COMMISSIONER OF INCOME TAX Vs. HINDUSTAN SHIPYARD LIMITED

JUDGEMENT

(1.) HINDUSTAN Shipyard Ltd., Visakhapatnam, a Government of India undertaking, registered under the Indian Companies Act, entered into an agreement with Zaklady Prz Emyslu Metalowego H-Cegielski, Poznam, Poland, a Polish company, for the purchase of six main diesel engines with accessories. The price of each engine with the accessories was Rs. 30,72,346 f.o.b. Polish or other European ports in non-convertible Indian rupees. The day of payment, it was stipulated, was to be deemed to be the day of crediting the amount to the account of Bank Handlowy, Warszawa, with the Bank of India, Bombay. 90 per cent. of the value of the machinery shipped was agreed to be paid through the State Bank of India, Visakhapatnam, on collection basis, against the original set of documents to be submitted directly to the State Bank of India, Visakhapatnam, within fifteen days from the date of presentation from the State Bank of India, Visakhapatnam, to the purchasers. The remaining 10 per cent. was agreed to be paid on the expiry of the guarantee period of six months after delivery of the respective vessels. The price agreed to belaid was inclusive of 5 per cent. commission payable to Messrs. S. M. Maneklal Industries Ltd., Bombay, agents of the Polish company. The property in the engines was to pass to the purchasers immediately on delivery on board the vessel named by the forwarding agents of the purchasers at the port of shipment named by the Polish company. The agreement made detailed provisions for inspection, testing and acceptance of the engines. The engines were agreed to be erected by the staff of the purchaser under the supervi-sion of the erector and supervising engineer placed at the disposal of the purchaser by the Polish company. The Polish company agreed to supply an erector and a supervising engineer for a period of 12 months for every ship free of charge. The Polish company also agreed to provide for every ship, free of cost, one guarantee engineer for a period of 6 months on board the ship. Detailed provisions were made in the agreement regarding the various guarantees given by the Polish company. The Polish company also agreed to organise a training course in Poland for a period of 6 months for eight technical employees of the purchaser to be sent in batches. The expenses of the training course including travelling expenses were to be borne by the Polish company. The agreement contained the other usual conditions regarding cancellation of contract, extension of time, settlement of disputes, etc.

(2.) THE Income-tax Officer took the view that the Polish company had received taxable income through the Hindustan Shipyard Ltd., the assessee-company, which company he held was the agent of the Polish company within the meaning of Section 163(1) of the Income-tax Act, 1961. THE assessee-company preferred an appeal to the Appellate Assistant Commissioner. Before the Appellate Assistant Commissioner it was conceded by the department that the income received by the Polish company was not assessable on receipt or accrual basis in the hands of the assessee-company under Section 5(2) of the Income-tax Act, 1961. THE dispute resolved itself to the question whether the non-resident Polish company had any "business connection" with the assessee-company so as to attract the provisions of Sections 9(1)(i) and 163(1)(b) of the Income-tax Act, 1961. THE Appellate Assistant Commissioner found against the assessee on the issues argued before him and rejected the appeals of the assessee. On further appeal to the Income-tax Appellate Tribunal, it was held that the Polish company had no "business connection" with the assessee-company within the meaning of Sections 163(1)(b) and 9(1)(i) of the Income-tax Act, 1961, and, therefore, the income of the foreign company was not liable to be assessed in the hands of the assessee-company. An attempt was made by the department to raise before the Tribunal once again the question of recourse to Section 5(2) of the Income-tax Act, 1961. THE Tribunal pointed out that it was not open to the department to reagitate the question which had been specifically given up before the Appellate Assistant Commissioner. However, the Tribunal went on to express an opinion that the income of the foreign company could not be assessed in the hands of the assessee-company on accrual or receipt basis under Section 5(2). THE assessee's appeals were allowed by the Tribunal. A consolidated application was made by the Commissioner of Income-tax to the Income-tax Appellate Tribunal to state a case and refer the following questions of law for the decision of the High Court:

(3.) IN Commissioner of INcome-tax v. McLeod and Co. Ltd. , all that was decided was that it was open to the court to consider whether the statement of the case by the Tribunal was complete and whether the proper question of law was raised by the Tribunal. The Supreme Court quoted with approval the following observations of Kania J. in N. V. Khandvala v. Commissioner of INcome-tax [1946] 14 ITR 635, 637 (Bom) :