SUPREME COURT OF INDIA

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1 SUPREME COURT OF INDIA Performing Right Society Ltd. v. Commissioner of Income-tax A.C. GUPTA AND JASWANT SINGH, JJ. CIVIL APPEAL NO. 488 OF 1975 AUGUST 10, 1976 Hardayal Hardy, S.K. Mehta, M. Qamaruddin, P.N. Puri and A.K. Sen for Appellant S.C. Manchanda, P.L. Juneja and S.P. Nayar for the Respondent JUDGMENT OF THE HIGH COURT Janah, J. ( ) The first appellant, the Performing Right Society Ltd., is a company (hereinafter referred to as "the Society") incorporated under the English Companies Act, having its registered office at Copyright House, 33 Margaret Street, Cavendish Square in the county of London, England. The said society is an association of composers, authors and publishers of copyright musical work established to grant permission for the public performance, and in accordance with more recent copyright legislation, broadcast by diffusing by relay service of copyright music. The society collects royalties for issuing licence granting such permission and distributes such royalties to the members of the society, namely, the composers, authors, music publishers and other persons having interest in the copyright. The society's constitution is that of a company limited by guarantee having no share capital. It makes no profit for itself, pays no dividend and does not charge its members any agency commission or any fees or subscription. All royalties collected and all receipts from other sources are distributed among the composers, authors and publishers concerned in proportion to the respective extent to which their works are publicly performed and/or broadcast. The society does not deduct from the royalties anything beyond a bare pro rata cost of administration. The second appellant, Messrs. Natsin India Private Ltd. (hereinafter referred to as the "India agent"), is a private limited company incorporated under the Indian Companies Act having its office at 26, Chowringhee Road, Calcutta 13. The second appellant was appointed by the society to be its lawful attorney in India by virtue of a power-of-attorney granted by the society to the second appellant. The second appellant is the agent in India for the first appellant and it has the power, inter alia, to commence, prosecute, enforce suits, actions and other proceedings and to engage advocates, counsels and to sign, execute plaints, petition, etc., on behalf of the first appellant. On January 19, 1940, the society entered into an agreement with All India Radio

2 which provides that the licensee (i.e., All India Radio) shall send to the society at its registered office in England the list of all musical work broadcast in each week during the term of licence from each of the licensee's main stations (Delhi, Bombay, Calcutta and Madras) and the external service, indicating (i)the name and location of the said station. (ii)the name and location of any broadcasting station or other place from which the performances are relayed other than the licensee's own studio. (iii)the date and time of the broadcast. (iv)the title of each work. (v)the name of the respective composer, author, arranger and publisher and also (vi)(where gramophone records are used). The name of the manufacturer and identification number of each record; together with such further details as will enable the society to identify the work for the purpose of distribution of fees. Such lists are to be certified by the licensee as correct. The agreement further provides that the licensee will pay to the society at the rate of 2 (two pounds) per hour of broadcast of western music from each of the licensee's main and external service station and such annual payment must be made by All India Radio to the society in England. With regard to the royalties realised by the Indian agent on behalf of the society from cinema houses and other sources where music, over which the society has copyright, is played, the society has been paying income-tax to the income-tax authorities in India, and there is no dispute with regard to the receipts of such royalties by the society through its Indian agent. The society filed income-tax returns before the Income-tax Officer at Madras. The said officer later on issued a notice under section 34(1) of the Indian Income-tax Act, 1922, on the ground that in the statements filed at the time of original assessment the Indian broadcasting fees had not been included in the income. In the assessment year the Income-tax Officer held that though All India Radio paid fees to the society in England for the transmission of music from India the income accrued or arose or was deemed to accrue or arise to the society in India and as similar facts exist in every year also, he assessed such income to tax after deducting proportionate distribution expenses for all the years. The society, thereafter, preferred a revisional application under section 264 of the Income-tax Act before the Commissioner of Income-tax, West Bengal (where the society's income-tax files had been transferred in the meantime). By an application dated July 4, 1970, in support of its revisional application filed before the Commissioner of Income-tax, West Bengal, the society took a plea that the business in India is carried on by All India Radio and not by the society and

3 that payments were made by All India Radio to the society in England in terms of the agreement and as such the royalties received by the society in England cannot be said to have been received in India and, therefore, this income was not taxable under the Income-tax Act by the income-tax authorities in India. It was further contended by the society before the Additional Commissioner of Income-tax, West Bengal, who heard the revisional application, that in so far as its transaction with All India Radio was concerned, the Indian agent of the society had no part in the same. The agreement was made outside India and payments were received outside India and hence the royalties received from All India Radio could not be taxed through the society's agent in India. The Additional Commissioner did not allow this point to be raised before him as he was of the opinion that it was completely a new point and the relevant facts were not on record for the purpose of deciding whether the claim made by the society was correct or not. In that view the revisional application was dismissed by the Additional Commissioner of Income-tax by his order dated July 18, Against the said order the petitioner obtained a rule under article 226 of the Constitution. The rule came up for final hearing before Banerjee J. who discharged the same by his judgment and order dated March 23, 1973, (see [1974] 93 ITR 44 (Cal)) holding that the royalties received by the society in London from All India Radio was liable to tax under the Income-tax Act by the income-tax authorities in India. Against the said order the appellants have preferred this appeal. The point which requires consideration in this appeal, therefore, is whether the royalties received by the society in London in terms of its agreement with All India Radio, is liable to be taxed by the income-tax authorities in India. Mr. Arun Kumar Dutt, learned counsel for the appellants, has contended before us that such royalties are not liable to be taxed because the contract was entered into in England, the society does not carry on any business in India in so far as the receipt of such royalties is concerned, and also because the payments for such royalties are made in England by All India Radio. In order to deal with the contention which has been raised in this appeal we have to consider the relevant provisions of the Income-tax Act, 1961, which are to be found in sections 5 and 9 of the said Act. The relevant provisions of the said two sections are as follows: "5. Scope of total income. (1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which.. (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 derived which

4 (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 him in India during such year. 9. Income deemed to accrue or arise in India. (1) The following incomes shall be deemed to accrue or arise in India (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;.." Learned counsel for the appellants has submitted that section 5(2)(b ) is controlled by section 9(1). According to him any income for the purpose of section 5(2)(b) relating to a non-resident must be income as could be found in section 9(1)(i). He has contended that before any liability can be fixed by virtue of section 9(1)(i) it must be an income accruing or arising, directly or indirectly, through or from any asset or source of income in India and not merely from a source in India. He submits that unless it was so section 5(1)(a) would have applied and there was no necessity of applying section 5(2)(b) read with section 9(1)(i) as has been done by the income-tax authorities in the present case. According to Mr. Dutt if the society receives income from the income which All India Radio is getting by its broadcast then it can be said to be an income from a source of income in India. According to Mr. Dutt, that not being the case here the royalties which the society gets from All India Radio are not liable to be taxed. In support of this contention reliance was placed on the decision of the Privy Council in Rhodesia Metals Ltd. v. Commissioner of Taxes [1941] 9 ITR (Suppl.) 45 (PC). In that case the head office and the directing power of the company was in England, the contract for the purchase and sale of lands was made in England and the consideration for sale was also received in England. The Judicial Committee held that the company is assessable for income accrued in Rhodesia observing that "source means not a legal concept but something which a practical man would regard as real source of income." That case, therefore, in our opinion does not support the contention of Mr. Dutt, on the contrary it goes against him. Counsel for the appellants invited our attention to the decision in Commissioner of Incometax v. Lady Kanchan Bai [1970] 77 ITR 123 (SC) in support of his contention. We do not see how this decision is of any assistance to the appellants in the present case. In that case the Supreme Court followed the decision of the Privy Council in Rhodesia Metals Ltd. v. Commissioner of Taxes [1941] 9 ITR (Suppl.) 45 (PC) regarding the "source" of income.

5 Relying upon the decision in Caltex India Ltd. v. Commissioner of Incometax [1952] 21 ITR 278 (Bom) counsel for the appellants contends that there must be a territorial nexus between the person who is sought to be taxed and the country which seeks to tax, and, according to him, this territorial nexus is absent in the present case. It has been contended that the first appellant has no control over the alleged source of income in India, namely, All India Radio. It has been further contended that in a particular year All India Radio may not earn any income but it has to pay royalties if it broadcasts the music over which the society has a copyright. Similarly, All India Radio may have a great deal of income, in a particular year, but no royalties would be payable by it to the society, if it does not broadcast any music over which the society has a copyright. In the case in Caltex ( India) Ltd. v. Commissioner of Income-tax [1952] 21 ITR 278 (Bom), it was contended that the territorial nexus was between the assessee-company and British India because the assessee-company earned its profit in British India but when it comes to the question of the dividends the mere fact that dividends were paid by the assessee-company out of profits which it earned in British India does not constitute the territorial nexus between the assessee-company and British India which country was taxing the assessee-company, because the assessee-company was registered in the Bahamas Island and the situs of share was outside British India. In that connection the Bombay High Court observed that in order to decide that question one important fact had to be borne in mind, and that is the dividend income of the California company arises out of profits which have been made by the assessee-company in British India. In the present case the source of income admittedly is broadcasting of western music by All India Radio. That being so, it is quite clear that the royalties which the society receives from All India Radio should be deemed to accrue or arise in India within the meaning of section 9(1)(i) of the Income-tax Act, The next case relied upon by the counsel for the appellants is Mrs. Kusumben D. Mahadevia v. Commissioner of Income-tax [1963] 47 ITR 214 (Bom). In that case, a company which was a resident and ordinarily resident company in British India held certain shares in another joint stock company which operated in the State of Baroda, outside British India. The dividends received from the company at Baroda were not included in the dividends which the resident company received from other sources. The question which was referred to the Bombay High Court under section 66(1) of the Indian Income-tax Act, 1922, was whether the net dividend accrued to the assessee in the former Baroda State or whether it is income accrued or deemed to accrue to the assessee in British India. It was held that the income which the assessee received as dividend of Rs. 47,120 declared by the company at Baroda would be deemed to accrue to her in British India. This decision, therefore, does not help the appellants in the present case.

6 Counsel for the appellants referred to the decision in Commissioner of Income-tax v. R.D. Aggarwal and Co. [1965] 56 ITR 20 (SC). In that case the question which arose for decision was whether there was any "business connection" between a non-resident company and the assessee which was a registered company having their place of business at Amritsar. That case, in our opinion, proceeds on a different basis altogether and it is of no assistance to the appellants in the present case. Mr. Dutt relied upon a circular of the Central Board of Direct Taxes being Circular No. 223/F, 1969, dated 23rd July, 1969, regarding liability to tax on income accruing or arising to a non-resident under section 9 of the Act. Mr. Dutt contended that this circular has statutory force under section 119 of the Act. For our present purpose, however, we are not required to consider whether the circular has any statutory force or not because the circular relates to income accruing or arising through or from business connection in India. Paragraph 7 of the said circular is as follows: "7. Extent of the profits assessable under section 9 Section 9 does not seek to bring into the tax net the profits of a non-resident which cannot reasonably be attributed to operations carried out in India. Even if there may be a business connection in India, the whole of the profits accruing or arising from the business connection is not deemed to accrue or arise in India. It is only that portion of the profit which can reasonably be attributed to the operations of the business carried out in India which is liable to income-tax." This circular, therefore, contemplates a situation quite different from that in the present case. Mr. Dutt has lastly argued that his writ application was directed against the order passed by the Additional Commissioner of Income-tax refusing to exercise his revisional power by not allowing the appellants who were the petitioners before the Additional Commissioner of Income-tax in the revisional application, to raise a point on the ground that it was not taken before the Income-tax Officer. Mr. Dutt argued that if the trial court was of the view that there was no failure to exercise jurisdiction vested in the Additional Commissioner of Income-tax or that there was no error apparent on the face of the record the trial court ought to have discharged the rule without deciding the question as to whether the royalties received by the first appellant should be deemed to accrue or arise in India under section 9 of the Income-tax Act, We are unable to accept this argument of counsel for the appellants for the reason that the appellants themselves raised this question before the trial court, and naturally, therefore, the trial court had to give its decision on this question. The appellants cannot now turn round and say that the trial court ought not to have recorded its findings on the contention advanced before it. Mr. Dutt submitted further that a decision on this question would be binding upon him for all time to

7 come and his liability for succeeding years would continue because of the decision of the trial court. Mr. Pal, learned counsel for the respondent, drew our attention to the decision of the Supreme Court in Commissioner of Income-tax v. Brijlal Lohia [1972] 84 ITR 273 (SC) and pointed out that a finding arrived at for the purpose of assessment in one year would not be res judicata for the purpose of assessment for subsequent years and, therefore, there is no substance in the appellants' contention in this regard. It is not necessary for us to decide whether, in the facts and circumstances of the present case, the findings of the trial court or of this court would be res judicata for the purpose of assessment in subsequent years. This appeal, therefore, fails and is accordingly dismissed, but there will be no order as to costs. B.C. Mitra J. I agree. JUDGMENT OF THE SUPREME COURT Gupta, J. The first appellant, Performing Right Society Ltd. (hereinafter called "the Society"), is a company incorporated under the (English) Companies Acts, 1908 and 1913, having its registered office at Copyright House, 33 Margaret Street, Cavendish Square, London a company limited by guarantee and having no share capital. The society is an association of composers, authors and publishers of copyright musical works established to grant permission for the performing right in such works. "Performing right" means the right of performing in public, broadcasting and causing to be transmitted to subscribers to a diffusion service, in all parts of the world. The members of the society are required to assign to the society the performing right in their works, and the society exercises and enforces on their behalf all rights and remedies in respect of any exploitation of such works. The society collects royalties for the issue of licences granting such permission and distributes the royalties to the members of the society, namely, the composers, authors, music publishers and other persons having an interest in the copyright, in proportion to the extent to which a member's work is publicly performed or broadcast after a pro-rata deduction of the expenses. Article 43 of the articles of association of the society provides that the business and operations of the society shall be conducted and managed by a general council, and article 48 authorises the general council to apply the receipts also for certain other purposes. Article 48 reads as follows : "48. The general council may, before making any distribution among the members: (a)apply out of the receipts such sums as it thinks proper or has agreed to contribute as : (i)gratuities, donations, pensions and emoluments to any member or ex-member of the society or any person at any time in the

8 employment of the society, or engaged in any business acquired by the society, and the wives, widows, families and dependants of any such person ; (ii)contributions to any benevolent, pension or similar fund which may be established for the benefit of members, ex-members or employees of the society or their wives, widows, families or dependants ; (b)set aside out of the receipts such sums as it thinks proper as subscriptions, donations, loans, gifts or other payments for any of the purposes for which power is given by paragraphs (iii) and (iv) of clause 3(f) of the memorandum of association, provided that without the assent of the society in general meeting the aggregate of all such payments shall not in any one year exceed the sum of one thousand pounds and four thousand pounds under the provisions of those paragraphs respectively ; (c)set aside out of the receipts such sums as it thinks proper as a reserve fund to meet contingencies, or for future distribution, or for repairing, improving and maintaining any of the property or premises of the society, and for such other purposes as the general council shall in its absolute discretion think necessary or conducive to the interests of the society, and may invest the several sums so set aside in such investments as it may think fit, and from time to time deal with or vary such investments and dispose of all or any part thereof for the benefit of the society, and may divide the reserve fund into such special funds as it thinks fit, and employ the reserve fund or any part thereof for the general purposes of the society, and that without being bound to keep the same separate from the other assets." On December 13, 1953, the society entered into an agreement with the President of India owning and controlling broadcasting stations in India and organizing and conducting the same under the name of All India Radio (hereinafter referred to as "the licensee") whereby the society granted to the licensee the authority, (a) to broadcast from the licensee's sound broadcasting stations in India all musical works included in the repertoire of the society, and (b) to utilise, solely, for the purpose of sound broadcasting as aforesaid, any originating performance of the such musical works, irrespective of the source of such performance and the means whereby the such performance is conveyed to the point of broadcast transmission from the licensee's stations. The agreement was executed in England. It may be stated here that previous to this agreement the parties had entered into a similar agreement in the year The agreement of 1953 states that the licence granted thereby "shall be deemed to have come into force on April 1, 1949, and shall continue from year to year until determined by either party

9 giving to the other three calendar months' notice in writing to expire on March 31 in any year". The agreement provides that the licensee shall send to the society at its registered office in London, the lists of all musical works broadcast in each week during the term of the licence from each of the licensee's main stations (Delhi, Bombay, Calcutta and Madras) and the external services, and requires the licensee to furnish a return after the first day of April every year during the period of licence, stating the aggregate number of hours occupied during the period ended on the previous 31st March in broadcasting western music from each of the licensee's main and external service stations. The agreement further provides that for the rights granted, the licensee will pay to the society annually a sum calculated at the rate of 2 (two pounds) per hour of broadcasting western music from each of the licensee's main and external service stations and that such annual payments must be made to the society in London. The second appellant, M/s. Natsin India Private Ltd., is a private limited company incorporated under the (Indian) Companies Act having its office at 26, Chowringhee Road, Calcutta. The second appellant was appointed by the society to be its lawful attorney in India by virtue of a power-of-attorney granted by the society to the second appellant in July, As agent in India for the society, the second appellant realises on its behalf royalties from cinema houses and other sources where music over which the society has copyright is played in this country, and has, inter alia, the power to commence and prosecute suits and other proceedings, engage lawyers, and sign plaints, petitions, etc. Prior to July, 1967, the society, a non-resident company, used to file its returns of income before the Income-tax Officer, Madras, through its former agent in India, M/s. Vernon and Company of Madras. The royalties or fees realised from the licensee were not included in its returns for the assessment years to Later, the Incometax Officer, Madras, issued notices under section 34(1) of the Indian Income-tax Act, 1922, and assessed the said income after deducting the proportionate administrative expenses. The appeals taken by Vernon and Company against the supplementary assessment orders for the aforesaid years were dismissed by the Appellate Assistant Commissioner, Madras. The matter rested there and the society had been paying tax on its income in India including the income from royalties received from the licensee without objection until the assessment year for which the accounting year ended December 31, In the said assessment year also the Income-tax Officer, Companies Circle L(II), Madras, by his order dated October 23, 1963, assessed the total income of the society treating the income arising out of the agreement with the licensee chargeable as was being done all these years. Against this order of assessment, the society through the second appellant made a revisional application under section 264 of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), to the Commissioner of Income-tax, West Bengal, where the society's income-tax

10 file had been transferred in the meantime. The Additional Commissioner of Income-tax who dealt with the application dismissed the same by his order dated July 18, The society then moved a writ petition before the Calcutta High Court challenging the order of the Additional Commissioner of Income-tax. A rule nisi was issued on the petition by a learned judge of the High Court but ultimately the rule was discharged and the petition was dismissed. On appeal by the society, a Division Bench of the High Court affirmed the view taken by the learned single judge and dismissed the appeal on September 24,1973 (see page 12 supra). In this appeal by special leave the appellants question the correctness of that decision and challenge the order of assessment on two grounds: (1)the agreement between the society and the licensee having been executed in England and the royalties being also payable in England, the income out of this agreement is not liable to be taxed in India ; (2)the society being under an obligation to distribute the income to its members, the royalties realised are not really the income of the society. The first point seems to be covered by the provisions of section 5(2)( b) of the Act. Section 5(2) reads as follows : "5. Scope of total income. (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 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 him in India during such year. Explanation 1. Income accruing or arising outside India shall not be deemed to be received in India within the meaning of 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 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." The society is a non-resident company, and though it receives the income out of the agreement executed not in India but in England, the income undoubtedly accrues or arises in India. On behalf of the appellants it was contended that the source of income was really the agreement which was entered into in England. We do not think that the question as to the source of the income is relevant because sub-section (2) of section 5 provides that

11 all income "from whatever source derived" is to be included in the total income of the non-resident assessee if the income accrues or arises in India during the relevant year. Reference was also made to section 9 of the Act which enumerates the incomes that shall be "deemed to accrue or arise in India" though actually accruing elsewhere, to establish that the income in question could not be deemed to accrue or arise in India. But the income in this case has in fact accrued in India and no question arises whether it should be "deemed" to accrue or arise in India. Whether a certain income accrued or arose in India within the meaning of section 5(2) is a question of fact "which should be looked at and decided in the light of commonsense and plain thinking" as the Calcutta High Court considering a similar question under section 4(1) of the Indian Income-tax Act, 1922, observed: V.G. Every, In re [1937] 5 ITR 216 (Cal). In the case before us the High Court and the income-tax authorities considered it a hard matter of fact that the income derived from broadcast of copyright music from the stations of All India Radio arose in India. In our opinion, this was the correct view to take and we find no reason to differ from it. The next question is whether the income from the royalties was the society's own income. It was contended on the authority of Bejoy Singh Dudhuria v. Commissioner of Income-tax [1933] 1 ITR 135 (PC) that the obligation to disburse the sum among its members diverted the income from the society to the members, and it could not be called the income of the society. In Bejoy Singh Dudhuria's case [1933] 1 ITR 135 (PC) there was a decree of the court charging the appellant's whole resources with a specific payment to his stepmother ; the Privy Council held that the decree had to that extent diverted his income from him and directed it to his step-mother, and that to that extent what he received for her was not his income. But where payments are made by the assessee after he has received the income as his, the position is different. This was pointed out by the Judicial Committee in a later case, P.C. Mullick v. Commissioner of Incometax [1938] 6 ITR 206 (PC), where the executors in accordance with the directions in the will had paid Rs. 5,537 to the person who performed the testator's addya sradh, and another sum of Rs. 1,25,000 for probate duty out of the income of the estate. It was held that this was not a case in which a portion of the income was by an overriding title diverted from the person who would otherwise have received it as in Bejoy Singh Dudhuria's case [1933] 1 ITR 135 (PC) but it was "simply a case in which the executors having received the whole income of the estate apply a portion in a particular way pursuant to the directions of their testator, in whose shoes they stand". The true test for the application of the rule of diversion of income by an overriding title has been explained by this court in Commissioner of Income-tax v. Sitaldas Tirathdas [1961] 41 ITR 367, 374, 375 (SC) :

12 "In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation income is diverted before it reaches the assessee, it is deductible; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one's own income, which has been received and is since applied. The first is a case in which the income never reaches the assessee, who even if he were to collect it, does so, not as part of his income, but for and on behalf of the person to whom it is payable." On the facts of the present case it is clear that the royalties payable by the licensee under the agreement are realised by the society as its income; article 48 of the society's articles of association put the matter beyond doubt. Out of the receipts are deducted the expenses and also such other sums as in the discretion of the general council should be set aside for the purposes mentioned in article 48. This is a case where the assessee having received the income applies it in a particular way ; it is not a case of diversion of income by an overriding charge. The appeal is accordingly dismissed. There will be no order as to costs.