Mere use of word agency in agreement not conclusive of relationship between parties

Pr. CIT Vs M/s RST India Ltd. (Bombay High Court)

It is not disputed that upon termination of the contract, the assessee’s entire business of soliciting freight on behalf of the US based company came to be terminated. It may be that assessee had, other business. Insofar as the question of taxing the receipts arising out of the contract terminating the very source of the business, the same would not be relevant. The real question is, was the relationship between the assessee and the US based company one in the nature of the agency? Section 28(ii)(c) of the Act makes any compensation or other payment due, the receipt of a person holding an agency in connection with the termination of the agency or the modification of the terms and conditions relating thereto, chargeable as profits and gains of business and profession. The essential requirement for application of section would therefore be that there was a co­relation of agency­ principal between the assessee and the US based company. In the present case the CIT (A) and the tribunal have concurrently held that the relationship was one of principal to principal and not one of agency.

Learned Counsel Mr.Suresh Kumar for the Appellant however submitted that the agreement itself described the relationship between the parties as one of the agency. In our opinion, any such reference or the expression in the agreement, by itself would not be conclusive or determinative of relationship between the parties. The true character of the relationship from the agreement would have to be gathered from reading the document as a whole. This Court in case of Daruvala Bros. (P). Ltd. Vs. Commissioner of Income­Tax  (Central), Bombay, reported in (1971) 80 ITR 213 had found that the agreement made between the parties, was of sole distribution and the agent was acting on his behalf and not on behalf of the principal. In that background, it was held that the agreement in question was not one of agency, though the document may have used such term to describe the relationship between the two sides.

FULL TEXT OF THE HIGH COURT ORDER / JUDGMENT

The revenue has filed this Income Tax Appeal challenging the judgment of Income Tax Appellate Tribunal. Following question is presented for our consideration

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