| SooperKanoon Citation | sooperkanoon.com/63087 |
| Court | Income Tax Appellate Tribunal ITAT Hyderabad |
| Decided On | Nov-29-1987 |
| Judge | K Viswanathan, T R Rao, J Member |
| Reported in | (1988)26ITD198(Hyd.) |
| Appellant | Mannesmann Demag Lauchhammer |
| Respondent | Commissioner of Income-tax |
2. The Indian Company is National Mineral Development Corporation Ltd. (NMDC for short). This campany had through M/s. Heavy Engineering Corporation Ltd., purchased certain machineries from M/s. Mannesmann Demag Lauchhammer (DEMAG for short) a non-resident company incorporated in West Germany. These machineries were installed in the Iron Ore Project of the Indian Company and it was working for some time. M/s.
DEMAG had provided for a warranty of one year. Performance guarantee tests were carried out in April and May 1978 and there was no problem during the warranty period in the working of these machineries.
However, after the expiry of the warranty period, certain problems were cropped up. The N.M.D.C. wrote to DEMAG regarding these problems and DEMAG by their letter dated 23rd April, 1979 agreed to rectify the plants and machineries on certain conditions. They would send one erection Engineer and he should be given free accommodation and allowance of Rs. 300 per day of his stay in India. Certain machineries were also sent for which rent of DM 60 per day will be charged. Air ticket to and fro must be furnished to the Engineer. The Company should be paid at the rate of DM 565 per calendar day for the period when their erection Engineer would be in India. After getting the approval of the Government of India for the visit of the erection Engineer, an agreement was entered into by N.M.D.C. with DEMAG on 2nd December, 1980. The conditions laid down in the offer by the DEMAG were practically accepted. One further condition to which N.M.D.C. agreed was that the income-tax liability if any would be borne by N.M.D.C.3. Accordingly, one Engineer was sent to India and he stayed for 44 days. At the end of the period, after the machineries put into order DEMAG presented to N.M.D.C. with a bill for DM 32542. This amount was remitted after getting the approval of the Reserve Bank of India.
4. For the purpose of remittance of this amount N.M.D.C. have to obtain the clearance from the Income-tax Department. The Income-tax Officer was of opinion that the amount will be liable to Indian Income-tax and he advised N.M.D.C. to deduct tax. N.M.D.C. paid income-tax of Rs. 1,20,674 on 21-1-1981. Thereafter, the amount was remitted.
5. A return was filed by N.M.D.C, in a representative capacity in which N.M.D.C. claimed that the technical fee was not taxable in India and therefore the tax deducted at source should be refunded. The Income-tax Officer however held that the amount was rightly taxed. He worked out the taxable income as follows :5. Free Boarding and Lodging 1,657 -------- 6. The N.M.D.C. is on further appeal before us. Mr. Murthy appearing for the Company submitted that the plant and machinery purchased from M/s. DEMAG were defective and DEMAG had sent an Engineer to rectify that defect. Therefore the services rendered were merely to do certain repairs of the machinery which was already purchased by N.M.D.C. and for which the warranty period had expired. This cannot be, according to him, be considered as technical fee because there was no consultancy by N.M.D.C. in respect of any managerial, technical problems. The machineries were purchased from DEMAG and DEMAG had to see that they are in proper working condition. If for this purpose, an Engineer is sent to India, the fees payable thereon cannot be considered as taxable in India and for this purpose, he had cited the decision of the Andhra Pradesh High Court in the case of CIT v. Hindustan Shipyard Ltd. [1977] 109 ITR 158. He also pressed into services, the exemptions given under Section 10(6).
7. Assuming it is taxable Sri Murthy submitted that what could be taxed is only a technical fees paid at the rate of DM 565 per day. The other items cannot be considered as taxable receipts of the DEMAG. He also submitted that in any case grossing up of the tax liability that is calculating tax on tax is not justified on the facts of the case.
8. Dr. Prasad for the department submitted that the payment is clearly covered by the Explanation 2 to Section 9(1)(vii). He pointed out that this Explanation includes the provision of services of technical or other personnel. Therefore, nothing further need be looked into. He then pointed out that the requirement of repairing the machineries should not be construed as an ordinary maintenance, He pointed out that highly skilled Engineers were required and DEMAG itself had referred to it as consultation services in their letter dated 23-4-1979 they have stated "In the following we offer you our consultation by one of our erection Engineers for attending both electrical and mechanical works and, in addition, the letting of measuring instruments according to the following conditions". He then referred to the letter of N.M.D.C. dated 2nd December, 1980 wherein the Corporation had accepted the offer "for the deputation of one Mechancial/Electrical Engineer to Bailadial Deposit-5 Projects to rectify defects such as checking of structure, rectification of Wagon Loader, dismantling/repairing of reclaimer Bucket Wheel Drive, Planatory Gear Box/Stacker and other checkings".
These are not ordinary repair works and it thus require technical consultancy and so it should be considered according to him as coming under Section 9(1)(vii). With regard to the claim that the other receipts like Dearness allowance paid to the Engineer, air fare, etc., should not be included, Dr. Prasad submitted that these are reimbursement of expenditure of DEMAG. Under Section 44D no expenditure would be allowed in the case of non-resident from technical fees and therefore the assessee cannot claim any deduction. With regard to the grossing up for the purpose of taxation, he submitted that as per contract, the receipts were tax-free and so it has to be grossed up.
9. We have considered the submissions. The case of the department is that the fees paid to DEMAG is covered by Section 9(1)(vii).
Explanation 2 of that section reads as follows : Explanation 2 : For the purposes of this Clause 'fees for technical services' means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head 'Salaries'.
It will be clear from this section that any consideration paid to a non-resident for rendering services like managerial services, technical services or consultancy services would be treated as technical fees.
The three type of services would also include the provision of services of technical or other personnel. It might be possible to argue that in merely repairing certain machineries for which the warranty period had already expired. There is no consultancy services either managerial or technical. But, the Explanation 2 to Section 9(1)(vii) had expanded the scope of such services by including the provision of technical or other personnel. Normally, managerial or technical consultancy services would be done by a non-resident company by utilising the services of their Managers and Technicians, The Company has to act only through its employers or Directors. Thus, the human element in such consultancy services is already implied. But, the Legislature in their wisdom had decided to add the words in parenthesis and so the provision of services of technical or other personnel for any purpose would be treated as technical services, be it for a small repair work or a large reconstruction work. We, therefore, do not find any reason why the technical consultancy in respect of repair works cannot be considered as technical fees.
10. Further, as Dr. Prasad has pointed, both the DEMAG and N.M.D.C. had understood that there is consultancy work involved in such services.
The quotations from the correspondence given above clearly show that DEMAG considered it as consultancy work. We, therefore, hold that the receipts are technical fees.
11. Sri Murthy had relied on the decision of the Andhra Pradesh High Court in the case of Hindustan Shipyard Ltd. (supra). Particular stress had been laid on the fact found in that case that certain Engineers would be sent for the erection of the marine Engines supplied by the non-resident company. The department's contention that certain business activity was undertaken by the non-resident in India and further there was business connection was rejected by the High Court by observing "In the instant case, though Polish Company agreed to render certain limited services, the services were connected with the effective fulfilment of the contract of sales and were merely incidental to the contract and were usually implied in all such contracts by way of guarantee of the efficient working of the products sold". Thus, in that case, the finding was that the services were for effective fulfilment of the contract and it was merely incidental. In the case before us, the facts are entirely different. The warranty period for the machinery had already expired. The DEMAG had agreed to get it rectified and that was in a separate contract. It had nothing to do with the original contract for which the machineries were supplied. Besides, in the case of Hindustan Shipyard Ltd. (supra) no separate fees was paid for the services of the Engineer. In this case, separate fee is being paid.
Therefore, the two cases are not parallel at all.
12. It is needless to say that the reliance placed by Sri Murthy on Section 10(6) is totally misplaced because that section deals with individuals. Here, we are dealing with a Company.
13. This will take us to consider the second issue that is what is the quantum of the technical fees. The department's case is that all expenditure incurred by N.M.D.C. would amount to the technical fees. We are unable to accept this submission. An expenditure of Rs. 17,845 had been incurred by way of Air Fare for the Engineer, This payment is made in India in rupee currency. Similarly, a payment at the rate of Rs. 300 per day had been made to the Engineer to meet his out of pocket expenses. By making these payments, N.M.D.C. is not making any direct payment to DEMAG. If there was no contract requiring N.M.D.C. to meet these expenditure, these would represent the expenditure of DEMAG in India. But, N.M.D.C, agreeing to meet this expenditure, DEMAG has no obligation on their employees and the technical fees received by them would be the net income.
14. Now the question is whether meeting such an expenditure which normally could be met by the non-resident company would amount to income by way of fees for technical services. We must remember that the department is relying on a deeming provision for bringing to tax these amounts. In other words, but for Section 9(1)(vii), these receipts may not be taxable. The correspondence was between N.M.D.C. and DEMAG by post and the payment is effected in West Germany and therefore following the ratio laid down by the Supreme Court in the case of Carborandum Co. v. CIT [1977] 108 ITR 335, normally it could be held that the income accrues and arises out of India and therefore not taxable in India. It is to get over such difficulties that the statute was amended by introduction of Section 9(1)(vii). Since it is a deeming provision, the section has to be very strictly construed. Only that part of the receipt which could be clearly stated to be technical fees can be brought to tax. The expenses which DEMAG would otherwise incur but for the contract with N.M.D.C. would be deduction against the gross receipts. Not a deduction against the technical fees receivable. What would have been brought to tax would be the gross receipts less the expenditure. All that is achieved by DEMAG is that the expenditure is met by N.M.D.C. The technical fees remain intact and such expenditure do not go to reduce the gross receipts. The section authorises taxing of technical fees alone. It does not authorise taxing every business receipt from India, although such receipts may be incidental to the agreement to provide technical fees, they are not technical fees.
Therefore, we cannot accept the order of Income-tax Officer including these incidental fees as taxable Under Section 9(1)(vii), especially when the section has to be strictly construed.
15. It was argued that Section 44D prohibited any deduction from the total receipts. It is true that Section 44D prohibits certain types of deductions. The purpose of prohibition contained in Section 44D is to ensure that whatever fees is received as technical fees by the non-resident should be brought to tax. That is effected already and the assessee is not being allowed any deduction. However, what the department now contends is to increase the scope of technical fees by bringing into the net of taxation certain reimbursement of expenditure and treating the whole receipts as "technical fees", the reimbursement of expenditure cannot be treated as technical fees as already stated by us. Technical fees is clearly that fee agreed to between the parties by a contract for providing technical services. It will not include the expenditure which the non-resident company would incur and which will be reimbursed by the Indian Company. We therefore hold that only Rs. 1,32,072 can be brought to tax.
16. The last question is whether the Income-tax Officer is justified in calculating tax on tax. The income computed by the Income-tax Officer is Rs. 1,70,933. The tax payable on technical fees as fixed by Section 115A is 40 per cent for the asst. year under consideration. Now if the Income-tax Officer were to apply 40 per cent on Rs. 1,70,933, the tax payable would be only Rs. 68,372. However, he has levied a tax of Rs. 1,13,953. This is arrived at by calculating tax on tax. This Rs. 68,372 calculated a tax payable on Rs. 1,70,933 is itself treated as the receipt taxable and tax thereon is calculated. Thus, the tax is calculated by applying the grossing up principle. The principle is what will be the income receivable by the assessee which after payment of tax at 40 per cent would leave the assessee with the net amount stipulated in the contract. The grossing up had been resorted to by the Income-tax Officer because the contract dated 2-12-1980 had stated that the income-tax liability if any would be borne by N.M.D.C.17. The Commissioner (Appeals) had not specifically adverted to this issue but she must be presumed to have decided it against the assessee because she has dismissed the assessee's appeal.
18. Before us, it was submitted that grossing up in such cases is not correct and for this proposition reliance has been placed on the decision of the Orissa High Court in the case of CIT v. American Consulting Corpn. [1980] 123 ITR 513. Now in our opinion, the Income-tax Officer is justified in grossing up the fee for technical fees in order to arrive at the tax payable thereon. The contract for payment of technical fee stipulates that N.M.D.C. should bear income-tax payable on these receipts. In other words, what DEMAG should get is the technical fee stipulated in the contract without the liability of payment of income-tax. Therefore, the technical fee payable by N.M.D.C. is that figure which after payment of income-tax would leave DEMAG with same amount contracted for. Therefore, it is in the contract itself that the technical fees is a higher figure than what is apparent. The same result would follow if we were to resort to the statutory provisions found in Section 28. Under Section 28(iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession would also be chargeable to income-tax under the head "Profit and gains of business". Now the DEMAG definitely has the benefit of passing on the liability to pay their income-tax to N.M.D.C. This benefit must also be included in the assessment.
19. In this connection, we may refer to the decision of the Mysore High Court in the case of Tokyo Shibaura Electric Co. Ltd. v. CIT [1964] 52 ITR 283. That was also a case of a non-resident company entering into an agreement for payment of fees without deducting of taxes or other charges assessed in India. The High Court held agreeing with the Tribunal that the real income by way of royalty received by the non-resident under the agreement was such amount as would, if that the tax thereon has been deducted, have left the royalty figure as fixed in the contract. Thus, even before the introduction of the specific statutory provision in Section 28(iv) the position in law was the same.
The statutory provision made it very explicit.
20. In the case of American Consulting Corporation relied on by the assessee, the facts were as follows : M/s. Hindustan Steel Ltd. had entered into an agreement with the non-resident company for certain services to be rendered by the non-resident. The objects of the contract regarding consideration was clearly to place the non-resident in a position where it would not be required to pay any tax out of the net profit derived by it from the venture of supplying Hindustan Steel Ltd., with the requisite number of experts. The tax liability that might fall on the non-resident was agreed to be borne by Hindustan Steel Ltd. The question whether the payments should be grossed up or not had come before the Tribunal on two occasions. When the matter came up for the first time, the Tribunal held that there was no provision in the Act at the relevant time for taxing such perquisites as profits and gains of the business carried on by the assessee (please see page 519 of the report). Having said that the Tribunal also stated that the extent of the tax liability undertaken to be borne by Hindustan Steel Ltd., was only the amount of tax actually due. In other words, the Tribunal held that the income of the assessee has to be arrived at simply by adding the amount of tax due to the income from the business and not by grossing up the net income what is known as tax on tax basis. Having said that the provisions of Section 28(iv) would be applicable, the Tribunal proceeded to determine the extent of such benefit. At page 520 the High Court had extracted the finding of the Tribunal. To condense the passage extracted, it is enough to say that the amount to be added would turn on whether the non-resident was maintaining accounts on cash basis or mercantile basis. The High Court was of opinion that this finding of the Tribunal was within the powers vested in them and therefore they would not incline to take a different view.
21. From the above, it would be seen that the case cited does not support the assessee's contention that no grossing up at all should be attempted. The issue before the High Court was whether the finding of the Tribunal that the grossing up should be done by merely adding the tax payable on the income is correct or not.
22. It is true that the above decision of the Orissa High Court could be construed as a decision in support of the method of merely adding the tax payable on the income and it is not necessary to gross it up.
Now whether that is sufficient or not can be demonstrated by certain arithmatical examples. Let us assume that the technical fee payable is Rs. 1,000. The tax payable thereon is at 40 per cent, i.e., Rs. 400.
Now if we accept this method then the taxable income will be Rs. 1,000 + Rs. 400, i.e., Rs. 1,400. The tax payable on Rs. 1,400 is Rs. 560.
Now, if the Indian Company has to pay only Rs. 560 as tax then the total receipt for the assessee would be not Rs. 1,400 as fixed up earlier but Rs. 1,560. Thus, the premise with which the calculation was started that is the technical fees plus tax payable thereon was Rs. 1,400 itself is proved wrong. Thus, arithmatically it can be proved that the method suggested by the assessee is not correct. Grossing up is only other alternative method and such method has been upheld by the Mysore High Court in the case already cited above.
23. We may mention that grossing up does not depend upon the method of accounting followed by the assessee. For one thing as far as the DEMAG is concerned, the receipt is from N.M.D.C. and that would be entered in the books as the net amount receivable. Under the circumstances of the case, there cannot be any entry regarding the liability to pay Indian Income-tax in their books of account. That is because as per the contract the assessee is not liable to Indian Income-tax Act. So, the books of account do not have to record that liability. Now merely because a liability is not recorded it does not cease to be an amount payable. Therefore, the entry in the books of account as far as this aspect is concerned, is not at all relevant. Apart from that, we are considering the case of a non-resident having income deemed as receivable in India. In the case of deeming provisions like Section 9(1)(vii), the liability is without reference to books of account.
Obviously, a deemed income is not an accounted income either in cash or on mercantile basis. Therefore, the method of accounting of the non-resident is irrelevant. Finally, we may refer to the decision of the Madras High Court in the case of CIT v. Standard Triumph Motor Co.
Ltd. [1979] 119 ITR 573. The Madras High Court has laid down that in the case of a non-resident who is to be assessed under the deeming provisions method of accounting followed by the nonresident is totally irrelevant. For these reasons, we hold that the method of accounting is not a relevant piece to be considered. We further hold that the correct method is of grossing of receipts. To sum up, our finding is that the non-resident must be assessed on a total receipt of Rs. 1,32,072 grossed up according to the principles of tax on tax.