M/S. KANCHANGANGA SEA FOODS LTD.versusCOMMISSIONER OF INCOME TAX

                       [2010) 7 S.C.R. 866


A          MIS. KANCHANGANGA SEA FOODS LTD.
                                v.
               COMMISSIONER OF INCOME TAX
             (Civil Appeal Nos. 3844-3847 of 2003)
                          JULY 7, 2010
B
                 [D.K. JAIN, C.K. PRASAD, JJ.]

       Income Tax Act, 1961: ss.5(2), 195, 201 - Receipt by
  Non resident Company - Chargeability to tax - On facts,
C assessee obtained permit to carry fishing operations - A Non
  resident Company agreed to provide fishing trawlers to the
  assessee - Charter fee payable to Non Resident Company
  by way of 85% of gross earning from sale of fish - Chartered
  vessels with entire catch brought to Indian port - Payment of
D charter fee to the Non resident company in India after
  valuation and payment of local tax - Held: Receipt of charter
  fee by Non resident company was chargeable to tax -
  Assessee erred in not deducting the tax.

E      The assessee-appellant had been engaged in the
  business of export of sea food and for that purpose had
  obtained permit to fish in the exclusive economic zone
  of India. The assessee entered into an agreement with a
  Non-Resident company for providing the fishing trawlers.
  In terms of the agreement, assessee was required to pay
F charter fee of 85% of the gross earning from the sale of
  fish to the Non-Resident company.

      The Non-Resident Company delivered the trawlers to
  the assessee at Chennai Port. Actual fishing operations
G were done outside the territorial waters of India but within
  the exclusive economic zone. 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
H                             866
KANCHANGANGA SEA FOODS LTD. v. COMMISSIONER 867
              OF INCOME TAX

paid. The assessee after paying the d!-Jes arranged for        A
customs clearance and paid 85% of the catch to the Non
Resident Company.

   The assessee did not deduct the tax from the Non-
Resident company.                                              B
    The question which came up for consideration in the
present appeal was whether the assessee was in default
under Section 201 of the Act for failure to deduct tax
under Section 195 of the Act.
                                                               c
    Dismissing the appeal, the Court

     HELD: 1. From a plain reading of Section 5(2) of the
Income Tax Act, it is evident that total income of non-
resident company shall include all income from whatever
                                                               0
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. In the present
case the chartered vessels with the entire catch were          E
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-         F
resident company as the latter did not have any control
over the catch. It was after the non-resident company was
given share of its 85% of the catch that it came within its
control. It is trite to say that to constitute income, the
recipient must have control over it. Thus the non-resident     G
company effectively received the charter-fee in India.
Therefore, the receipt of 85% of the catch was in India
and that being the first receipt in the eye of law and being
in India would be chargeable to tax. The non-resident
                                                               H
    868     SUPREME COURT REPORTS             [2010) 7 S.C.R.

A 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
B 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
c 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". 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. [Para 14) [878-C-H; 879-A-B]
0
       Commissioner of Income-Tax, A.P. v. Toshoku Ltd. 125
  l.T.R. 1980 525; lshikawajima-Harima Heavy Industries Ltd.
  v. Director of Income-Tax, Mumbai (2007) 288 l.T.R. 408 (SC)
  - distinguished.
E
       2. 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
F under Section 201 of the Income Tax Act. [Para 18) [880-
  A-B]
                        Case Law Reference:
    125 1.T.R. 1980 525          distinguished    Paras 11, 15
G   (2007) 288 l.T.R. 408 (SC)   distinguished   Paras 11, 16
        CIVIL APPELLATE JURISDICTION : Civil Appeal No(s).
    3844-3847 of 2003.

          From the Judgment and Order dated 07.06.2002 of the
H
KANCHANGANGA SEA FOODS LTD. v. COMMISSIONER 869
              OF INCOME TAX

High Court of Andhra Pradesh at Hyderabad in Referred Case         A
No. 144 of 1995.

                               WITH

    C.A. Nos. 3849-3852 of 2003.
                                                                   B
    A. Subba Rao and Naik H.K., for the Appellant.

    R.P.Bhatt, H.R. Rao, Yatinder Chaudhary and B.V.
Balaram Das for the Respondent.

    The Judgment of the Court was delivered by                     c
    C.K. PRASAD, J. 1. All these appeals arise out of a
common judgment dated 7th June, 2002 passed by the Division
Bench of the Andhra Pradesh High Court in Referred Case
No.144 of 1995 and Writ Petition No.1103 of 1998 and as such       D
they were heard together and are being disposed of by this
judgment.

     2. Facts giving rise to the present appeals are that the
appellant Mis. Kanchanganga Sea Foods Limited is a
company incorporated in India and engaged in sale and export       E
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
"assessee") entered into an agreement dated 7th March, 1990
chartering two fishing vessels i.e., two pairs of Bull Trawlers,   F
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:                             G
    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,
                                                                   H
    870         SUPREME COURT REPORTS                 [201 O] 7 S.C.R.


A         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:
B
           a)    The Deponent Owners should pay the charterers
                 Rs. 75,000/- or 15% of the gross value of the catch
                 whichever is more.

           b)    Annual charter fee shall be maximum of US $
c                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
D                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
E
                 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
F 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
G purpose 85% of the gross earnings from the sale of fish was
  to be paid to the non-resident company.

         3. Necessary permission to remit 85% of the gross
    earning from the sale of fish towards charter-fee was granted
H   by the Reserve Bank of India. As per agreement the Trawlers
KANCHANGANGA SEA FOODS LTD. v. COMMISSIONER 871
       OF INCOME TAX [C.K. PRASAD, J.]

were to be delivered at Chennai Port for commencement of            A
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
                                                                    8
    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               C
    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      D
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.     E
The assessee after payin~ 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            F
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           G
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       H
    872      SUPREME COURT REPORTS                     [201 O] 7 S.C.R.


A 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 was also
  contended that even if 85% of the catch is considered as
B 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
  ra.ised by the assessee and finding the same to be untenable
c fejected 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
D         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."
E
         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
F   payable and interest accrued at a rate of Rs.1,55,872/- per
    month from 1st October, 1992 onwards till the date of payment.

        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:
G
          "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
H         inspection its valuation is made, and customs and port
KANCHANGANGA SEA FOODS LTD. v. COMMISSIONER 873
       OF INCOME TAX [C.K. PRASAO, J.~

    clearance is given, that EastWide effectively receives its A
    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 B
    point of view and is not to be confused with its nature under
    the general law. (C.l.T. vs. Scindia Worshop Ltd. - 119
    l.T.R. 526, 331 Born.)."

     7. However, the Deputy Commissioner reduced the liability C
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
dismi~sed the appeal :

    "The entire catch of fish belonged to the assessee. It was D
    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 E
    the hands of the non~residen,t under Section 5(2) of the Act."

     8. The Tribunal on an application fil~d before it by the
assessee had referred to the Andhra Pradesh High Court, the
following questions of law:
                                                                  F
     "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 ?
                                                                G
     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 th~ form of 85% of the ·
           catch of fish by the Non-Resident was in India since
           all the formalities are completed in India ?         H
    674        SUPREME COURT REPORTS                 (2010] 7 S.C.R.

A         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
B               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
c               payment made to the Non-Resident towards hire
                charges even though the alleged payment is not in
                cash?

          5.    Whether on the facts and in the circumstances of
D               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
                 ?"
E
       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 dismissing the
F appeals dated 14th February, 1995 but the said application was
  also dismissed.
       10. Aggrit:ved by the same assessee filed Writ Petition
  No.1103 of 1998 and both the Reference and the Writ Petition
G 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 an the
  questions referred to it against the assessee and in favour of
  the Revenue, same read as follows:-                         '
H
KANCHANGANGA SEA FOODS LTD. v. COMMISSIONER 875
       OF INCOME TAX [C.K. PRASAD, J.)
    "On the facts and in the circumstances of the case, the          A
    Tribunal is correct in law in holding that 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
                                                                     8
    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            C
    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      o
     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         E
      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."
                                                                     F
       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   G
tax at source under Section 195 of the Income Tax Act 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        H

                           0
    876      SUPREME COURT REPORTS                  (2010] 7 S.C.R.

A 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
  Commissionerof/ncome-Tax, A.P. v. Toshoku Ltd. (1251.T.R.
B 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
c         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
D         earned by the non-resident assessees for services
          rendered outside India cannot, th.erefore, 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."
E
  Reliance has also been placed on a decision of this Court in
  the case of lshikawajima-Harima Heavy Industries Ltd. v.
  Director of Income-Tax, Mumbai [(2007) 288 l.T.R. 408 (SC)]
  and our attention has been drawn to the following passage at
F 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
G         permanent establishment is relevant for assessing the
          income of a non-resident under the OTAA. There, however,
          may be a case where there can be overlapping of in~pme;
          but we are not concerned with such a situation. The entire
          transaction having been completed on the high seas, the
H         profits on sale did not arise in India. as has been
KANCHANGANGA SEA FOODS LTD. v. COMMISSIONER 877
       OF INCOME TAX [C.K. PRASAD, J.]

    contended by the appellant. Thus, having been excluded       A
    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       B
    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      C
the assessee having not carried out its obligations to make
deductions, the authorities and the Tribunal rightly held the
assessee in default.

     13. We have considered the submissions advanced and
we do not find any force in the submissions of the Counsel for   D
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:                                                         E

    "5(1) )()()()(              )()()()(         )()()()(


    (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            F
    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     G
    him in India during such year.

Explanation 1.-lncome accruing or arising outside India shall
not be deemed to be received in India within the meaning of
                                                                 H
    878      SUPREME COURT REPORTS                  [2010] 7 S.C.R.


A   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
8
    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."

        14. From a plain reading of the aforesaid provision it is
C 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
D 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
E 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
F 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 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%
G 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
H
       KANCHANGANGA SEA FOODS LTD. v. COMMISSIONER 879
              OF INCOME TAX [C.K. PRASAD, J.]

       been so, the value of the catch ought to have been the price           A
       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
       600,0001= per vessel per annum "payable by way of 85% of
       gross earning from the fish-sales". In the light of what we have       B
       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 lne•.:me Tax Act.

            15. Now referring to the decisions of this Court in the case
       of Toshoku Ltd.(supra), same is clearly distinguishable. In the        c
       said case the amount credited in favour of the assessee was
       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


-
       ralceipt of income, actual or constructive, which would be
       evident from the following passage of the judgment:                    D

           "It ~annot 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."   E
       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.
                                                                              F
            16. In the case of /shikawajima-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 arid after paying the local     G
       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.
                                                                              H
                                                                    1

    880     SUPREME COURT REPORTS               [2010] 7 S.C.R.


A      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
B 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.

    D.G.                                     Appeal dismissed.
c