Divan, C.J:— In this case at the instance of the revenue the following question has been referred to us for ouropinion:
“Whether, on the facts and in the circumstances of the case, intereston the amount payable by the assessee to M/s. Ansaldo under the contract in the assessment years 1962-63, 1963-64 and 1964-65 was taxable in the hands of the assessee as the agent of the non-resident company under section 9(1)(i) of the Income-tax Act, 1961?”
2. The assessment years with which we are concerned in the present case are assessment years 1962-63 to 1964-65. The assessee is a limited company incorporated in 1956. The business of the assessee is to manufacture cement. In order to import certain plant and machinery, the assessee-company entered into an agreement on December 12, 1956, with a foreign company known as Messrs. Ansaldo, S.P.A (Ansaldo Joint Stock Company) of Genoa, Italy. The agreement provided for various matters including the payment of price for the entire plant and equipment aggregating to Rs. 7,53,345. Under the terms of the agreement plant and machinery were to be delivered by Messrs. Ansaldo at one of the European ports. 35 per cent of the price was to be paid on the date of the agreement; 15 per cent, on supply of certain machinery and the remaining 50 per cent, of the price was to be paid in five annual instalments of 10 per cent. each. 30 per cent of the price was to be paid by the assessee against three bills of exchange to be drawn by the non-resident company on the assessee and to be accepted by the assessee.
3. The assessee was to pay six per cent, interest on the three bills of exchange on the expiry of six months from the date of issue of the above bills till their maturity and the interest was to be paid by means of other bills accepted at the same time and falling due at same maturities as the corresponding main bills of exchange. The assessee was to be entitled to pay the bills of exchange even before their maturity but if that was done, the payment of the interest was to be waived by the nonresident company. There were clauses in the agreement as to what should be done if the deliveries were delayed and there were clauses with regard to tests and performance guarantee. The other clauses are in usual terms to be found in such contracts. One of the clauses in the agreement provided that the price was to be paid in terms of pound Sterling and the rate of pound Sterling with reference to Italian Lira was fixed in clause 10 A.
4. The main dispute in the present reference is with regard to the payment of interest on the three bills of exchange. The assessee showed the amount outstanding in its books of account and the interest which was stipulated was payable on the amount. The non-resident company was shown as a creditor to the extent of the amount receivable by it in the books of the assessee-company. The Income-tax Officer held that in respect of interest payable on these bills of exchange, the assessee-company would be liable under section 9(1)(i) of the Income-tax Act, 1961, as agent of the non-resident company and he passed the assessment order accordingly. When the matter was carried in appeal before the Appellate Assistant Commissioner by the assessee, that officer held thai the condition's kid down in section 9(1)(i) did not apply to the present case and, therefore, the nonresident company was not liable, in respect of interest payable by the assessee and, consequently, the assessee-company was not liable to pay any tax on these items of interest in its capacity as an agent of the non-resident company. He, accordingly, allowed the appeal. The matter was carried in appeal by the revenue to the Appellate Tribunal and it was contended that the interest payable to the non-resident company was income arising through or from any asset in India and hence it fell within section 9(1)(i) of the Income-tax Act, 1961. The Tribunal held that there was no business connection in India inasmuch as the non-resident company belonged to a foreign nation and had no branch or place of business in India. It was merely a supplier of goods and the assessee had purchased goods from the non-resident company. The Tribunal, after examining the question in the light of the general principles and relying on the decision of the Supreme Court in Delhi Cloth & General Mills Co. Ltd. v. Harnam Singh AIR 1955 SC 590., held that the true test was as to which was the country in which the elements of the contract were most densely grouped and with which factually the contract was most closely connected. Applying this test the Tribunal found that according to the terms of the contract payments were made in foreign country; the non-resident company was not an usual supplier of plant and equipment; it had no sales office or any representative in India; and that being a non-resident company it agreed to sell the goods on payment in foreign currency. It was not a case of the non-resident company coming into India to erect the plant and the delivery was also effected f.o.b European port. The non-resident company was nowhere near the territories of India in relation to the supply of plant and equipment except for the purpose of signing the agreement and no representative of the nonresident company was posted in India; the bills were drawn by the nonresident company in a foreign territory and were sent to the assessee for being accepted; and that the assessee having accepted the bills paid the moneys in foreign currency again. On facts, the Tribunal held that most of the elements in the contract were closely connected with the country in which the non-resident company was functioning and it, therefore, held that the amount payable under the contract was not an asset held by the non-resident company in India. The appeals for the three years filed by the revenue before the Tribunal were, therefore, dismissed by the Tribunal. Thereafter, at the instance of the revenue, the question hereinabove set out has been referred to us for our opinion.
5. Under section 9(1) provision is made for certain types of income which are deemed to accrue or arise in India and under section 9(1)(i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through or from any money lent at interest and brought into India in cash or in kind or through the transfer of a capital asset situate in India, is deemed to accrue or arise in India. Under the charging section income-tax has to be charged in respect of the income which arises or accrues in India or under the deeming provisions of the Act is deemed to accrue or arise in India. On behalf of the revenue, Mr. Kaji urged before us that the interest on the amount payable by the assessee to Messrs. Ansaldo was income accruing or arising through or from an asset held by a non-resident company in India and, in the alternative, he contended, that this interest was income accruing or arising through or from money lent at interest and brought into India in cash or in kind. Though the second alternative is not covered by the question referred to us, we have heard counsel on the point because the question directly arose under section 9(1)(i). If we had been inclined to accept the alternative contention of Mr. Kaji, we would have amended the question accordingly in order to bring out the real controversy between the parties.
6. Mr. Kaji referred us to the principles of private international law and the relevant passages from Cheshire's Private International Law and Dicey's Conflict of Laws. However, we find that the question is completely covered by the decision of the Supreme Court in Delhi Cloth & General Mills Company's case, and hence it is not necessary for us to refer to these principles of private international law or of conflict of laws. The Supreme Court there was concerned with a question of a debt owed to a foreigner and it held that a debt is property. It is a chose-in-action and is heritable and assignable and it is treated as property under the Transfer of Property Act which calls it an “actionable claim”. Choses-in-action arising out of contract have two aspects: (1) as property, and (2) as involving a contractual obligation for performance. The property aspect is relevant for purposes of assignment, administration, taxation and the like; the contractual aspect for performance. It further held that debt, being intangible, cannot have location except notionally and in order to give it notional position rules have to be framed along arbitrary lines. Determination of the legal liabilities which arise out of the facts relating to a debt raises complex questions of private international law. Two distinct lines of thought emerge. One is that applied by the English courts, namely, the lex situs: the other is the one favoured by Cheshire in his book on Private International Law, namely, the “proper law of the contract”. Bose J., delivering the judgment of the Supreme Court, has pointed out that the English approach is to treat the debt as property and determine its “situs” and then, in general, to apply the law that obtains there at the date when payment is due. But the difficulty of the English view is that they have different sets of rules for ascertaining the “situs”, with the result that the “situs” shifts from place to place for different purposes, also that it is determined by intention. Thus, the situs can be in one place for purposes of jurisdiction and in others for those of banking, insurance, death duties and probate. The “situs” also varies in the case of simple contract debts and those of speciality. After examining the several authorities on the point, the Supreme Court observed in paragraph 48:
“But when all is said and done, we find that in every one of these cases the proper law of the contract was applied, that is to say, the law of the country in which its elements were most densely grouped and with which factually the contract was most closely connected. It is true the judges purported to apply the ‘lex situs’ but in determining the ‘situs’ they apply rules (and modify them where necessary to suit changing modern conditions) which in fact are the very rules which in practice would be used to determine the proper law of the contract.
7. The English judges say that when the intention is not express, one must be inferred and the rules they have made come to this, that as reasonable men they must be taken to have intended that the proper law of the contract should obtain. The other view is that the intention does not govern even when express and that the proper law must be applied objectively. But either way, the result is the same when there is no express term.
8. The ‘proper law’ is in fact applied and for present purposes it does not matter whether that is done for the reasons given by Cheshire or because the fluid English rules that centre round the ‘lex situs’ lead to the same conclusion in this class of case.”
9. Therefore, the correct test, according to the Supreme Court, to be applied is the law of the country in which the elements were most densely grouped and with which factually the contract was most closely connected. That is the test to apply, whether one applies the test of “lex situs” as done by the English judges or whether one applies the proper law of the contract. In view of the terms of the contract which we have set out in this case, it is obvious that so far as the non-resident company, Messrs. Ansaldo of Genoa was concerned, all that the company did was to send a representative when the contract was signed in India. Barring that action, so far as the performance of the contract was concerned, the non-resident company nowhere came near the shores of India or territories of India. It puts the goods on board the ship concerned at a port in Europe. It received all the price in Europe and that too in terms of foreign currency. The plant was not to be erected or put up by the non-resident company but the assessee-company was to set up the plant in India. Even the instalments were to be paid in foreign currency. So far as the unpaid price was concerned, the amount was to be paid by bills of exchange drawn in a foreign country and accepted by the assessee-company in India. Thus, most of the elements of this contract are found to be most densely grouped with the country, namely, Italy, where the non-resident company, Messrs. Ansaldo, is carrying on its business of supplying plant and machinery and hence the debt which the assessee-company owed to the non-resident company was not an asset held by the non-resident company in India. Therefore, the interest which was payable in respect of this debt was not income arising from or through any asset held by the non-resident company in India. Since the non-resident company had no income accruing or arising in India, it cannot be said that there was any liability of the non-resident company to pay income-tax on the amount of interest of the three instalments and consequently, there cannot be said to be any liability of the assessee-company as the agent of the non-resident company so far as this aspect of income accruing or arising through or from any asset held by the nonresident company in India was concerned.
10. As regards the alternative argument urged by Mr. Kaji regarding income accruing or arising through or from any money lent on interest and brought into India in cash or in kind, in view of the decision of the Supreme Court in Bombay Steam Navigation Co. (1953) (Pte.) Ltd. v. Commissioner of Income-tax, it is obvious that this amount of unpaid price can never be said to be a loan advanced by the non-resident company to the assessee-company. In the Bombay Steam Navigation Company's case the facts before the Supreme Court were that pursuant to a scheme of amalgamation between two shipping companies, the assessee-company before the Supreme Court was incorporated to take over certain passenger and ferry services carried on by one of the amalgamating companies. The assessee-company took over assets, which were finally valued at Rs. 81,55,000, and agreed that the price was to be satisfied partly by allotment of 29,990 fully paid up shares of Rs. 100 each and the balance was to be treated as a loan and secured by a promissory note and hypothecation of all movable properties of the assessee-company. The balance remaining unpaid from time to time was to carry simple interest at six per cent. The question was whether the amount of interest could be considered to be interest on capital within the meaning of section 10(2)(iii) of the Indian Income-tax Act, 1922. The Supreme Court held that the expression “capital” used in section 10(2)(iii), in the context in which it occurred, meant money and not any other asset and it was held on the facts that there was in truth no capital borrowed by the assessee in this case. Shah J., as he then was, delivering the majority judgment, observed at page 57:
“The parties had agreed that assets of the value of Rs. 81,55,000 be taken over by the assessee-company from the Scindias. Out of that consideration Rs. 29,99,000 were paid by the assessee-company and the balance remained unpaid. For agreeing to deferred payment of a part of the consideration, the Scindias were to be paid interest. An agreement to pay the balance of consideration due by the purchaser does not in truth give rise to a loan. A loan of money undoubtedly results in a debt, but every debt does not involve a loan. Liability to pay a debt may arise from diverse sources, and a loan is only one of such sources. Every creditor who is entitled to receive a debt cannot be regarded as a lender.”
11. In view of this clear-cut pronouncement of the Supreme Court, it is obvious that the amount of the unpaid price cannot be said to be a loan advanced by the non-resident company to the assessee-company nor can the non-resident company be said to be a lender to the assessee-company so far as that amount was concerned. Since the non-resident company cannot be said to have lent the amount of the unpaid purchase price to the assessee-company either in cash or in kind, there is no question of the interest payable by the assessee-company to the non-resident company being deemed to be “income” accruing or arising from any money lent at interest and brought into India in kind. Hence, the alternative argument urged on behalf of the revenue must be rejected since there was no money lent by the non-resident company to the assessee-company though the amount of the unpaid price was undoubtedly a liability which the assessee-company owed to the nonresident company. Since the alternative contention on behalf of the revenue is being rejected, we have not thought it proper to frame an additional question to cover that aspect.
12. Under these circumstances it must be held that the amount payable by the assessee to Messrs. Ansaldo by way of interest on the unpaid purchase price so far as the amounts represented by the bills of exchange were concerned, was not taxable in the hands of the assessee as agent of the nonresident company under section 9(1)(i) of the Income-tax Act, 1961. We, therefore, answer the question referred to us in the negative and in favour of the assessee. The Commissioner will pay the costs of this reference to the assessee.
13. Question answered in the negative.