*179 Decision will be entered for the petitioner.
Prior to World War II, petitioner, a foreign corporation not engaged in trade or business within the United States, purchased roller bearings from an American company which it resold to its customers in the territory assigned to it under an agreement with the American company. In 1939 and throughout 1940 various war conditions made it impossible to continue this practice and an arrangement was made whereby petitioner forwarded orders from its customers to the American company. In 1941 a method was introduced whereby petitioner's distributors and customers in its territory would send their orders direct to the American company. Under both arrangements, the American company would ship the bearings ordered direct to petitioner's customers f. o. b. Canton, Ohio, crediting the petitioner with the difference between the price charged its customers and the normal price the American company would have charged the petitioner for the same bearings. After January 1941, petitioner agreed to accept a flat rate of 20 per cent of the gross sales price of such orders. Held, that the amounts received by petitioner in the years 1940 to 1943, *180 inclusive, as a result of the arrangement between it and the American company were from sources without the United States and are not taxable to the petitioner under the provisions of section 231 (a) of the Internal Revenue Code.
*881 This proceeding involves the following deficiencies and penalties:
| Year | Income tax | 25% penalty |
| 1940 | $ 7,421.27 | $ 1,855.32 |
| 1941 | 30,269.77 | 7,567.44 |
| 1942 | 6,486.17 | 1,621.54 |
| 1943 | 1,211.81 | 302.95 |
*181 The first issue presented is whether the petitioner, a British corporation not engaged in trade or business within the United States during the years 1940 to 1943, inclusive, realized fixed or determinable annual or periodical income from sources within the United States during those years within the meaning of section 231 (a) of the Internal Revenue Code.
The second question involves the petitioner's liability for a 25 per cent penalty under section 291 (a) of the Internal Revenue Code for failure to file a return in each of the years in question.
FINDINGS OF FACT.
The petitioner, British Timken Limited, is a British corporation which was organized in June 1920. Since that time it has been engaged in the manufacture of antifriction bearings, with its principal place of business in Birmingham, England.
Petitioner filed Federal income tax returns for 1940, 1941, 1942, and 1943 on January 7, 1947, with the collector of internal revenue for the eighteenth district of Ohio.
In 1928 the Timken Roller Bearing Co., an Ohio corporation, hereinafter referred to as American Timken, and a British business man, Michael Dewar, purchased all of the capital stock of petitioner. American Timken*182 acquired slightly more than 50 per cent of petitioner's stock.
After the acquisition of the stock by American Timken and Dewar in 1928, a business agreement was entered into between petitioner and American Timken providing for a controlled license of the trademark "Timken" and authorizing the petitioner to make use of the trade-mark "Timken" on its products. This agreement, as well as subsequent agreements, described the territory in which British Timken was to sell and service tapered roller bearings, which, generally, included the United Kingdom, the British Empire excepting *882 the Dominion of Canada, and the continent of Europe, with the exception of France.
Under the 1928 agreement between petitioner and American Timken, it was provided that either company might accept and execute orders for bearings for ultimate destination in the other company's territory for use for bearing replacement purposes in completed articles of manufacture. The company selling in the territory of the other was obliged to notify that company of the details of the sale and to pay to the other company an amount equal to 10 per cent of the net sales price. In an agreement entered into by petitioner, *183 American Timken, and Societe Francaise Timken in 1938, a similar provision was incorporated, providing for the payment of 5 per cent of the net price unless such sales were made through or at the request of the company operating in the territory.
At all times since 1928 there has been in effect a management agreement between American Timken and Dewar. The substance of this agreement has been that American Timken and Dewar agreed to vote their stock for a board of directors selected by Dewar and, in effect, for Dewar's management as long as it showed a specified standard of earnings. This agreement, with slight modifications, has continued in effect down to the present time.
In 1934 American Timken and Dewar sold part of the stock which they held in the petitioner to the public, but since 1934 American Timken has continued to own directly or have the beneficial interest in about 30 per cent of the stock of petitioner and Dewar has continued to own about 25 per cent of the stock.
As a result of its agreements with American Timken in 1928, petitioner set up in its territory a sales organization to handle service or replacement sales and an engineering force which went into the customer's*184 plant to induce the customer to design his equipment originally around Timken bearings. Since that time petitioner has exclusively handled and borne the expense of these sales activities in the territory set aside for it.
Petitioner covered Australia and New Zealand by appointing agents who advised the company on general business matters. It appointed various distributors and sent out from its plant in England two or three engineers who became resident in Australia.
Petitioner appointed a firm known as Kemsley & Co. as its sole resident factory representative and distributor in Australia. Kemsley later found it desirable to appoint subdistributors throughout Australia and separate distributors for the automobile replacement and industrial trade. During the years in question there existed in Australia several different classes of distributors handling the petitioner's products. In addition to the petitioner's business, Kemsley also represented other bearing manufacturers doing business in Australia.
*883 In India petitioner established agents and distributors, trained their representatives in England, and sent its own engineers on frequent visits to that country. In South*185 Africa it followed the same policy, later forming a subsidiary company known as British Timken of South Africa. From time to time it sent special engineers from England to these territories.
Prior to the outbreak of World War II on September 3, 1939, petitioner occasionally ordered bearings from American Timken, which company would fill the order and ship the bearings directly to the petitioner in England. Following the entry of England into the war, there was a greatly increased demand for bearings, which the petitioner found itself unable to meet. Enemy submarine activity disrupted the transmittal of orders from the territories to England and the petitioner's system of receiving bearings from American Timken and reshipping them to its customers. Petitioner's situation was further complicated by currency restrictions imposed by Great Britain.
American Timken was concerned over the possibility that Timken's Australian position would be jeopardized by petitioner's inability to supply its customers and, further, by petitioner's reluctance at first to accept American Timken's assistance during the emergency. It also expressed doubt as to the advisability of petitioner's retention*186 of the Kemsley Co. inasmuch as that company did not represent Timken exclusively.
Shortly after the outbreak of war in 1939, a system was devised whereby petitioner forwarded orders to American Timken and the latter shipped the bearings direct to the customers and credited petitioner with the difference between petitioner's price to its customers and the normal price charged the petitioner by American Timken. In a letter dated October 31, 1939, in regard to a number of orders in the hands of American Timken at that time, petitioner outlined the procedure as follows:
* * * *
We find that it is only possible for us to make payment to you for Bearings which we actually import into this country, as at the time of making payment we have to prove importation, and you will, therefore, readily understand that, where Bearings are sent to our customers direct, it is not possible for us to make payment ourselves. * * * you will kindly arrange to render your Invoices direct to these friends, in accordance with the prices shown on the Customs Invoices which we submitted to you with our Orders, plus Freight Charges, and pass us Credit representing the difference between these prices and your *187 normal prices to us.
The shipping arrangements outlined in the letters which accompanied our Orders are, of course, still applicable, the only change being the question of payment.
* * * *
*884 We need hardly add that we shall accept responsibility in the event of your being unable to obtain payment from our customers in respect of any Orders which we send to you on this basis, and if there are any special payment or shipping arrangements to be made, we will indicate these on the Orders which we send to you.
Due to delay and the frequent loss of orders while en route from Australia to England and from England to the United States, a new arrangement was worked out in December 1940 between Dewar, who was in Washington on business for the British Government, and representatives of American Timken. It was agreed that the petitioner's distributors and customers would thereafter send their orders direct to American Timken and that American Timken would continue to credit petitioner with the difference between the price charged petitioner's customers and the normal price American Timken would charge the petitioner for the same bearings.
In handling the orders in question, American Timken, *188 on the petitioner's recommendation, utilized the services of the Fenchurch Export Corporation, the American representative of Kemsley & Co., as a forwarding agent. The terms of all shipments by American Timken during the years involved were made f. o. b. Canton, Ohio, the bearings being consigned to the petitioner's distributors and customers, and payment being made to American Timken.
Petitioner fixed the prices on bearings sold to its customers by American Timken and indicated to American Timken the terms of payments which should be followed in dealing with purchasers within its territory.
Because of the difficulty involved in figuring amounts owing to petitioner under the crediting arrangement, it was agreed in January 1941 that petitioner would accept a flat rate of 22.56 per cent of the gross value of sales handled by American Timken prior to January 1941 and 20 per cent thereafter.
The amounts received by petitioner as a result of the arrangements heretofore outlined for the years 1940, 1941, 1942, and 1943 were as follows:
| 1940 | $ 49,475.13 |
| 1941 | 110,071.88 |
| 1942 | 21,620.57 |
| 1943 | 4,039.36 |
During the same years, petitioner made sales of bearings manufactured in its*189 plants in England. The proceeds of all sales were carried in the petitioner's general trading account and were not separated on the basis of where the bearings were manufactured. Petitioner has estimated the gross profit applicable to the sales of all bearings and also the gross profits on bearings made and sold by it as follows: *885
| Estimated gross | Estimated gross | |
| profit on bearings | profit on bearings | |
| Year | sold by petitioner | made by petitioner |
| in its territory | and sold in | |
| its territory | ||
| 1940 | $ 68,985.82 | $ 19,510.82 |
| 1941 | 119,521.44 | 9,449.56 |
| 1942 | 25,584.57 | 3,984.00 |
| 1943 | 8,333.88 | 4,294.52 |
From 1940 to 1943, inclusive, petitioner incurred the following expenses in connection with the maintenance of its sales organizations in Australia, New Zealand, India, and South Africa:
| 1940 | 1941 | 1942 | 1943 | |
| Commissions to agents | $ 10,040.02 | $ 12,762.36 | $ 2,984.00 | $ 5,344.92 |
| Engineers' salaries | 5,732.54 | 6,464.00 | 2,880.00 | 2,908.80 |
| Engineers' expenses | 5,494.36 | 4,060.20 | 944.00 | 1,583.68 |
| General expenses | 4,238.84 | 4,738.92 | 4,808.00 | 4,884.36 |
Petitioner allocated the sales expense shown above on the basis of the totals of British and*190 American bearings shipped into its territory in each year. Petitioner determined the share of such expense attributable to American made bearings in the following percentages:
| 1940 | 71.7% |
| 1941 | 92.1% |
| 1942 | 84.5% |
| 1943 | 48.4% |
Petitioner maintained no office or place of business within the United States and no officer or employee of the petitioner was in the United States during the years 1940 to 1943, inclusive, for the purpose of transacting business with American Timken. Petitioner was not engaged in trade or business within the United States in any of the years in question.
The amounts credited to petitioner by American Timken in the years in question were reported by petitioner for tax purposes in Great Britain and a tax of 10 shillings sixpence on the pound was paid.
The amounts received by petitioner as a result of the arrangements between it and American Timken during the years 1940 to 1943, inclusive, constituted income from sources without the United States.
OPINION.
The principal issue in this case is whether the petitioner, a foreign corporation, during the taxable years 1940 to 1943, inclusive, realized "fixed or determinable annual or periodical" income from sources*191 within the United States within the meaning of *886 section 231 (a) of the Internal Revenue Code. 1 As the evidence clearly establishes that during the years in issue petitioner maintained no office or place of business in this country and the parties are in agreement that petitioner was not engaged in trade or business within the United States, we are not here concerned with the question of whether petitioner is taxable under section 231 (b).
*192 Our first inquiry must necessarily be directed to the actual source of the petitioner's income, which the respondent seeks to tax as being from sources within the United States.
Although the details of the arrangement between petitioner and American Timken were somewhat different in 1940 than in subsequent years, it seems clear from the evidence that in all transactions title to the purchased bearings passed directly from American Timken to petitioner's distributors and customers and the collection of the sales price was made by American Timken. In the circumstances, we do not believe that it can be held that there was a purchase within the United States by petitioner and thereafter a sale from petitioner to its customers outside the United States. We think it is equally clear that American Timken was not the agent of petitioner in the United States. See Amalgamated Dental Co., Ltd., 6 T.C. 1009">6 T. C. 1009.
Respondent suggests that the arrangement between the companies, which was a temporary means of conducting business under war conditions, constituted a profit-sharing agreement. The record provides no foundation for such an interpretation, which is obviously*193 in conflict with the respondent's admission that petitioner was not engaged in trade or business in this country. Moreover, it is plain that petitioner's income was in no way related to the profit realized from the sale of bearings to its distributors and customers by American Timken, but was measured at first by the difference between American Timken's price to petitioner and the price received from petitioner's distributors and customers and later by a fixed percentage of gross sales which experience had showed was the approximate equivalent of that difference.
Where the income of a taxpayer is derived from the sale of personal property, the situs of the sale and the "source" of the income attributable to the sale is the place where the seller surrenders all his right, title, and interest to the buyer. East Coast Oil Co. v. Commissioner, *887 31 B. T. A. 558; affd., 85 Fed. (2d) 322; Ronrico Corporation, 44 B. T. A. 1130; G. C. M. 25131, C. B. 1947-2, p. 85.
In the present case, the bearings were shipped to the consignee f. o. b. Canton, Ohio, title passing*194 in Canton from American Timken to the Australian distributor or purchaser, and if we were concerned here with the source of the income of American Timken, we would of course have no difficulty in placing the sources of its income as within the United States. But we do not regard the fact that the situs of the sales was within the United States as determinative of the source of petitioner's income. Although a manufacturer's profits may be the direct result of the production and sale of its products, it does not follow that such sales constitute the source of the income of many persons associated with the sales such as its salesmen, buyers, agents, and officers whose earnings are attributable to other considerations such as their sales ability or technical knowledge. This is true even though the compensation received may be measured by the amount of sales. It is the situs of the activity or property which constitutes the source of the compensation paid and not the situs of the sales by which it is measured that is of critical importance. See Mertens, Law of Federal Income Taxation, vol. 8, sec. 45.27, p. 289.
Petitioner had established a sales force by appointing agents to handle*195 the sale of bearings in its territory and had at its own expense sent consulting engineers to Australia to induce industrial users to incorporate Timken roller bearings into their original design of machinery. These sales facilities produced orders for bearings during the years in issue which were filled from petitioner's production in England, as well as the orders which were forwarded direct to American Timken. Petitioner and its agencies maintained contact with users of Timken bearings, procured orders, fixed the prices and terms of the sales of bearings made in its territory, and classified the orders, at no expense to American Timken.
It is also clear that American Timken could not have sold its bearings to petitioner's distributors and cutomers without the petitioner's consent, unless it chose to violate the agreement between the companies in regard to their respective territories. American Timken was petitioner's largest stockholder and the record shows that in 1940 and 1941 it was disturbed over the possibility that petitioner's inability to supply sufficient bearings to its Australian users would result in its competitors' making gains that would threaten the post-war *196 demand for Timken roller bearings in that country. It appears that it was with considerable reluctance that petitioner agreed to let American Timken supply its customers even under these conditions.
As we have already stated, the amount paid by American Timken to petitioner was a rough approximation of the difference between the price petitioner would have paid American Timken and the price *888 charged by the latter to petitioner's distributors and customers for the same bearings. The arrangement was a temporary one, forced by the war, and it was evidently the desire of both companies that from a profit standpoint they would both receive out of the transaction substantially what they would have received under normal peacetime operations. It seems evident that whatever petitioner did to warrant the payment to it of the so-called commissions was performed outside of the United States. The Commissioner and the petitioner agree that the latter was not engaged in trade or business within the United States and had no office or place of business within this country. The bearings were sold directly by American Timken to petitioner's distributors and customers and petitioner itself*197 never had either legal or beneficial title to the goods at any point in the transactions. As we view the matter, the sums paid petitioner were in recognition of the fact that the orders for bearings came as a direct result of the activities of petitioner's agents in its allotted territory and the further fact that the bearings were being sold in a market exclusively reserved to the petitioner under a long standing agreement between the companies. In our opinion, the source of petitioner's income was in the British Empire, which was the situs of the sales activities of petitioner's agents and the situs of petitioner's exclusive right to sell Timken bearings to customers. See Piedras Negras Broadcasting Co., 43 B. T. A. 297; affd., 127 Fed. (2d) 260; Sabatini v. Commissioner, 98 Fed. (2d) 753; and Korfund Co., 1 T.C. 1180">1 T. C. 1180.
We, therefore, conclude and hold that the amounts received by petitioner from American Timken in the taxable years in issue were from sources without the United States and are not taxable to the petitioner under the provisions of section *198 231 (a) of the Internal Revenue Code. In view of our conclusion on this point, a determination of whether the sums paid petitioner were fixed or determinable annual or periodical income and whether petitioner is liable for a 25 per cent penalty for failure to file timely returns is unnecessary.
Decision will be entered for the petitioner.
Footnotes
1. SEC. 231. TAX ON FOREIGN CORPORATIONS.
(a) Nonresident Corporations. --
(1) Imposition of tax. -- There shall be levied, collected, and paid for each taxable year, in lieu of the tax imposed by sections 13 and 14, upon the amount received by every foreign corporation not engaged in trade or business within the United States from sources within the United States as interest (except interest on deposits with persons carrying on the banking business), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and income, a tax of 30 per centum of such amount * * *↩