Principal-to-principal sales to an Indian subsidiary excluded deemed Indian accrual of non-resident income under tax law.

A non-resident company's sales to its Indian subsidiary were treated as principal-to-principal transactions at arm's length where the contracts were concluded outside India, the goods moved on CIF terms without reservation of disposal, and the subsidiary resold the goods on its own account and paid tax on its own profits. On those findings, the subsidiary was not an agent of the parent, so no part of the non-resident's income was deemed to accrue or arise in India under section 42(3) of the Indian Income-tax Act, 1922. The question of chargeability to tax in India was answered against the Revenue.

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Issues: Whether the non-resident company derived income from a business connection in India chargeable to tax under section 42 of the Indian Income-tax Act, 1922, and whether the transactions with its Indian subsidiary were on a principal-to-principal basis so as to exclude attribution of income to India under section 42(3).

Analysis: The Tribunal had found that the contracts for sale were concluded outside India, the goods were shipped on CIF terms without reservation of right of disposal, and the Indian subsidiary acted on its own account in reselling the goods in India and paying tax on its own profits. The Board's circular on business connection and sales to an Indian subsidiary was treated as a relevant guide. On those findings, the dealings were held to be sales between principal and principal at arm's length, and the subsidiary was not acting as an agent of the non-resident. In such circumstances, no part of the non-resident's income could be deemed to accrue or arise in India under section 42(3).

Conclusion: The question was answered in the negative and against the Revenue. The assessee was held not chargeable to tax in India on these transactions.

Ratio Decidendi: Where a non-resident sells goods to its Indian subsidiary on a principal-to-principal basis at arm's length, with contracts concluded outside India and the subsidiary acting for its own business and not as agent of the parent, no income from those sales is deemed to accrue or arise in India under section 42(3) of the Indian Income-tax Act, 1922.

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