Full Judgment Text
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTON
CIVIL APPEAL NOS. 3844-3847 OF 2003
M/S. KANCHANGANGA SEA FOODS LTD. …APPELLANTS
VERSUS
COMMISSIONER OF INCOME TAX …RESPONDENT
WITH
CIVIL APPEAL NOS. 3849-3852 OF 2003
M/S. KANCHANGANGA SEA FOODS LTD. …APPELLANTS
VERSUS
INCOME TAX OFFICER,
Ward I & ORS. …RESPONDENTS
J U D G M E N T
C.K. PRASAD, J.
1. All these appeals arise out of a common judgment dated
th
7 June, 2002 passed by the Division Bench of the Andhra
Pradesh High Court in Referred Case No.144 of 1995 and Writ
2
Petition No.1103 of 1998 and as such they were heard
together and are being disposed of by this judgment.
2. Facts giving rise to the present appeals are that the
appellant M/s. Kanchanganga Sea Foods Limited is a
company incorporated in India and engaged in sale and export
of sea food and for that purpose obtained permit to fish in the
exclusive economic zone of India. To exploit the fishing rights,
the appellant-company (hereinafter referred to as the
th
“assessee”) entered into an agreement dated 7 March, 1990
chartering two fishing vessels i.e., two pairs of Bull Trawlers,
with Eastwide Shipping Co. (HK) Ltd. a non-resident company
incorporated in Hong Kong. Clause 4 of agreement which is
relevant for the purpose reads as follows :-
“4. Deponent Owners to provide:
The Deponent Owners will provide fishing
vessels, as approved by Government of India, for all
inclusive charter fee of US $ 600,000.00 per vessel
per annum. The charter fee is inclusive of fuel cost,
maintenance repairs, wages, food for the crew and
any other expenses incurred in connection with the
operation of the vessel. They will provide training to
the Indian crew in all aspects of fishing techniques,
maintenance and running of the engine. In addition:
a) The Deponent Owners should pay the
charterers Rs.75,000/- or 15% of the gross
value of the catch whichever is more.
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b) Annual charter fee shall be maximum of US $
600,000 per vessel per annum payable by way
of 85% of gross earning from the fish sales
subject to the condition that this will not exceed
85% of the sales value of the catch per vessel
per annum on voyage to voyage basis.
Minimum 15% of the earning by way of sales
value of catch of fish should accrue to the
charterer. Payment to the Deponent Owners
should not exceed the above charter fee.
c) Export value of catch from the chartered vessels
should not be lower than the prevailing
international market price at the time of export.”
Thus, according to the terms of the agreement the Eastwide
Shipping Co.(HK) Ltd., the owner of the fishing Trawlers
(hereinafter referred to as the “non-resident company”) was to
provide fishing Trawlers to the assessee for all inclusive
charter fee of US $ 600,000 per vessel per annum. In terms of
the agreement the assessee was to receive Rs.75,000/- or 15%
of the gross value of catch, whichever is more. The charter
fee was payable from earning from the sale of fish and for that
purpose 85% of the gross earnings from the sale of fish was to
be paid to the non-resident company.
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3. Necessary permission to remit 85% of the gross earning
from the sale of fish towards charter-fee was granted by the
Reserve Bank of India. As per agreement the Trawlers were to
be delivered at Chennai Port for commencement of fishing
operation. Clause 4 of the terms and conditions of permission
granted by the Reserve Bank of India reads as follows:
“4. In case you are required to deduct tax at
source while paying charter hire charges, you
have to produce documentary evidence showing
the payment of taxes by deduction at source
from the charter hire charges paid by you.
However, if no tax is to be deducted at source
as above, a clearance to that effect should be
obtained from the Ministry concerned and
submitted to us before payment of charter hire
charges.”
4. Trawlers were delivered to the assessee with full
equipment and complement of staff at Chennai Port. Actual
fishing operations were done outside the territorial waters of
India but within the exclusive economic zone. The voyage
commenced and concluded at Chennai Port. The catch made
at high seas were brought to Chennai where surveyor of
Fishery Department verified the log books and assessed the
value of the catch over which local taxes were levied and paid.
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The assessee after paying the dues arranged Customs
clearance for the export of the fish and the Trawlers, which
were used for fishing, carried the fish to destination chosen by
non-resident company. The Trawlers reported back to Chennai
Port after delivering fishes to the destination and commenced
another voyage. The assessee did not deduct the tax from the
non-resident company nor produced any clearance certificate
during the Assessment Years 1991-92 to 1994-95. Notice
under Section 201(1) of the Income Tax Act was issued to it to
show cause as to why it should not be deemed to be an
assessee in default in relation to tax deductible but not
deducted. The assessee filed objection contending that the
non-resident company did not carry out activities or
operations in India which have the effect of resulting in
accrual of income in India and hence it was not obliged to
make any deduction. Alternatively, it was contended that even
if the operation of bringing the catch to India Port for Customs
appraisal and export to the non-resident company results in
an operation, it was an operation for mere purchase of goods
and, therefore, there was no income liable for assessment. It
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was also contended that even if 85% of the catch is considered
as charter fee to the non-resident company it was paid outside
India. Accordingly the plea of the assessee is that where the
entire income is not taxable there is no obligation to deduct
tax at source. The Income Tax Officer considered the
objections raised by the assessee and finding the same to be
untenable rejected the same and while doing so observed as
follows:
“In the light of the above, I have no hesitation in
holding that the income earned by the non-resident
company was chargeable to tax u/s. 5(2) of the Income
Tax Act. The assessee made payment to the foreign-
company, the sums representing hire charges, without
deducting taxes at source, thereby committed default
under the provisions of Section 195. This is, therefore, a
fit case to deem it to be an assessee in default as laid
down in Section 201(1) of the Income Tax Act, 1961.”
5. Ultimately, it held the assessee to be in default of
Rs.1,66,91,962/-, which included interest due under Section
201(1A) of the Income Tax Act. The Income Tax Officer further
held the assessee liable to pay interest @ 15% on the taxes
payable and interest accrued at a rate of Rs.1,55,872/- per
st
month from 1 October, 1992 onwards till the date of
payment.
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6. On appeal by the assessee, the Deputy Commissioner
(Appeals) declined to interfere and affirmed the order of the
Income Tax Officer on its following findings:
“It is commercial venture of the appellant. For
giving assistance to it, Eastwide is paid hire charges.
Actual payment is made at an Indian Port, that is, in
India. Only when the catch is brought in, its
suitability is certified on inspection its valuation is
made, and customs and port clearance is given, that
Eastwide effectively receives its payment.
Simultaneously the appellant also credits Eastwide’s
account. Therefore, Eastwide actually receives the
hire charges in India. In this connection it has to be
remembered that for the purpose of Income Tax Act
the nature of a receipt is to be considered from the
commercial point of view and is not to be confused
with its nature under the general law. (C.I.T. vs.
Scindia Worshop Ltd. – 119 I.T.R. 526, 331 Bom.).”
7. However, the Deputy Commissioner reduced the liability
to Rs.8,34,597/-. The assessee unsuccessfully preferred
appeal before Income Tax Appellate Tribunal (hereinafter
referred to as the “Tribunal”) and on its following finding it
dismissed the appeal :
“The entire catch of fish belonged to the
assessee. It was shown as sale by the assessee,
85% of such fish catch was adjusted against the
liability of the assessee towards hire charges for
chartering the vessels from the non-resident. It was
thus in discharge of the assessee’s liability against
hire charges and therefore, it would be receipt in the
8
hands of the non-resident under Section 5(2) of the
Act.”
8. The Tribunal on an application filed before it by the
assessee had referred to the Andhra Pradesh High Court, the
following questions of law:
“ 1. Whether on the facts and in the circumstances
of the case the Appellate Tribunal is correct in
law in holding that payment is made to the
Non-Resident by the assessee in India ?
2. Whether on the facts and in the circumstances
of the case the Appellate Tribunal is correct in
law in holding that the receipt in the form of
85% of the catch of fish by the Non-Resident
was in India since all the formalities are
completed in India ?
3. Whether on the facts and in the circumstances
of the case the Appellate Tribunal is justified in
rejecting the claim that there is no payment to
the non-resident by the assessee but there was
only a receipt of 15% of the value of fish catch
from the non-resident to the assessee ?
4. Whether on the facts and in the circumstances
of the case the Appellate Tribunal is correct in
law in holding that the assessee is liable to
deduct tax at source under section 195 of the
Act on the alleged payment made to the Non-
Resident towards hire charges even though the
alleged payment is not in cash ?
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5. Whether on the facts and in the circumstances
of the case the Appellate Tribunal is correct in
law in holding that the assessee was in default
under Section 201 of the Income Tax Act, 1961,
for the failure to deduct tax under section 195
of the Act ?”
9. The assessee, then filed application before the Tribunal
for stay of collection which was rejected and the writ petition
and special leave petition preferred against that order were
dismissed by the High Court and this Court. The assessee
had also filed application for rectification of the order
th
dismissing the appeals dated 14 February, 1995 but the said
application was also dismissed.
10. Aggrieved by the same assessee filed Writ Petition
No.1103 of 1998 and both the Reference and the Writ Petition
were heard together by the High Court and have been
answered and disposed of together by the common judgment
impugned in these appeals. The High Court answered all the
questions referred to it against the assessee and in favour of
the Revenue, same read as follows:-
“ On the facts and in the circumstances of the
case, the Tribunal is correct in law in holding that
10
payment is made to the non-resident by Assessee in
India.
On the facts and in the circumstances of the
case, the Tribunal is correct in law in holding that
the receipt in the form of 85% of the catch of fish by
the non-resident was in India since all the formalities
are completed in India.
On the facts and in the circumstances of the
case, the Tribunal is justified in rejecting the claim
that there is no payment to the non-resident by the
Assessee but there was only a receipt of 15% of the
value of fish catch from the non-resident to the
Assessee;
On the facts and in the circumstances of the
case, the Tribunal is correct in law in holding that the
Assessee is liable to deduct tax at source under
Section 195 of the Act on the alleged payment made
to the non-resident towards hire charges even though
the alleged payment is not in cash; and
On the facts and in the circumstances of the
case, the Tribunal is correct in law in holding that the
Assessee was in default under Sec.201 of the Income
Tax Act, 1961 for the failure to deduct tax under
Section 195 of the Income Tax Act.”
11. Mr. A. Subba Rao, learned Counsel appearing on behalf
of the appellant-assessee submits that there was no income
chargeable which resulted to the non-resident company as no
payment of any sum by the assessee to the non-resident
company took place in India and therefore, the liability to
deduct tax at source under Section 195 of the Income Tax Act
11
or the liability under Section 201 of the Act did not arise. It
has also been pointed out by the learned Counsel that there
was no receipt of income at all in India as the 85% of the fish
catch, which was given to the non-resident company, was sold
outside India and the sale proceeds thereof were also realized
outside India. In his submission, the non-resident company,
therefore, had no receipts in India. In support of the
submission reliance has been placed on a decision of this
Court in the case of Commissioner of Income-Tax, A.P. v.
Toshoku Ltd. (125 I.T.R. 1980 525) and our attention has
been drawn to the following passage from the said judgment:
“In the instant case, the non-resident assessees
did not carry on any business operations in the
taxable territories. They acted as selling agents
outside India. The receipt in India of the sale
proceeds of tobacco remitted or caused to be remitted
by the purchasers from abroad does not amount to
an operation carried out by the assessees in India as
contemplated by cl.(a) of the Explanation to s.9(1)(i) of
the Act. The commission amounts which were
earned by the non-resident assessees for services
rendered outside India cannot, therefore, be deemed
to be incomes which have either accrued or arisen in
India. The High Court was, therefore, right in
answering the question against the department.”
Reliance has also been placed on a decision of this Court in
the case of Ishikawajima-Harima Heavy Industries Ltd. v.
12
Director of Income-Tax, Mumbai [(2007) 288 I.T.R. 408
(SC)] and our attention has been drawn to the following
passage at pages 443-444:
“Therefore, in our opinion, the concepts profits
of business connection and permanent establishment
should not be mixed up. Whereas business
connection is relevant for the purpose of application
of Section 9; the concept of permanent establishment
is relevant for assessing the income of a non-resident
under the DTAA. There, however, may be a case
where there can be overlapping of income; but we
are not concerned with such a situation. The entire
transaction having been completed on the high seas,
the profits on sale did not arise in India, as has been
contended by the appellant. Thus, having been
excluded from the scope of taxation under the Act,
the application of the double taxation treaty would
not arise. The Double Tax Treaty, however, was
taken recourse to by the appellant only by way of an
alternate submission on income from services and
not in relation to the tax of offshore supply of goods.”
12. Mr. R.P. Bhatt, learned Senior Counsel appearing on
behalf of the respondent, however, contends that income had
accrued to the non-resident company in India and admittedly
the assessee having not carried out its obligations to make
deductions, the authorities and the Tribunal rightly held the
assessee in default.
13
13. We have considered the submissions advanced and we do
not find any force in the submissions of the Counsel for the
appellant and the authorities relied on are clearly
distinguishable and those in no way support assessee’s
contention. Section 5(2) of the Income Tax Act provides, what
would be the total income of a non-resident, same reads as
follows:
“5(1) xxxx xxxx xxxx
(2) Subject to the provisions of this Act, the total
income of any previous year of a person who is a
non-resident includes all income from whatever
source derived which--
(a) is received or is deemed to be received in
India in such year by or on behalf of such
person; or
(b) accrues or arises or is deemed to accrue or
arise to him in India during such year.
Explanation 1.—Income accruing or arising outside
India shall not be deemed to be received in India
within the meaning of this section by reason only of
the fact that it is taken into account in a balance
sheet prepared in India.
Explanation 2.—For the removal of doubts, it is
hereby declared that income which has been
included in the total income of a person on the
basis that it has accrued or arisen or is deemed to
have accrued or arisen to him shall not again be so
included on the basis that it is received or deemed
to be received by him in India.”
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14. From a plain reading of the aforesaid provision it is
evident that total income of non-resident company shall
include all income from whatever source derived received or
deemed to be received in India. It also includes such income
which either accrues, arises or deem to accrue or arise to a
non-resident company in India. The legal fiction created has
to be understood in the light of terms of contract. Here, in the
present case the chartered vessels with the entire catch were
brought to the Indian Port, the catch were certified for human
consumption, valued, and after customs and port clearance
non-resident company received 85% of the catch. So long the
catch was not apportioned the entire catch was the property of
the assessee and not of non-resident company as the latter did
not have any control over the catch. It is after the non-resident
company was given share of its 85% of the catch it did come
within its control. It is trite to say that to constitute income
the recipient must have control over it. Thus the non-resident
company effectively received the charter-fee in India.
Therefore, in our opinion, the receipt of 85% of the catch was
in India and this being the first receipt in the eye of law and
15
being in India would be chargeable to tax. In our opinion, the
non-resident company having received the charter fee in the
shape of 85% of fish catch in India, sale of fish and realization
of sale consideration of fish by it outside India shall not mean
that there was no receipt in India. When 85% of the catch is
received after valuation by the non-resident company in India,
in sum and substance, it amounts to receipt of value of
money. Had it not been so, the value of the catch ought to
have been the price for which non-resident company sold at
the destination chosen by it. According to the terms and
conditions of the agreement charter fee was to be paid in
terms of money i.e. US Dollar 600,000/= per vessel per annum
“payable by way of 85% of gross earning from the fish-sales”.
In the light of what we have observed above there is no escape
from the conclusion that income earned by the non-resident
company was chargeable to tax under Section 5(2) of the
Income Tax Act.
15. Now referring to the decisions of this Court in the case of
Toshoku Ltd.(supra) , same is clearly distinguishable. In the
said case the amount credited in favour of the assessee was
16
not at its disposal and in the background of the said fact it
was held that making entries in the books would not amount
to receipt of income, actual or constructive, which would be
evident from the following passage of the judgment:
“It cannot be said that the making of the book entries
in the books of the statutory agent amounted to
receipt by the assessees who were non-residents as
the amounts so credited in their favour were not at
their disposal or control.”
Here the non-resident company had received charter-fee in
India in the shape of 85% of the catch after its valuation, over
which it had alone control and therefore receipt was
chargeable to tax.
16. In the case of Ishikawajima-Harima Heavy Industries
Ltd.(supra) the entire transaction was completed on high-
seas, and in this background, it was held that profit did not
arise in India. In the case in hand, undisputedly the catch
was brought to an Indian Port, where it was valued and after
paying the local taxes, charter fee in the shape of 85% of the
catch was given to the non-resident company.
17. Both the decisions, therefore, do not lend any support to
the contention of the assessee.
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18. From the conspectus of discussion aforesaid, it is
obvious that the assessee was liable to deduct tax under
Section 195 of +the Income Tax Act on the payment made to
the non-resident company and admittedly it having not
deducted and deposited was rightly held to be in default under
Section 201 of the Income Tax Act.
19. We do not find any merit in these appeals and they are
dismissed accordingly, but without any order as to costs.
………………………………….J.
( D.K. JAIN )
………………………………….J.
( C.K. PRASAD )
New Delhi,
July 7, 2010.