, 1966. The assessee entered into two agreements with Skoda Export, Praha, Czechoslovakia, on February 27, 1968, and August 2, 1968, respectively. In this case, we are concerned with the second agreement entered into on August 2,

1968, which was entered into expressly ” for the delivery of machinery, equipment, instruments and spare parts and for rendering technical co-operation for the erection of plate and vessels plant at Visakhapatnam, India “. In this agreement, the non-resident is referred to as ” the supplier ” and the assessee as ” the customer “. (The first agreement provided for training of personnel of the customer in Czechoslovakia, rendering of consultancy activities and technical assistance and supply of technical documentation, etc., with which agreement we are not concerned herein). The second agreement provided for the terms and conditions for supply of machinery. The machinery was to be delivered F.O.B. European port and the time for fulfilment of delivery was the date of the bills of lading. This is made clear by Arts. 7, 9, 10, 11 and 15. The payment for the machinery was to be made by the assessee, according to the economic agreement entered into in 1959, in eight equal consecutive annual instalments. The first annual credit instalment was to be paid on the expiry of one year after the date of presentation by the non-resident to the bank at Czechoslovakia of the final commercial invoice, together with documents according to paragraphs 13 and 14 of Art. 11. The payment of purchase price was to be effected under the credit granted by the Czechoslovakia Government in the manner provided in Art. 15, cl. (d). The sum and substance of this clause is that the purchase price was to be paid outside India.

4. A number of questions arose in the assessment proceedings, one of which was whether a business connection existed between the non-resident and the assessee. This question was concluded by the decision of this Court in Bharat Heavy Plate and Vessels Ltd. vs. Addl. CIT (1979) 119 ITR 686 (AP), where it was held that a business connection did exist. It was held that a combined reading of the two agreements entered into in the year 1968 does establish a real and intimate connection between the assessee and the non-resident within the taxable territories, which amounts to a business connection. It was observed that there is an element of continuity between the business of both the assessee and the non-resident. Another aspect in dispute related to the fees paid for consultancy activity. The question was whether any income accrued of arose to the non-resident in respect of the consulting fee as a result of operations carried out by it within the taxable territories and which constituted a business connection. In Skoda Export vs. Addl. CIT (1983) 37 CTR (AP) 77 : (1983) 143 ITR 452 (AP), this Court answered the said question in the affirmative, i.e., in favour of the Revenue and against the assessee. Now, in this referred case, a third aspect arises for consideration, viz., whether any profit or gain accrued or arose to the non- resident in India on account of the supply of machinery and technical documentation to the assessee for the asst. yrs. 1969-70 and 1970-71. It was held by the Tribunal and it is not in dispute that the question has to be examined in the light of the provisions of s. 9(1)(i) of the Act and not s. 5(2). Sec. 9(1)(i), in so far as it is relevant, reads thus :

” 9. (1) The following incomes shall be deemed to accrue or arise in India— (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through or from any money lent at interest and brought into India in cash or in kind or through the transfer of a capital asset situate in India. Explanation.—For the purposes of this clause— (a) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India; (b) in the case of a non-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in India for the purpose of export; (c) in the case of a non-resident, being a person engaged in the business of running a news agency or of publishing newspapers, magazines or journals, no income shall be deemed to accrue or arise in India to him through or from activities which are confined to the collection of news and views in India for transmission out of India; (d) In the case of a non-resident, being— (1) an individual who is not a citizen of India; or (2) a firm which does not have any partner who is a citizen of India or who is resident in India ; or (3) a company which does not have any shareholder who is a citizen of India or who is resident in India, no income shall be deemed to accrue or arise in India to such individual, firm or company through or from operations which are confined to the shooting of any cinematograph film in India…”

5. According to the main clause, all income accruing or arising, whether directly or indirectly, through or from any business connection in India, shall be deemed to be income accruing or arising in India. If this were the only clause, there is no doubt that the income arising by the sale of machinery would be income arising in India, notwithstanding the fact that the sale took place outside India. This is for the reason that the sale of machinery is not an independent or isolated transaction, but is part and parcel of the business venture, or business connection, between the assessee and the non-resident. The sale of machinery was in pursuance of and in terms of the agreements between them, which provided for setting up of Plate and Vessels Plant at Visakhapatnam, in India. But, Explanation (a) appended to cl. (i) of s. 9(1) seeks to exclude those operations which are not carried out in India. According to this Explanation, in the case of a business of which some operations are carried out in India and some outside India, the income of the business deemed under s. 9(1)(i) shall be ” only such part of the income as is reasonably attributable to the operations carried out in India” The Explanation contemplates a business comprising several operations, some of which are carried out outside India. In such a situation, only the operations carried out within India shall be taken into account and a reasonable portion thereof shall be treated as income accruing or arising in India. The operations which are carried out outside India shall not be taken into account for this purpose [see CIT vs. Toshoku Ltd. (1980) 19 CTR (SC) 192 : (1980) 125 ITR 525 (SC) at pp. 530-531]. In the present case, it is not disputed that the business venture, or business connection, as it may be called, between the assessee and the non-resident comprised of several operations, viz., sale of machinery, providing consultancy services in India, training Indian personnel in Czechoslovakia, providing Czechoslovakian personnel for helping in the erection of plants in India and so on. Once this is so, it would follow that the sale of machinery which is one of the operations comprised in the business having taken place outside India cannot be taken into account for the purpose of determining the income accruing or arising in India. This is also the view of the Tribunal. On a consideration of the relevant clauses of the agreement dated August 2, 1968, the Tribunal held that the sale of machinery took place outside India and hence no part of the profit arising therefrom can be said to arise in India. Accordingly, there is no question of any apportionment of that profit under and for the purpose of s. 9(1)(i). We agree with this view.

There was a good amount of controversy as to whether the sale of machinery is an isolated and independent transaction or is a part of the business venture between the assessee and the nonresident. We do not think there is any room for such controversy. The sale of machinery, though completed outside India, was not an independent or isolated transaction. It was a part and parcel of the business venture, or business connection, between the assessee and the non-resident. The sale of machinery was in pursuance of and one of the things to be performed under and in pursuance of the agreement entered into between them. This is also the view expressed by a Bench of this Court in Bharat Heavy Plate and Vessels Ltd. vs. Addl. CIT (supra). The same view is expressed in the subsequent decision in Skoda Export vs. Addl. CIT (supra) as well.

We may also mention that learned standing counsel for the Department challenged the finding of the Tribunal that the sale of machinery was completed outside India. According to him, the sale was completed only in India, inasmuch as the assessee was entitled to inspect and satisfy itself about the quality and standard of the machinery supplied. We do not see any substance in this contention. The various clauses in the agreement referred to above make it clear that the sale of machinery was F.O.B., European port, and the time of fulfilment of delivery was prescribed as the date of the bills of lading. The payment was also to be made outside India. The agreement further makes it clear that the insurance risk during the course of the journey was that of the assessee and it paid for the same : even the freight charges from the European port to the place of destination were paid by the assessee. Thus, judged from any angle, the sale of machinery, which are ” goods ” within the meaning of the Sale of Goods Act, was completely outside India. A mere provision in the agreement that the assessee is entitled to satisfy itself about the quality and standard of the machinery in India cannot, in the circumstances of this case, detract from the fundamental position that the sale took place outside India. In such a situation, one has to apply the test of predominance and decide where the sale took place ? On a combined reading of the clauses of the agreement, we have no doubt that the sale of machinery did take place outside India.

For the above reasons, we answer the question referred to us in the negative, i.e., in favour of the assessee and against the Revenue. There shall be no order as to costs in the circumstances of the case.

[Citation : 172 ITR 358]