Rc v. The Commissioner Of Income Tax Vizag

THE HON’BLE SRI JUSTICE V.V.S.RAOANDTHE HON’BLE SRI JUSTICE B.N.RAO NALLA REFERRED CASE No.256 of 199629.11.2011 Between: Far Eastern Shipping Services, Singapore, represented byCoastal Trawlers Limited, Vizag … Petitioner AND The Commissioner of Income-tax, Vizag … Respondent THE HON’BLE SRI JUSTICE V.V.S.RAOANDTHE HON’BLE SRI JUSTICE B.N.RAO NALLA REFERRED CASE No.256 of 1996 ORDER:(Per Hon’ble Sri Justice V.V.S.Rao) The assessee, namely, Far Eastern Shipping Services,Singapore, represented by Coastal Trawlers, Visakhapatnam gotthe following four questions referred to this Court under Section 256(1) of the Income Tax Act, 1961 (the Act). 1)Whether on the facts and circumstances of the case,the finding of the Hon’ble Tribunal that the non-residentprincipal of the assessee had carried on certainoperations in Indian Taxable Territory resulting in theaccrual of income was based on any material orevidence? 2)Whether on the facts and circumstances of the case,the Tribunal was correct in recording as a fact thatthough the operation of catch of fish took place outsidethe taxable territory, such catch was brought to theIndian Shore for processing and preservation, whenthe facts as found by the Assessing Authority and thefirst appellate authority show otherwise and the factsas found by the first appellate authority were notquestioned by the department in its appeal? 3)Whether on the facts and the circumstances of thecase, the Tribunal having noted the provisions of theAgreement for avoidance of Double Taxation between India and Singapore, was right in not holding that noincome accrued or arose to the non-resident principalof the assessee in India which fact was conceded bythe appellant department in one of the grounds urgedin its appeal? 4)Whether having regard to the actual facts andcircumstances of the case, the Tribunal was correct inholding that income is deemed to have accrued orarisen to the non-resident assessee in India during theprevious year relevant to the assessment year underthe consideration under the provisions of Section 9(1)of the Income-tax Act? The background facts as stated by the Income-tax AppellateTribunal, in brief, are as follows. The assessee is a non-residentcompany of Singapore which is represented by an Indiancompany. Under an agreement between the two companies duringthe assessment year 1987-88 the non-resident company charteredtheir fishing trawlers to the Indian company. There is no disputethat the consideration for the charter is payment of hire charges inkind i.e., 85% of the value of the catch to be given by the Indiancompany and non-resident company again pay back 15% of thevalue to the Indian company. Be that as it is, the assessing officerpassed orders on 09.3.1998 appointing the Indian company as theagent of non-resident company and raised demand for the taxinsofar as 7.5% of 85% of the catch received by the assessee.The Commissioner of Income-tax (Appeals), however, allowed theappeal taking a view that income could not be said to arise oraccrue in India as all the operations resulting in the accrual ofincome were carried out by non-resident outside India. This viewwas, however, reversed by the Tribunal. It is contended by the assessee that the agreement betweenthe parties was entered into at Singapore, that no part of theaccruals arose in India and that and that when the operation ofcatch of fish took place outside taxable territory the income cannot be charged to tax. The Revenue relies on the decision of this Court inKanchanganga Sea Foods Ltd v CIT[[1]]which was affirmed by theSupreme Court in Kanchanganga Sea Foods Ltd v CIT[[2]](II). It is contended by the assessee that the agreement betweenthe parties was entered into at Singapore, that no part of theaccruals arose in India and that and that when the operation ofcatch of fish took place outside taxable territory the income cannot be charged to tax. The Revenue relies on the decision of this Court inKanchanganga Sea Foods Ltd v CIT[[1]]which was affirmed by theSupreme Court in Kanchanganga Sea Foods Ltd v CIT[[2]](II). In Kanchanganga Sea Foods Ltd five questions were referredto this Court. The first three of them being similar to the questionsreferred to in this referred case. Therein the assessee wasengaged in the sale of export of sea food. After obtainingpermission to fish in the exclusive economic zone, they enteredinto agreement for chartering two fish vessels with East WideShipping Company (Hongkong) Limited. The Reserve Bank ofIndia granted permission to remit 85% towards hire charges andthe agreement was also permitted by the Government of India. The fishing trawlers were delivered at Madras Port forcommencement of fishing operations and 85% of gross earnings inthe sale of fish was paid as chartering fee. The assessing officerlevied interest under Section 201(1A) of the Act on the ground thatthe assessee while making payment to non-resident within themeaning of Section 195 of the Act failed to deduct tax at source. The contention of the assessee that there was nochargeable income at all which resulted to the non-residentcompany as no payment of any sum by the assessee to the non-resident and that as the operations were carried on beyond twelvenautical miles on the seashore beyond the taxable territory, noincome agreed to the non-resident company. The appellateCommissioner agreed with the view but the Tribunal having regardto Section 5(2) of the Act reversed the CIT (A) and at the instanceof assessee refer the questions to this Court. This Courtconsidered the scope of Section 195, 201 and 201(1A) of the Actand answered the questions against the assessee and in favour of the Revenue holding that demand is made to the non-resident inIndia; the receipt in the form of 85% of the catch of fish by thenon-resident was in India after completion of all formalities andthat the Tribunal was correct in holding that the assessee ought tohave deducted tax at source. Before the Supreme Court in Kanchanganga Sea Foods (II)itwas submitted that there was no income chargeable whichresulted to the non-resident assessee as no payment of any sumby the assessee took place in India and, therefore, liability todeduct tax at source did not arise. The plea was rejected by theSupreme Court and it was held as follows. the Revenue holding that demand is made to the non-resident inIndia; the receipt in the form of 85% of the catch of fish by thenon-resident was in India after completion of all formalities andthat the Tribunal was correct in holding that the assessee ought tohave deducted tax at source. Before the Supreme Court in Kanchanganga Sea Foods (II)itwas submitted that there was no income chargeable whichresulted to the non-resident assessee as no payment of any sumby the assessee took place in India and, therefore, liability todeduct tax at source did not arise. The plea was rejected by theSupreme Court and it was held as follows. From a plain reading of the aforesaid provision it isevident that the total income of a non-resident company shallinclude all income from whatever source derived, received ordeemed to be received in India. It also includes such incomewhich either accrues, arises or deemed to accrue or arise to anon-resident company in India. The legal fiction created has tobe understood in the light of the terms of contract. Here, inthe present case the chartered vessels with the entire catchwere brought to the Indian port, the catch was certified forhuman consumption, valued, and after customs and portclearance the non-resident company received 85% of thecatch. So long the catch was not apportioned the entire catchwas the property of the assessee and not of the non-residentcompany as the latter did not have any control over the catch.It is after the non-resident company was given share of its85% of the catch it did come within its control. It is trite to saythat to constitute income the recipient must have control overit. Thus the non-resident company effectively received thecharter fee in India. Therefore, in our opinion, the receipt of85% of the catch was in India and this being the first receipt inthe eye of the law and being in India would be chargeable totax. In our opinion, the non-resident company havingreceived the charter fee in the shape of 85% of fish catch inIndia, sale of fish and realisation of sale consideration of fishby it outside India shall not mean that there was no receipt inIndia. When 85% of the catch is received after valuation bythe non-resident company in India, in sum and substance, itamounts to receipt of value of money. Had it not been so, thevalue of the catch ought to have been the price for which thenon-resident company sold at the destination chosen by it.According to the terms and conditions of the agreementcharter fee was to be paid in terms of money i.e. US $600,000 per vessel per annum “payable by way of 85% of grossearning from the fish sales”. In the light of what we haveobserved above there is no escape from the conclusion thatincome earned by the non-resident company was chargeableto tax under Section 5(2) of the Income Tax Act. In view of the decision of the Supreme Court, the questions1 to 4 referred to this Court are answered in the affirmative infavour of the Revenue and against the assessee. The Referred Case shall stand disposed of accordingly. _______________ (V.V.S.RAO, J) ____________________ (B.N.RAO NALLA, J) November 29, 2010.YS [1](2004) 265 ITR 644 (AP)(2004) 265 ITR 644 (AP) [2](2010) 11 SCC 144 : (2010) 325 ITR 540 (SC)