K.K.DESAI, J. - (1.) IN this reference under s. 66(1) of the INdian IT Act, 1922, the question referred to us for decision is as follows : "Whether, on the facts and in the circumstances of the case, the sum of Rs. 50,000 had been rightly taxed in the hands of the assessee under s. 10(5A) of the Act ?" Having regard to the language of the above section, the direct questions which arise for consideration are : (1) whether the assessee-firm was holding an agency. . . . .relating to the business of any other person ? and (2) whether the compensation of Rs. 50,000 in respect whereof the assessee-firm has been taxed under the above section was received by it in connection with the termination of an agency or the modification of the terms and conditions of an agency ?
(2.) THE facts appear in the statement of the case. THE assessee is a private limited company. By an agreement dt. 29th April, 1955, made between Ciba Pharma Ltd. (which company was the importer of pharmaceutical products of Ciba Ltd., Basle, Switzerland), and the assessee-firm, the latter was appointed distributor of the pharmaceutical products of Ciba Ltd. of Switzerland in the territories of Western and Central India and Hyderabad State on the terms and conditions contained in the agreement. THE question that arises for decision is whether this agreement is an agreement of agency. THE question has arisen because under s. 10(5A), cl. (d), tax is payable in respect of any compensation or other payment received by an assessee. THE clause reads as follows : "(d). . . . . .holding an agency in the taxable territories for any part of the activities relating to the business of any other person, at or in connection with the termination of his agency or the modification of the terms and conditions relating thereto." It has been held against the assessee-firm that, the agreement is an agreement of agency and the above sum of Rs. 50,000 having been paid towards compensation in connection with termination of an agency in respect of a part of the above territories, is liable to be taxed. The main submission on behalf of the assessee-firm is that, on a true construction thereof, the above agreement provides for a scheme for sale of all the pharmaceutical goods of the Ciba Ltd. of Switzerland in the territories mentioned in the above agreement to the assessee-firm and authorises the assessee-firm for itself and on its own behalf to distribute, thereby, in fact meaning to resell the goods purchased by the assessee-firm to direct purchasers and also to sub-distributors who in their turn would have the authority for themselves to effect retail sales of these very goods to their customers and constituents. The submission is that for this reason the agreement cannot be considered to be an agreement of agency. The contrary submission on behalf of the Revenue is that on a true construction the effect of the above agreement is that the assessee-firm has been appointed an agent for distributing pharmaceutical goods of the above Swiss company in the territories mentioned in the agreement. To appreciate these rival submissions, the relevant provisions of the agreement are necessary to be noticed. It is convenient to state that in this connection emphatic reliance has been placed by both sides on the scheme of the whole of the agreement and specific reliance has been placed on behalf of the assessee-firm on cls. 9, 24, 26 and 27 of the agreement. On behalf of the Revenue specific reliance has been placed on the recitals and cls. 3, 19 and 30 of the agreement. Ciba Pharma Ltd. is referred to in the agreement as "Importers".
(3.) THE relevant part of the recital in the agreement runs as follows : ". . . . .it has been agreed that the importers shall appoint the distributors and the distributors shall act as distributors for the sale of all such pharmaceutical products as may be entrusted to them by the importers on the terms and conditions hereinafter mentioned. . . . ." Though under cl. 1 the period of agreement was one year, admittedly, the period had been extended and the agreement continued in existence in the year of assessment which is 1960- 61. Under cl. 3, the assessee-firm agreed to "act as distributors in the territory for the sale within the territory . . . at prices from time to time fixed by the importers''. Under cl. 4, the assessee-firm is authorised to appoint sub-distributors. Clause 7 provides in respect of the price that the distributors shall not sell the said goods above or below prices, from time to time fixed by the importers as the selling prices. In case of price reduction the importers shall credit the distributors with the difference of price for all stocks not sold. Under cl. 8, the firm agreed to make a deposit of Rs. 3,00,000 to be utilised to cover delayed adjustments of outstandings or otherwise adjust monetary discrepancies which may arise in the accounts. Clause 9 provides that the importers' invoice shall be payable by the distributors and, inter alia, entitles the distributors to credit for 30 days and 45 days in respect of payments of the importers' invoices. Under cl. 11, the distributors agreed to pay interest at the rate of 9 per cent. to the importers, in respect of amounts not paid at the delayed dates provided under cl. 9. Clause 12 provides for the distributors truly, faithfully and honestly to act in the matter of the agreement so as to promote and safeguard the interests of the importers. Clause 14 provides for submission by the distributors every week of copies of their invoices and of copies of the invoices of their sub-distributors and at the beginning of every month a statement showing the sales of the said goods during the previous month in line with the invoices already submitted week by week. Under cl. 15, the distributors agreed to maintain "a suitable sized and adequately staffed wholesale sales office. . . .'' Under cl. 16, the distributors are authorised to appoint sub-distributors. Under cl. 17, the importers agreed to supply the necessary stocks to the distributors once a month. Under cl. 18, the distributors are directed to maintain sufficient stocks in order to enable them to execute all orders without delay. Clause 19 provides that "all goods which are not sold within six months from the date of invoice will be taken back and the value of the same credited to the distributors' account,. . . . .It is of course understood that returned goods will be credited at the prices originally charged in the respective invoices less the discounts granted. THE importers shall bear the goods-train freight for the goods returned''. Under cl. 20, the importers are authorised to take full and complete inspection and examination of the goods in the possession of the distributors. Clause 24 provides : "THE distributors shall enter into written agreements with their sub-distributors; such agreements to incorporate : (a) all the provisions of this agreement mutatis mutandis, and (b) . . . . . . . . . . . . . . . THE agreements between the distributors and the sub-distributors are to be countersigned by the importers. . . .THE distributors shall be responsible to the importers for all acts, defaults and omissions of every sub-distributor so appointed, who shall be the agents of the distributors and not of the importers." Clauses 26 and 27 provide : "26. THE distributors shall not enter into any contract in the name of or purporting to be on behalf of the importers nor shall the distributors by any act pledge the credit of the importers without permission in writing from the importers." 27. If and as long as the distributors shall duly and faithfully perform all their obligations under this agreement, any supplies made shall be upon the selling prices specified by the importers . . . less a discount as the case may be of-- 10% (ten per cent.) thereon for goods sold to medical profession and dealers, or 20% (twenty per cent.) thereon for certain goods sold to hospitals . . . and a discount for the distributors of 11 1/2% on the net price of the goods arrived at after deduction of such discount of 10% or 20% as the case may be. It is, however, understood that where the importers quote net prices, a discount of 11 1/2% to the distributors shall be calculated on such net prices only . . . THE distributors shall produce the original order from all the parties and copies of their invoices showing the discounts allowed to the different parties." Clause 30 provides : "On the termination of this agreement whether by efflux of time or otherwise the importers shall . . . within six months from the date of such termination complete checking and take delivery of the stocks held by the distributors including stocks with sub- distributors and shall within the said period adjust the accounts between themselves and the distributors. . ." Now, apparently, the parties have, as mentioned in the introductory recital, made the above agreement for appointing the assessee-firm as distributors for the sale of the pharmaceutical products entrusted to the assessee-firm. Several of the clauses in the agreement including those recited above provide for a scheme of what is mentioned in the agreement as scheme for distribution of the pharmaceutical products of the above Swiss company. In that connection, the products are agreed to be delivered to the assessee-firm. The firm undertakes and covenants to carry out work which is described as work of distribution truly, faithfully and honestly. The firm undertakes to safeguard the interests of the importers. The supplies to and sales by the firm are agreed to be made on the prices fixed by the importers. The firm is authorised to appoint sub- distributors and the provision is that agreement with sub-distributors to be made by the assessee- firm must be in writing and must incorporate all the provisions in the agreement mutatis mutandis. For the Revenue, particular reliance is placed on cls. 19 and 30 wherein it is provided that goods not sold would be taken back by the importers and the value of the same would be credited to the distributors' account. All the stocks of goods not sold by the distributors would be taken back on termination of the agreement and the value of the goods returned would be credited in the accounts. Having regard to this general scheme in the agreement which is mentioned as agreement of distribution, it has been repeatedly submitted by Mr. Joshi for the Revenue that the true nature of this agreement is merely that of an agreement of agency whereunder the assessee- firm was authorised to merely distribute pharmaceutical products of the importers. In his submission, there is no provision for sale of the goods by the importers of the assessee-firm. The work being of distribution on the face of it, a finding should be made that it is agency work. In that connection, he repeated what is mentioned in the order dt. 20th Jan., 1962, of the Tribunal, viz., that the fact that the assesse-firm had to pay for the invoice of the goods did not make any difference in the matter of the true nature of the agreement between the parties.;