S.T Desai, J.:— This reference raises the vexed question of ‘business connection.’ Income which accrues to an assessee directly or indirectly through any business connection in the taxable territories is under s. 42 deemed to be his income arising in the taxable territories. Business connection is an expression which no Court has attempted to define. Tests have some times been suggested and criteria have been discussed but none of them offer the desired solution and for the obvious reason that in the ultimate analysis the determination of what is business connection must rest upon the facts of each particular case. The question that we have to answer on this Reference is a mixed question of law and fact and we shall take the facts as found by the Tribunal. The assessee is Evans Medical Supplies Ltd. a company registered in the United Kingdom. The assessment years are 1948–1949 to 1951–1952. The assessee has been treated as “non-resident” in the taxable territories in respect of each of the four assessment years. Its business is to manufacture and sell pharmaceutical preparations and medicines. Prior to 1947 it had a branch in India which used to sell its goods in the taxable territories. Early in 1947. The Evans Medical Supplies (India) Ltd. for brevity called ‘Indco’—was incorporated and registered under the Indian law. The Tribunal has found that the business which was formerly carried on by the assessee came to be carried on thereafter by the Indian company. An agreement was arrived at between the two companies and it is dated April 1, 1947. The terms of that agreement, which have particular relevance to this Reference, are as under:

“(1) Evans (assessee) appoint Indco their sole authorised agents in India and Burma.

(2) Evans will allow Indco commissions on all goods supplied to Indco's territory as defined in…

(4) Evans reserve to themselves the right to reduce the rate of commission on any goods which may be sold at special low prices for exceptional quantities or under special circumstances. Such reduced rate of commission shall, however, never be less than 1½ per cent, except by mutual agreement.

(6) Evans will grant Indco an advertising and propaganda allowance on all supplies of Evans Medical Products and Evans Veterinary Speciality products supplied to Indco's territory and duly paid for, calculated at 20 per cent, on the nett invoice value after deduction of commissions on such supplies.

(7) All goods invoiced by Evans direct to Indco will be charged at normal prices, viz. Medical Products H List, a separate credit note being sent to Indco for commission and advertising and propaganda allowance.

(8) On shipments made to customers in Indco's territory, a credit note covering commission and advertising allowance will be sent by Evans to Indco.

(10) Evans will charge Indco for supplies shipped direct to Indco at current export prices, viz. Evans Medical Products H List; Evans Counter Adjuncts, H List minimum printed prices; Evans Pills, Tablets etc. H List Pink section, H List minimum printed prices; Evans Veterinary Products, E List, Green section, minimum printed prices less printed discounts. Drugs at the lowest H List price appropriate to the quantity supplied.

(11) …

(12) …

(13) Indco is authorised to appoint its own agents to represent Evans' interests in the territory of Burma.

(14) Such appointments and terms thereof must, however, be submitted to Evans for approval.

(15) …

(16) Indco undertakes to effect an energetic advertising and propaganda campaign in connection with Evans Medical Products and Evans Veterinary Speciality Products up to the extent of the total advertising allowances Indco received from Evans.

(17) …

(18) Indco undertakes not to buy or interest in any products other than itself those obtained from Evans.”

2. It will be seen that under the agreement the assessee company was at liberty to sell goods directly to Indian customers and it could also do so through the Indian company. On all such sales, the Indian company got its commission as well as the advertisement and propaganda allowance. It got commission as well as the advertisement and propaganda allowance in respect of all goods supplied to the Indian company directly under cl. 10 of the agreement; in respect of all the sales made to the Indian company by the assessee; in respect both of goods invoiced under cl. 7 by the assessee company direct to the Indian company as well as goods shipped direct to the Indian company under cl. 10 as also goods sold by the assessee directly to customers in India. The assessee did not dispute its liability in respect of goods sold directly to its customers in India nor did it raise any dispute in respect of goods invoiced by it to the Indian company under cl. 7 of the agreement. It, however, raised a dispute in respect of products supplied and shipped directly to the Indian company under cl. 10 of the agreement. It was common ground before the Income-tax authorities that the sales in respect of products supplied and shipped directly to the Indian company under cl. 10 had taken place outside the taxable territories. The objection raised by the assessee company before the authorities was that the sales made by the assessee to the Indian company under cl. 10 of the agreement were between principal and principal and as such there was no business connection in the taxable territories within the meaning of s. 42(1). The ground on which the objection was based was that those sales had taken place outside the taxable territories. The Department, on the other hand, contended that there was a business connection in regard to all the dealings of the assessee company in respect of the sale of its products in the taxable territories and relied on s. 42 of the Act. The Income-tax Officer as well as the Appellant Assistant Commissioner decided against the assessee company who carried the matter in appeal to the Tribunal. The Tribunal reached the conclusion that in respect of goods sold and supplied by the assessee company to the Indian company directly, there was no business connection, although it found that in respect of the other dealings between the assessee and the Indian company there was a business connection. The Revenue has now come before us on this reference and the question we are asked to determine is:

“Whether there is any business connection in the taxable territories within the meaning of section 42(1) in regard to the goods sold outside the taxable territories by the Evans Medical Supplies Ltd., Liverpool, to Evans Medical Supplies (India) Ltd.?”

3. It has been argued before us by Mr. Joshi, learned counsel for the revenue, that on a proper reading of the agreement, the inference should have been that there was a business connection in respect of all goods invoiced by the assessee company directly to the Indian company under cl. 7 of the agreement as also in respect of goods directly supplied and shipped by the assessee company to the Indian company. Reliance has been placed on a number of clauses in the agreement and it is urged that there was only one agreement between the parties which covered all the operations of the Indian company within the taxable territories. It has been said that cl. 10, which, according to the Tribunal, created a separate category of transactions or separate capacity in the Indian company was an integral part of the whole arrangement under which the Indian company was appointed the sole authorised agents of the assessee company, and it is added that the place where offer and acceptance took place or where the sales can be said to have taken place has no relevance in determining the principal question relating to business connection. It has also been said that there was continuous activity between the assessee company and the Indian company. Now, this principle of the existence of continuous activity in dealings between an assessee and his business connection in the taxable territories has no particular bearing on the present case. The question before us is not whether business connection envisages a single transaction or requires continuous activity of dealings between an assessee and his business connection in the taxable territories. It is also urged that there was no restriction on the price which the Indian company could charge in respect of goods invoiced by the assessee directly to the Indian company or products supplied by the assessee and shipped directly to the Indian company under cl. 10. Reliance is also placed by learned counsel on cl. 18 of the agreement, whereby the Indian company is prohibited from dealing with products of any other merchants.

4. On the other hand, it has been argued by Mr. Palkhivala that the findings of fact recorded by the Tribunal on certain points are in favour of the assessee. It will be necessary for us to ascertain what those findings are. Undoubtedly, as we have already said, we shall be deciding the matter solely on the findings recorded by the Tribunal. We put it to learned counsel that there was a clear finding recorded by the Tribunal that there was no difference in the rate at which goods were sold by the English company to the Indian company or to an Indian constituent. Mr. Palkhivala said that was what the Tribunal had done. We put it to learned counsel that it was clear from the relevant terms of the agreement that commission as well as advertisement and propaganda allowance was to be paid by the assessee to the Indian company in respect of all its products whether under cl. 7 or cl. 10 or sold directly by it to any other merchant in India. The answer of learned counsel was that may be so under the agreement but there was no finding that the sales in question were under the agreement between the parties. This was an extreme argument. It was nowhere the case of the assessee that the dealings between the parties were de hors the agreement between them. It is for the first time that we hear that those sales could have been outside the scope of the agreement between the parties. In fairness to Mr. Palkhivala we must add that he stated that he was not in a position to say that those sales were not under the agreement. It is next submitted by Mr. Palkhivala that the Tribunal was right in taking the view that there were two capacities in which the Indian company carried on its operations. It is said that there was nothing in law to prevent the Indian company to purchase goods directly on its own account from the assessee. We agree that there was nothing to prevent the Indian company from purchasing goods directly from the assessee, but that is not the question before us. The question before us is what was the nature of the dealings between the parties; what were the incidents; what was the effect in law of those dealings in the context of Income-tax law? What we have to determine is: Was there or was there not any business connection between the assessee and the Indian company.

5. Now, the contention of the Revenue must succeed if it is able to show that the income attributable to sale of goods by the assessee company to the Indian company accrued to it or arose directly or indirectly through a business connection. It is well-settled law that the expression “business connection” is different from, though undoubtedly related to, the expression “business” as defined in the Act. What is insisted by the language of the section is that there should be (i) a business in India (ii) a connection between the assessee and that business; and (iii) the assessee must have directly or indirectly earned income by virtue of or through that connection. It is not necessary that the profit or gain should directly flow from the business connection. It is to be deemed to be the income of the assessee, who may well be a non-resident, even if it has arises indirectly through the business connection in the taxable territories.

6. Business connection is an expression of wide and indefinite import and the Legislature has avoided any attempt at definition of the same for it seems extremely difficult, if not impossible, to expect a definition exclusive or inclusive which will aptly meet with every mode or method of business dealings and not fail in some circumstances. Actions of business men are so diverse and infinite that any attempt at a comprehensive meaning would fail to serve its own purpose. The only safe guide, therefore, seems to us to be that it should be gathered from the context in which the expression finds place in the Act itself and the object of the Legislature in laying down this fiction of law—albeit to be gathered from the language of the enactment itself—whereby putative income is to be treated as if it bad accrued or arisen in the taxable territories.

7. The decided cases are no more than illustrative of the instances of business connection. It has been held inter alia that where the element of agency is shown to exist, the business connection would readily be established. On the other hand, the mere fact that the goods of a non-resident find way in the Indian market being sold directly to one or few selected merchants or through brokers in the taxable territories, cannot result in business connection of the nature contemplated by the section. These are cases which fall clearly on each side of the line of demarcation where a business connection must be said to have resulted. Difficulty arises where cases of this type lie close to border line and do not fall within any of the categories of business connection such as agency or instrumentality of a subsidiary company or a branch of the non-resident trader.

8. Now, in a case of the nature before us where there is no suggestion that there is a modus operandi which is an ingenious device or circuitous process deliberately adopted to avoid tax, we would be rather slow in holding that the non-resident trader has brought himself within the operation of the rule. But in the case before us we have elements and factors the importance of which cannot be ignored or minimised. The Tribunal has observed:

“Obviously having regard to the terms of the agreement dated 1-4-1947, there is a business connection but as already stated there is no dispute in regard to the profits that have been brought to tax in respect of such sales. There is another capacity in which Indco operates in India and that is to make purchases of Evans Medical products and other things at its own risk and to sell them in India as any other Indian merchant would do. The goods are supplied by the English company to Indco at the same rate as it would charge to any other Indian constituent except that commission is payable to Indco on the goods sold to a person in Indco's territory. The commission that Indco would get on sales made to another Indian constituent comes to it in the form of a reduction in the price charged to it. Otherwise, there is no difference in the rate at which goods are sold by the English company to the Indian company or to an Indian constituent.”

9. It is of importance to notice in this context cls. 7 and 10 of the agreement. Clause 7 read in its proper context evidently refers to goods invoiced by the assessee directly to the Indian company but it is of considerable importance and significance to note that the price which the assessee is to get is what is mentioned in the invoice and nothing more. What the Indian company charges thereafter is not the concern of the assessee. Clause 10, as we have already mentioned, relates to products supplied by the assessee and shipped directly to the Indian company. The price to be charged is the current export price. Mr. Palkhivala sought to make a point relying on the wording of cls. 7 and 10, that there was some difference in the matter of the price charged by the assessee to the Indian company under cls. 7 and 10. The finding of the Tribunal clearly negatives that contention. The Tribunal has in terms found—that must have been on the entire evidence before the Tribunal—that the rate at which the assessee sold the goods to the Indian company or to its Indian constituents was the same, and if Mr. Palkhivala's contention were correct, that finding could not have been recorded. In any way that finding has not been challenged in this case. The conclusion of the Tribunal that no business connection can be said to have resulted rests principally on the purchases made by the Indian company of the products of the assessee at its own risk and its right to sell them as any other merchant would do. It will be seen that the Tribunal has drawn a distinction between two separate capacities or categories of business activities of the Indian company. In our judgment the approach of the Tribunal was erroneous. It should have first viewed the matter with the nature of the relevant activities and operations of the assessee as the starting point of enquiry rather than from the other end of the matter, even though some aspect of the matter may overlap and be common to both. Moreover the Tribunal has overlooked one vital factor and a crucial aspect of the case which, when considered in the whole setting, carries the nature of the relationship clearly beyond the line of demarcation where business connection must be said to exist. Here is the case—taking all the facts as have been found by the Tribunal—of a business which was once carried on by the assessee company which came to be carried on by the Indian company in 1947 in the capacity of “the sole authorised agents of the assessee company”. The assessee company sells goods to customers in India either directly or through the Indian company and in respect of all those sales the Indian company gets commission as well as advertisement and propaganda allowance. When the assessee company sells goods to the Indian company under cl. 10, there is no difference in the rate, for they are sold at the same price. As found by the Tribunal the commission that the Indian company gets on sales made to another merchant in India comes to the Indian company even in respect of such direct sales in the form of reduction in the price charged to it. So that in respect of all the goods of the assessee company that find way in the Indian market, there is the same price received by the assessee company. In this context we may as well refer to cl. 2 which states that the assessee company will allow commissions on all goods supplied to Indco's territory. It is a blanket clause applicable to all the goods supplied or sold by the assessee company in Indco's territory no matter through what instrumentality and in what manner. It is stated in cl. 6 that the advertisement and propaganda allowance of 20 per cent, is to be paid by the assessee company to the Indian company in respect of all its products which find way in the Indian market no matter in what manner or mode those goods were sold or supplied. We need not examine all the terms of the agreement some of which raise points which are of minor importance, though those clauses also read along with the other clauses would lend some support to the case of the Revenue. The Indian company as required by cl. 16 undertook to effect the entire advertisement and propaganda compaign in connection with the products of the assessee in the taxable territories and it is of significance to note that the Indian company was bound to spend the whole amount calculated at 20 per cent, of the not invoice value paid to it regardless of the fact that amount was paid in respect of sales made by the assessee company under cl. 7 or cl. 10 of the agreement. Then comes cl. 18 of the agreement, which, when considered in the light of the whole arrangement and the nature of dealings between the assessee company and the Indian company, definitely carries the matter in the region of business connection and particularly so when the matter is viewed—as indeed in our judgment it must be viewed—from the nature of the activities and operations of the assessee. The assessee has the Indian company as its sole authorised agent in India. In respect of the goods supplied by it to the Indian company's territories directly or through the Indian company or directly to the Indian merchants, it allows stipulated commission. In addition to that, in respect of such goods, it gives the Indian company advertisement and propaganda allowance. The Indian company, as we have already pointed out, is under an obligation to spend the whole of that allowance including that paid in respect of goods directly sold to it. Lastly the Indian company is under an obligation not to buy or even interest itself in any products other than those obtained from the assessee company. This last mentioned obligation raises a crucial consideration which the Tribunal has wholly failed to appreciate. Quod the assessee it has by agreement become the instrument or channel in the taxable territories designated as “sole authorised agents” of the assessee and can only deal in the products of the assessee company. In such a case having regard to the other terms of the agreement, no distinction can be drawn such as the Tribunal has done in the matter of products sold to the Indian company and no stress can be laid on “the two capacities of the Indian agents”. We do not agree that there was any confusion in the matter when the Department taxed the assessee also in respect of its sales. The profits that accrue or arise to the non-resident and are assessed in a case of this type would have at least indirectly flowed from the employment of the same channel or the same instrument which, be it noted, is bound exclusively to deal in the non-resident's products in the taxable territories. For all these reasons, the sure conclusion seems to us to be that in regard to the goods in question, there was a business connection in the taxable territories.

10. After the arguments on the question which we have already considered were over, Mr. Palkhivala, learned counsel for the assessee, stated that even if we were to hold that there was a business connection between the assessee and the Indian company, it had made no profits liable to be assessed on deemed accrual basis in respect of the sales in question inasmuch as all the operations connected with the said sales were performed outside the taxable territories. This argument evidently was founded on the proviso to sub-s. (3) of s. 42. Mr. Palkhivala drew our attention at this stage to what the Tribunal had said about this aspect of the matter. It is true that before the Tribunal the assessee had raised two contentions. The first related to the absence of existence of any business connection and the second related to the position which may arise in a case under sub-s. (3) of s. 42. What the Tribunal has stated in its order is this:

“Here once the English company sells its goods to Indco, whatever activity is carried on by Indco within the taxable territories is carried on by it for its own benefit. Hence we would accept the assessee's first of the two contentions mentioned in para 4 above and on the view we have taken on the first contention, it naturally follows that the second contention has also to be accepted.”

11. Now, the two contentions cannot be said to be overlapping or substantially similar.

12. In the absence of any reasons stated by the Tribunal on this second question, it is somewhat difficult for us to see what those reasons were. But we are not concerned on this reference with that contention of the assessee which was urged before the Tribunal. Having drawn our attention to this aspect of the matter and the conclusion of the Tribunal, Mr. Palkhivala stated that since the decision of the Tribunal on the second contention is in favour of the assessee our answering the first question would become academic. If that was the position, we should have expected learned counsel to draw our attention to the same at the outset of the hearing of this reference which has gone on before us for three hours. Moreover we do not see any reason why we should take into consideration on this reference the nature of the second contention of the assessee or examine the conclusion reached on it by the Tribunal. The only question we are called upon to answer is that which we have already set out in the earlier part of our judgment and we see no reason why we should refrain from answering the same.

13. Our answer to the question will be in the affirmative.

14. Assessee to pay the costs.

Solicitor for the applicant: A.S Parikh.

Solicitors for the respondent: Crawford Bayley & Co.