[Kanchanganga Sea Foods Ltd. v. CIT & ITO & Ors.,
(2010) 325 ITR 540 (SC)]
The appellant M/s. Kanchanganga Sea Foods Limited, a company
incorporated in India, engaged in sale and export of seafood had obtained a
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 March 7, 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.
According to 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 an
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 was more. The charter fee was payable from earning from the
sale of fish and for that purpose, 85% of the gross earning from the sale of
fish was to be paid to the non-resident company.
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 the agreement, the trawlers were to be delivered at the Chennai Port for
commencement of fishing operation.
The trawlers were delivered to the assessee with full
equipment and complements of staff at the 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 the Chennai Port.
The catch made at the high seas was brought to Chennai, where the surveyor of
the Fishery Department verified the log books and assessed the value of the
catch over which local taxes were levied and paid. The assessee, after paying
the dues, arranged customs clearance for the export of fish and the trawlers
which were used for fishing, carried the fish to destination chosen by
non-resident company. The trawlers reported back to the Chennai Port after
delivering fishes to the destination and commenced another voyage. The assessee
did not deduct tax from the payments to the non-resident company, nor produced
any clearance certificate during the A.Ys. 1991-92 to 1994-95. Notice u/s.
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 had the effect of
resulting in accrual of income in India and hence it was not obliged to make any
deduction. Alternatively, it contended that even if the operation of bringing
the catch to India Port for customs appraisal and export to the non-resident
company resulted in an operation, it was an operation for mere purchase of goods
and, therefore, there was no income liable for assessment. It also contended
that even if 85% of the catch was considered as charter fee to the non-resident
company, it was paid outside India. Accordingly, the plea of the assessee was
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.
On appeal by the assessee, the Deputy Commissioner of
Income-tax (Appeals) declined to
interfere and affirmed the order of the Income-tax Officer.
The assessee unsuccessfully preferred appeal before the
Income-tax Appellate Tribunal.
The High Court answered all the questions referred to it
against the assessee and in favour of the Revenue.
The Supreme Court held that from a plain reading of the provisions of S. 5(2), it was evident that total income of a 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 is deemed to accrue or arise to a non-resident company in India. The legal fiction created has to be understood in the light of the terms of contract. Here, in the present case, the chartered vessels with the entire catch were brought to the Indian Port, the catch was certified for human consumption, valued, and after customs and port clearance, the non-resident company received 85% of the catch. So long as the catch was not apportioned, the entire catch was the property of the assessee and not of the non-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, 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, 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. According to the Supreme Court, the non-resident company having received the charter fee in the shape of 85% of the fish catch in India, the sale of fish and realisation of the 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 of which the 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., U.S. dollar 600,000 per vessel per annum “payable by way of 85% of gross earning from the fish sales”. In view of the above, there was no escape from the conclusion that the income earned by the non-resident company was chargeable to tax u/s.5(2) of the Income-tax Act.
Therefore, the assessee was liable to deduct tax u/s.195 on payment made to non-resident company and admittedly it having not deducted and deposited was rightly held to be in default u/s.201.
