Commissioner of Income-Tax, Bombay vs S. K. F. Ball Bearing Co., Ltd

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 9 of 1958

Decision Date: 10 August 1960

Coram: J.C. Shah, S.K. Das, M. Hidayatullah

In this case the Supreme Court recorded that the petition was brought by the Commissioner of Income‑Tax, Bombay against S. K. F. Ball Bearing Co., Ltd, the respondent, and that judgment was delivered on 10 August 1960 by a Bench consisting of Justices J. C. Shah, S. K. Das and M. Hidayatullah. The citation of the decision is 1960 AIR 1294 and it concerned the provisions of the Indian Income‑Tax Act, 1922, specifically section 4(1)(a). The factual background involved a Swedish company incorporated under the laws of Sweden that manufactured ball‑bearing equipment. That company entered into an agreement with the respondent, which was registered under the Indian Companies Act, 1913, appointing the respondent as its exclusive selling agent in India. Clause 23 of the agreement provided that the agent would pay to the Swedish company the net sales value of the products sold each month after deducting the agreed commission and any import expenses, and that payment would be made in Sweden no later than thirty days after the end of the month in which the sales occurred. During the Second World War a corporation named Pan‑rope Corporation was incorporated in the Republic of Panama to acquire the assets and business of the Swedish company, and thereafter the Pan‑rope Corporation transferred the property and business back to the Swedish company. The respondent continued to sell, in India, goods manufactured by the foreign corporations as their agent. In most transactions the respondent remitted the “sale value” to the foreign corporations after the goods were sold but before the sale proceeds were actually recovered from the buyers. In some instances remittances were made even before the goods were sold, and in other cases the remittances were made after the sale proceeds had been realised. The Income‑Tax Officer assessed the foreign corporations under section 4(1)(a) for tax on the profit included in the price realised by the respondent, without distinguishing between remittances made before the recovery of the sale proceeds and those made after such recovery. This assessment was affirmed by higher income‑tax authorities. The respondent challenged the assessment, and on a reference the High Court held that the foreign corporations had a business connection in the taxable territory for the years of account, but that the respondent was liable to pay tax on behalf of the foreign corporations only with respect to remittances that were made after the sale proceeds had been recovered. The Commissioner of Income‑Tax appealed this decision by special leave, leading to the present Supreme Court appeal.

In this case the Court held that under section 4(1)(a) the liability to pay income‑tax arose at the moment the income was received, and that the question of whether the income was received in the taxable territory was answered by looking at the place where the price was actually received. Consequently the Court found that the respondent company received profits on behalf of the foreign corporations in the taxable territory for every sale of consigned goods, and that this tax liability existed irrespective of whether the remittances to the foreign corporations were made before the price was received or after it had been received. The matter was a civil appeal, numbered 9 of 1958, taken on special leave from the judgment and order dated 24 February 1955 of the former Bombay High Court in Income‑tax Reference No. 50/X of 1954. Counsel for the appellant and counsel for the respondent appeared before the Court. The judgment was delivered on 10 August 1960 by Justice Shah. Aktiebolaget Svenska Kullakerfabriken of Gothenburg, incorporated under Swedish law, was a manufacturer of ball‑bearing equipment. S. K. F. Ball Bearing Co., Ltd. (hereafter “the S. K. F.”), registered under the Indian Companies Act 1913, was appointed by the Swedish company as its sole selling agent in India by an agreement dated 1 January 1939. When hostilities of the Second World War began, a corporation named Panrope Corporation was incorporated in the Republic of Panama in 1940 to take over, as a wartime arrangement, the assets and business of the Swedish company. Effective 1 July 1947, Panrope conveyed the property and business back to the Swedish company. During the years 1947, 1948, 1949 and 1950 the S. K. F. sold in India, as agent of the Swedish and Panamanian companies (collectively “foreign corporations”), the goods manufactured by them. A small quantity of goods was purchased by the S. K. F. and sold by it in India, but the appeal does not concern the tax liability on those sales and no reference is made to them. The Income‑Tax Officer, Companies Circle 11(3), Bombay, exercising powers under section 43 of the Indian Income‑Tax Act 1922, appointed the S. K. F. as statutory agent of the foreign corporations for assessment year 1948‑49 and as agent of the Swedish company for assessment years 1949‑50, 1950‑51 and 1951‑52. Accordingly the S. K. F. filed income‑tax returns for those years in the taxable territory on behalf of the foreign corporations. Clauses 13, 22 and 23 of the 1 January 1939 agreement between the S. K. F. and the Swedish company were material to the appeal; clause 13 required the agent to render before the tenth day of each month a true and detailed statement of the products sold, prepared in accordance with instructions to be given by the S. K. F., and to include names, addresses, descriptions and prices of the products sold.

The agreement required the agent to submit, before the tenth day of each month, a true and detailed statement of the products that had been sold by the agent or its sub‑agents during the preceding month. The statement had to be prepared according to instructions given by S K F and it had to list the names and addresses of the parties to whom the products were supplied, together with a description of the products and the prices at which they were sold. Clause 22 provided that the agent could sell the products either for cash or on credit. Although S K F granted permission to sell on credit, any credit extended by the agent to the buyer was to be deemed as given by the agent for his own account and on his own responsibility. If the buyer failed to pay the amount due by the date on which the agent was required to render a statement and make payment to S K F for credit sales, the agent remained liable to pay S K F in accordance with the terms and conditions defined in the agreement. Clause 23 stipulated that the agent was to pay S K F the net sales value of the products sold each month after deducting the agreed commission and the import expenses that had been paid. This payment was to be made in Sweden no later than thirty days after the last day of the month in which the sales were effected. The Income‑Tax Appellate Tribunal found that, for the purpose of rendering accounts of the net sales and making payments as required by clause 13, S K F maintained a current account in the names of the foreign corporations for the periods concerned, recording goods received on consignment. When S K F sold goods, the principal’s account was credited with the sale price and the account of the buyer to whom the goods were sold on credit was debited. In the majority of sales, remittances of the sale value after deduction of commission were made after the goods were sold but before the sale proceeds were recovered. In a few instances, remittances were made even before the goods were sold, and in the remaining cases, remittances were made after the proceeds had been realised from the buyers. The Income‑Tax Officer assessed the foreign corporations under section 4(1)(a) of the Indian Income‑Tax Act for tax on the profits included in the price realised by S K F from the consignment sales, without distinguishing between sales where remittances were made after recovery of proceeds and those where remittances were made before recovery.

The assessment order issued by the Income‑tax Officer was upheld first by the Appellate Assistant Commissioner and subsequently by the Income‑tax Appellate Tribunal. Following these confirmations, the respondent S. K. F. invoked section 66(1) of the Indian Income‑tax Act, 1922, and referred two specific questions to the High Court of Judicature at Bombay. The first question asked whether any evidence existed upon which the Tribunal could have concluded that the Panrope Corporation together with the other non‑resident company maintained a business connection within the taxable territories during the years of account in question. The second question concerned whether the profits attributable to the Panrope Corporation and the non‑resident company, arising from the consignment of goods, were actually received in the taxable territories on behalf of those foreign corporations.

During the hearing of the reference, counsel for the assessee acknowledged that S. K. F. did not purchase the goods described as “received on consignment” from the foreign corporations; rather, S. K. F. acted solely as their agent for the purpose of selling those goods. On the basis of this admission, the High Court recorded an affirmative answer to the first question, indicating that the Tribunal could indeed have found a business connection in the taxable territories. Regarding the second question, the High Court observed that the remittances made by S. K. F. under clause 23 of the agreement, which were effected before the actual sale proceeds were realised from the buyers, were received by the foreign corporations outside the taxable territory. Consequently, the Court held that such remittances could not be taken into account under section 4(1)(a) of the Indian Income‑tax Act when determining the assessable income of the foreign corporations.

The High Court further explained that liability to pay tax on behalf of the foreign corporations under section 4(1)(a) would arise only if the tax authority could establish that the foreign corporations themselves had received the sale proceeds within the taxable territory. The Court initially stated that the sale proceeds were received by the foreign corporations at the moment S. K. F. made the remittances prescribed by clause 23. However, it later qualified this view by noting that the remittances made before the actual sale proceeds were realised did not constitute an actual receipt of sale proceeds; instead, they represented performance of S. K. F.’s contractual obligation under clause 23. Moreover, the Court observed that the subsequent receipts by S. K. F. from the buyers, which occurred after those early remittances, were not receipts of sale proceeds on behalf of the foreign corporations but were receipts in S. K. F.’s own name and for its own benefit, serving merely to recover the amounts already remitted to the foreign corporations.

Accordingly, the High Court answered the second question affirmatively, but qualified that affirmation by qualifying it to the extent that the remittances were made after the sale proceeds had been received by the assessee company. The Supreme Court, however, expressed its inability to agree with the reasoning and the conclusion arrived at by the High Court. It emphasized that the terms of the agreement unambiguously demonstrated that the goods described as “received on consignment” were taken into S. K. F.’s possession solely in the capacity of a selling agent and not as a purchaser. While acknowledging that the goods were sold by S. K. F. in its own name rather than in the name of the foreign corporations, the Court noted that the sales were nonetheless effected for and on behalf of the foreign corporations, and that the proceeds of those sales were received by S. K. F. not on its own account but for the benefit of its principals.

In this case the Court observed that although the company S. K. F. sold the goods in its own name and not in the name of the foreign corporations, the sale was nevertheless made for and on behalf of those foreign corporations. Consequently, the proceeds of the sale that were received by S. K. F. were not received in its own capacity but were received for and on behalf of its principals. The Court pointed to clauses 9, 12, 13, 14, 17, 18 and 20 of the agreement, which plainly indicate that the goods that had been received by S. K. F. remained the property of the foreign corporations until those goods were sold to the buyers. The price obtained from the sale of the goods therefore contained the profit of the owner, and that profit was subject to tax under section 4(1)(a) of the Indian Income‑Tax Act when it was received in the taxable territory. The parties did not dispute that the sale proceeds realized by S. K. F. in the taxable territory, while acting as the agent of the foreign corporations, were liable to tax before any remittances were made under the agreement. The Court then considered whether the fact that S. K. F. had, in discharging an obligation it had undertaken, made remittances under the agreement before it actually realized the price of the goods sold changed the character of those realizations. It was clear that the remittances made by S. K. F. reached the foreign corporations with respect to all sales that occurred outside the taxable territory. Nevertheless, S. K. F. remained the agent of the foreign corporations for the sale of the goods and for the receipt of the price in the taxable territory. The relationship between S. K. F. and the foreign corporations was not altered by the fact that remittances were made prior to the receipt of the price from the buyers. Whether the remittance was made before or after the price was realised, the price of the goods sold by S. K. F. was received in the capacity of the agent of the foreign corporations. When a remittance in respect of a sale was made before the price was realised, S. K. F. was entitled to adjust its accounts and to claim credit for the amount that was subsequently realised. The amounts that the foreign corporations received under such remittances, whether made before or after the price was realised, were not the sale proceeds themselves but were amounts due from S. K. F. under an obligation expressly undertaken by it in clause 23 of the agreement. In every instance the price of the goods sold was received by S. K. F. within the taxable territory; and because S. K. F. acted as the agent for sale and for receipt of the price, the income embedded in those proceeds must be deemed to have been received by the foreign corporations also within the taxable territory. Accordingly, the receipt of income gives rise, under section 4(1)(a) of the Indian Income‑Tax Act, to a liability to pay tax, and the place where the price is received determines whether the income is deemed to have been received in the taxable territory.

In this case the Court noted that the price of the goods sold was only earned when the buyer actually paid, and that the income was therefore regarded as received only at the moment the S. K. F. obtained the payment. The Court held that any remittances made by the S. K. F. to the foreign corporations before the buyer’s payment could not be treated as income, because income had not yet been realized until the price was actually received. The Court further declined to accept the argument advanced by counsel for the S. K. F. that a contract of suretyship existed between the foreign corporations and the S. K. F., and that the foreign corporations’ receipt of the remittances amounted to receipt of the price of the goods. It was clarified that there was no tripartite agreement whereby the foreign corporations sold the goods directly to Indian purchasers; rather, the S. K. F. acted as the seller’s agent and guaranteed that the buyers would pay the price for the goods sold. Since the price was received by the S. K. F. within the taxable territory on behalf of the foreign corporations, the Court was unable to hold that the realization of that price, which included the profit, was not taxable under section 4(1)(a) as income received. The Court explained that the existence of an independent obligation obliging the S. K. F. to pay an amount equal to the price, less commission, before the price was actually realized did not remove the income from tax liability. Accordingly, the Court answered affirmatively the second question, holding that all sales for which the price was received by the S. K. F. in the taxable territory were taxable, irrespective of whether the remittance to the foreign corporations was made before or after the price was received. The appeal was therefore allowed in part, with the appellant entitled to costs of this Court and the costs of the reference in the High Court.