Hindustan Zinc Ltd. Vs. Dy. Cit - Court Judgment

Excerpt:
counsels: k. sampath, for the assessee r.n. jangid, for the revenue head note: income tax business disallowance under s. 40(a)(i)--applicability of provisionstechnical fees not accruing in india catch note: for setting up zinc and legal mining and smelter complex u. k. government provided aid and assistance to assessee under an agreement--technical know how fee were paid by crown agents to m/s dml, out of amount of grant made available to them by u.k. government towards their fees in respect of services provided to the assessee--as per government's direction assessee-company adjusted equivalent amount paid by crown agents to m/s dml in form of budgetary and equity support to government of india--assessee-company made rupee payment to caaa, government of india, of an amount equivalent to fees paid to m/s dml, by crown agents for services provided in connection with basic engineering technology and know-how for commissioning of lead zinc smelter plant--this amount being a lump sum consideration for acquiring technical know-how for purposes of its business, assessee-company claimed deduction under section 35ab in respect of 1/6th of amount so paid in computing profits and gains of business for year under consideration--assessing officer, however, disallowed the claim of the assessee on this count under section 40(a) considering that tax has not been deducted under chapter xvii-b from corresponding amount payable outside india--on appeal, commissioner (appeals) confirmed order of assessing officer--not sustainable--technical know how fee was never payable by assessee-company to dml outside india--there was therefore, no reasonable basis to consider expenses claimed by assessee in respect of same as 'not deductible' by invoking provisions of section 40(a)(i)--thus, assessing officer is directed to allow claim of assessee on this court. ratio: technical know how fee was never payable by assessee-company to dmc outside india--there was therefore, no reasonable basis to consider expenses claimed by assessee in respect of same as 'not deductible' by invoking provisions of section 40(a)(i)--thus, assessing officer is directed to allow claim of assessee on this court. held: it is evident that the amount of fees for technical services was never payable by the assessee-company to m/s dml outside india. as already discussed, the liability towards fees payable by the assessee-company to m/s dml, did arise in pursuance of the agreement entered into between them, but because of the manner and method of payment agreed upon by and between the concerned parties under the peculiar facts and circumstances of the case, the same was never payable by the assessee-company to m/s dml outside india. revenue has not raised any material arguments to controvert the contentions raised by the assessee in this regard. as such, considering all the facts and circumstances of the case, the amount of fees for technical services was not payable by the assessee-company to m/s dml outside india and this being the position, there was no reason/basis to treat/consider the expenses claimed by the assessee in respect of the same as 'not deductible' by invoking the provisions of section 40(a). in that view of the matter, the commissioner (appeals) was not justified in confirming the disallowance made by the assessing officer on this count under section 40(a). his impugned order on this issue is, therefore, reversed and the assessing officer is directed to allow the claim of the assessee on this issue. application: also to current assessment year. decision: in favour of assessee. income tax act 1961 s.40(a)(i) income tax act 1961 s.4 income tax act 1961 s.5 in the itat, jodhpur bench s.r. chauhan, j.m. & p.m. jagtap, a.m. - - the assessee-company thus received benefit of technical know-how for use of the same in its business through the good offices of the government of india for which payment was made as per the manner and method specified in the said sanction letter. 8. the learned departmental representative, on the other hand, submitted that there is no dispute regarding the allowance of expenditure under section 35ab, but the assessee having failed to deduct the tax at source from the amount of such expenditure, the same have been specifically disallowed in accordance with the provisions of section 40(a). relying on the decision of the honble supreme court in the case of cit v. he, therefore, contended that the assessee having clearly failed to deduct tax at source from the payment of fees to dml, the authorities below were fully justified in invoking the provision of section 40(b) and in disallowing the relevant expenditure. it is also observed that the allowability of the said expenditure under section 35ab has not been disputed by the authorities below and the claim of the assessee on this count has been disallowed specifically under section 40(a) for assessees failure to deduct and pay tax on the said amount under chapter xviib. , m/s dml for the entire scope of work and services covered in the said contract and phasewise details of the same were also clearly specified in the said agreement in para no. , m/s dml as well as the person responsible for making the said payment i. (supra) their lordships of honble supreme court have observed that for extending the operation of law to persons outside the territory of india, a nexus with something in india is necessary and we find that the existence of such nexus in the case on hand is very much evident from the facts of the case as well as the material available on record. 17. as regards the other contention of the learned counsel for the assessee that the fees was not payable by the assessee-company to m/s dml outside india, we find that this contention of the assessee can be better appreciated in the light of the manner and method of settling the accounts agreed upon by the concerned parties as under :(1) the hzl project incharge certified the bills raised by m/s dml for services rendered by them and forwarded the same to the crown agents, u.orderp.m. jagtap, a.m.this appeal of the assessee is directed against the order of the learned commissioner (appeals), udaipur, dated 18-11-1998.2. the only issue arising out of this appeal relates to the disallowance of rs. 4,22,37,000 claimed by the assessee under section 35ab of the income tax act, being 1/6th of the expenditure incurred for acquisition of technical know-how, for the reason that no tax was deducted at source.3. the relevant facts of the case giving rise to this appeal are that an agreement was entered into between the government of india and the government of united kingdom called as 'uk-india hzl aid arrangement, 1987' in terms of which the latter agreed to grant to the former aid and assistance for the development of a zinc and lead mining complex and smelter complex. for the purpose of disbursing the financial aid, the u.k. government placed the funds with its agent m/s crown agents in u.k. the government of india nominated the assessee vide letter no. 8(4)86-met.2/vol. iii, dated 19-11-1988, for the setting up of an integrated project consisting of zinc-lead mines at rampura agucha and lead zinc smelter at chanderiya. the financing pattern of the project, inter alia, included u.k. government grant-in-aid 73.30 million which was subsequently revised to 83.60 million. an amount of rs. 300 crores was also garnered through issue of bonds for the purpose of meeting the project cost. in respect of the u.k. aid extended by the government of india to the assessee, it was to account to the government of india towards its utilisation in the form of equivalent counterpart rupee deposit payment to office of the controller of aid. accounts and audit (hereinafter referred to as the caaa), department of economic affairs, ministry of finance, on receipt of the budgetary support from ministry of mines. the relevant terms and conditions are more specifically and elaborately spelt out in the sanction letter. the assessee-company thus received benefit of technical know-how for use of the same in its business through the good offices of the government of india for which payment was made as per the manner and method specified in the said sanction letter.4. the project was executed in phases and a total sum equivalent rs. 24.63 crores was paid by the crown agents in u.k. to m/s davy mackee (stockton) ltd., u.k. (hereinafter referred to as the dml) who provided basic engineering technology and know-how to the assessee-company for the commissioning of the lead zinc smelting plant at chanderiya. these payments were made by the crown agents to m/s dml, out of the amount of grant made available to them by the u.k. government towards their fees in respect of services provided to the assessee. as per the governments direction the assessee-company adjusted the equivalent amount paid by the crown agents to m/s dml in the form of budgetary and equity support to the government of india, as per the procedure laid down in the terms and conditions specifically set out in the letter dated 13-3-1987, issued by the under secretary, overseas development administration (qda). the hzl project incharge certified the bills to the extent of expenditure incurred with reference to the technical know-how as per the basic engineering agreement and forwarded the same to crown agents, u.k. the crown agents being representative of the oda of the u.k. government in turn released the grant amount for making payments to m/s dml. thereafter the crown agents intimated to the office of the caaa, government of india, full details regarding such payments released by them and thereafter the office of the caaa sent a demand note to the assessee-company requesting for deposit of amount paid to m/s dml by the crown agents in equivalent rupees to the credit of government of india. on receipt of such demand from the caaa the assessee approached the ministry of mines for release of budgetary support and on receipt of the same, the assessee-company made rupee payment to caaa, government of india, of an amount equivalent to fees paid to m/s dml, by the crown agents for services provided in connection with the basic engineering technology and know-how for the commissioning of lead zinc smelter plant at chanderiya. this amount being a lump sum consideration for acquiring technical know-how for the purposes of its business, the assessee-company claimed deduction under section 35ab in respect of 1/6th of the amount so paid in computing the profits and gains of the business for the year under consideration. the assessing officer, however, disallowed the claim of the assessee on this count under section 40(a) considering that the tax has not been deducted under chapter xvii-b from the corresponding amount payable outside india. the matter was carried before the learned commissioner (appeals) who upheld the action of the assessing officer. aggrieved by the same, the assessee is in appeal before us.5. the learned counsel for the assessee submitted before us that the expenditure claimed by the assessee under section 35ab has been disallowed by the revenue authorities by invoking the provisions of section 40(a). he further submitted that as per said provisions, amount of interest, royalty, fees for technical services or other sum chargeable under the income tax act, 1961, which is payable outside india is not deductible in computing the income under the head 'profit and gains of business or profession' if tax has not been deducted by the assessee on the same under chapter xviib. in this regard, he contended that the assessees case does not fall in the ambit of section 40(a) for two reasons, firstly the fees payable to m/s dml, for technical services was not chargeable under the income tax act, 1961, and secondly, the amount of fees was not payable by the assessee to m/s dml, outside india.6. as regards the chargeability of the said fees in the hands of m/s dml under the income tax act, he contended that sections 4 and 5 are relevant in this regard and m/s dml being a non-resident, the scope of the income chargeable to tax is determined by sub-section (2) of section 5 which includes all income from whatever source derived that accrues or arise to a person in india during the relevant year. he further contended that the income deemed to accrue or arise in india is defined in section 9 and the income by way of fees for technical services received by non-resident can be treated as income deemed to accrue or arise in india as per clause (vii) of sub-section (1) of that section only if the same is payable by a person who is a resident. in this regard, his contention was that the amount of fees for technical services was never payable by the assessee to m/s dml, a nonresident and, therefore, the said amount was not chargeable in its hands under the income tax act, 1961. he also contended that the amount of fees in this case was received by m/s dml, from crown agents and both these parties being nonresident, the validity of application of section 9(1)(vii) of the income tax act, 1961, to such transactions involving extra territorial operation is also in jeopardy in view of article 245(2) of the indian constitution. in this regard, he pointed out that an identical question, in view of its great public importance has already been referred by the honble supreme court to its constitutional bench in the case of electronic corpn. of india ltd. v. cit : [1990]183itr43(sc) .7. as regards his second plea, he contended that as per the terms and conditions of the agreement entered into between the assessee-company and m/s dml, the amount was never payable by the assessee to m/s dml outside india. in this regard, he invited our attention to payment terms specified in article 4 of the said agreement (p. 50 of the assessees paper book) and pointed out that as per the said payment terms assessee was only to make the payment to government of india in india and as such it cannot be said that the said amount was ever payable by the assessee to m/s dml outside india. he also explained the entire modus operandi with reference to relevant documents placed at pp. 27 to 39 of his paper book to substantiate his contention that the amount of fees was never payable by the assessee to m/s dml outside india. he, therefore, contended that on both these counts, the tax was not deductible from the amount of fees for technical services and know-how provided by m/s oml under chapter xvii-b and there was no reason for the authorities below to disallow the said expenditure claimed by the assessee, by invoking provisions of section 40(a) which had no application in the case.8. the learned departmental representative, on the other hand, submitted that there is no dispute regarding the allowance of expenditure under section 35ab, but the assessee having failed to deduct the tax at source from the amount of such expenditure, the same have been specifically disallowed in accordance with the provisions of section 40(a). relying on the decision of the honble supreme court in the case of cit v. moon mills ltd. : [1966]59itr574(sc) , he contended that even if the expenditure is genuine, the same can be disallowed under the overriding provisions of section 40(a) and the principles of commercial expediency do not apply in respect of such specific disallowances. he further submitted that the project executed by the assessee was not entirely financed by the u.k. government and the assessee-company raised the funds by issuing bonds also. he, further, contended that the entire amount paid to m/s dml as a part of the said cost cannot be considered as met out of the grants given by the u.k. government. he further contended that m/s dml is a commercial establishment and there is no dispute about the fact that the services were provided by that company to the assessee-company on commercial basis as per the terms and conditions spelt out in the agreement. according to him, the fees for the said services was payable by the assessee and the same also stood paid as per the payment for terms agreed between the parties. in this regard, he contended that the manner and method of such payment cannot change the character of the transaction. he further submitted that m/s dml was not the party to the agreement entered into between indian government and u.k. government and it was just a contractor approved for supply of services. he further contended that even though the payment by the assessee to dml was routed through government of india in terms of an agreement, no concession as regards the non-deduction of tax at source from such payment was given in the said agreement. he, therefore, contended that the assessee having clearly failed to deduct tax at source from the payment of fees to dml, the authorities below were fully justified in invoking the provision of section 40(b) and in disallowing the relevant expenditure. he also contended that the learned counsel for the assessee has raised various new contentions before the tribunal in support of assessees case and the same having not been put forth before the authorities below, the matter may be restored back to the assessing officer in order to give him an opportunity to consider these contentions.9. the learned counsel for the assessee clarified that the contentions raised by him are on legal aspects and all the relevant facts being available on record, the same may be considered by the tribunal. he also contended that the amount of fees was paid by the crown agents to dml directly from the funds appropriated by the u.k. government out of the grant amount and, therefore, it was impossible for the assessee having no control over the said payments whatsoever, to deduct the tax at source. he further contended that the decision of the honble supreme court : [1966]59itr574(sc) (supra) cited by the learned departmental representative is not applicable in this case since the assessee has challenged the applicability of section 40(a) itself in the facts and circumstances of the case.10. we have considered the rival submissions in the light of material available on record and precedent relied upon at the bar. it is observed that the assessee-company claimed 1/6th of the amount paid as lump sum fees for acquiring technical know-how for the purpose of its business from m/s dml as business expenditure under section 35ab. it is also observed that the allowability of the said expenditure under section 35ab has not been disputed by the authorities below and the claim of the assessee on this count has been disallowed specifically under section 40(a) for assessees failure to deduct and pay tax on the said amount under chapter xviib. in this regard, the learned counsel for the assessee has contended before us that the provisions of section 40(a) have no application in the assessees case for the reason that the fees for technical know-how was not chargeable under the income tax act, 1961, as per the provisions of section 9(1)(vii) read with section 5 and also for the reason that the amount of said fees was never payable by the assessee to m/s dml outside india. in this regard, the learned departmental representative has contended, inter alia, that these contentions now raised by the learned counsel for the assessee before the tribunal were not raised before the authorities below and, therefore, the same should not be entertained. we, however, find that these new contentions raised by the learned counsel for the assessee relate to the legal issues and considering that the facts for appreciating the same are available on record before us, we proceed to discuss and decide the issue raised before us in the light of the said contentions raised by the learned counsel for the assessee.11. to appreciate the contentions of the learned counsel for the assessee, it may be useful to refer to the relevant provisions of section 40(a) which are extracted below :'notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head 'profits and gains of business or profession.(a) in the case of any assessee(i) any interest (not being interest on a loan issued for public subscription before the 1-4-1938), royalty, fees for technical services or other sum chargeable under this act, which is payable outside india, on which tax has not been paid or deducted under chapter xvii-b.'the first contention of the learned counsel for the assessee is that the amount of fees for technical services was not chargeable under the income tax act, 1961, as per the provisions of section 9(1)(vii) read with sections 4 and 5. in this regard it is observed that the provisions relating to charge of income-tax are contained in section 4(1)fr of the income tax act which reads as under :'where any central act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions (including provisions for the levy of additional income-tax) of, this act in respect of the total income of the previous year of every person :provided that where by virtue of any provision of this act income-tax is to be charged in respect of the income of a period other than the previous year income-tax shall be charged accordingly.'from the perusal of the aforesaid provisions it is apparent that the income-tax is chargeable under the income tax act, 1961, being a central act, in respect of the total income of the relevant previous year and the scope of such total income in the case of a person who is a non-resident in india, which is relevant in the instant case, is defined in sub-section (2) of section 5 as follows :'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.12. as far as clause (a) of sub-section (2) of section 5 is concerned, it appears from the facts of the case that although an amount equivalent to fees paid by the crown agents to m/s dml was paid over by the assessee-company to the government of india, there is nothing on record to suggest/indicate that the said amount was received by the government of india on behalf of m/s dml inasmuch as the payments had already been made by the crown agents to m/s dml out of grants received from the u.k. government. as a matter of fact, the said amount received from the assessee-company was adjusted/reimbursed by the government of india in the form of budgetary and equity support provided to the assessee-company. it is thus clear that the fees for technical services was neither received nor was deemed to have been received in india during the year under consideration by or on behalf of m/s dml and this being the position, the same cannot be said to have covered in clause (a) of sub-section (2) of section 5.13. as regards the income deemed to accrue or arise in india, as envisaged in clause (b) of sub-section (2) of section 5 it is observed that the same is defined in section 9(1) and clause (vii) of the same, being relevant in the present case is extracted below :'the following incomes shall be deemed to accrue or arise in india :(vii) income by way of fees for technical services payable by(a) the government; or(b) a person who is a resident, except where the fees are payable in respect of services utilised in business or profession carried on by such person outside india; or(c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in india or for the purposes of making or earning any income from any source in india.'14. in the light of the aforesaid provisions, the learned counsel for the assessee has contended before us that the fees for technical services was never payable by the assessee or even by the government of india to m/s dml and, therefore, the same does not fall within the ambit of clause (vii) of section 9(1). in this context it is pertinent to find out whether the said fees was ever payable by the assessee to m/s dml and for this purpose, a useful reference can be made to the agreement entered into between the assessee-company and m/s dml, on 28-3-1987, article 3 of which relating to fees (para 3.1, 3.1.1. arid 3.1.2) being relevant in the present context is reproduced below :art. 3 : fees3.1 the total fees payable by the owner to the contractor for the entire scope of work and services covered in this contract shall be as specified hereunder :3.1.1.for phase-i as per art. 2.1 above : 3.1.1.1fee upto preparation of basic 4,111,284 engineering package as defined in annexure-i appendix-iii including partial payment of licence fees for know-how.plusdm 4,778,1283.1.1.2technical assistance fees during 132,600 preparation of firm cost estimates plusdm 177,822 (estimated on basis of 24 man months) 3.1.1.3total 3.1.1.1 + 3.1.1.2 4,243,884 plusdm 4,955,950(pounds sterling four million two hundred forty-three thousand eight hundred and eighty four only and dutch mark four million nine hundred fifty-five thousand nine hundred and fifty only.) .3.1.2for phase-ii as per art. 2.2 above : 3.1.2.1licence know-how and basic plus6,817,410 engineering fee for total implementation as defined in annexures-i and ii (this includes fee as per art. 3.1.1.1) dm 10,405,9363.1.2.2training-fee (125 man months as per plus213,700 art. 4.4) dm 283,5003.1.2.3technical assistance fees for plus2,235,750 supervision of firm cost estimates, dm 4,553,397 detailed engineering construction and commissioning including supervision of operation upto six months from start up prior to guarantee tests as per art. 4.3 read with clause 1.6 of annexure-i and 1,0 of annexure-ii hereof (estimated on the basis of 435 man months) (this includes the fee at art. 3.1.1.2. above). 3.1.2.4total fees (3.1.2.1 + 3.1.2.2 + 3.1.2.3) plus9,266,860 dm 15,242,833(pounds sterling nine million two hundred sixty-six thousand and eight hundred and sixty only and deutch mark fifteen million two hundred forty-two thousand and eight hundred thirty-three only.)15. a perusal of the above article reveals that the fees was payable by the owner i.e., the assessee-company to the contractor i.e., m/s dml for the entire scope of work and services covered in the said contract and phasewise details of the same were also clearly specified in the said agreement in para no. 3.1.1. it is thus evident that as per the terms and conditions of the said agreement. m/s dml was to provide the technical services to the assessee-company for which fees was payable by the assessee-company, although the said fees was ultimately paid to m/s dml by the crown agents out of the grants made available by the u.k. government and the assessee-company paid over the equivalent amount to government of india which was never meant for further transfer to m/s dml as per the manner and method of payment agreed by and between the concerned parties, we are of the opinion that the factual position which still remains unchanged is that the fees was payable by the assessee-company to m/s dml against the technical services which ultimately stood paid by the assessee-company to government of india on one hand and received by m/s dml from u.k. government through the crown agents on the other. in that view of the matter, we find no merits in the contention of the learned counsel for the assessee that the fees was never payable by the assessee-company to m/s dml and, therefore, the income from the same having not been deemed to accrue or arise in india within the meaning of section 9(1)(vii), was not chargeable under the income tax act, 1961. we, therefore, reject this contention of the learned counsel for the assessee and held that the liability in respect of fees for technical services provided by m/s dml to the assessee-company had actually accrued as per the terms and conditions of the agreement entered into by these two parties and this being the position, the said amount was chargeable under the income tax act, 1961, as per the provisions of section 9(1)(vii) read with sections 4 and 5.16. the learned counsel for the assessee has also contended that the recipient of the fees i.e., m/s dml as well as the person responsible for making the said payment i.e., crown agents, being the persons who are non-resident in india, the provisions of section 9(1)(vii), even though held to be applicable in the present context, would have extra-territorial operation and the parliament as per article 245 of the constitution is not empowered to enact law which operates extraterritorial. in this regard, we may observe that the tribunal is not right forum to raise the issue relating to the competence of parliament to enact the relevant provisions of law nor it is authorised to adjudicate upon the constitutional validity of the existing provisions of law already enacted by the parliament. in any case, a question involving identical issue has already been referred to its constitutional bench by the honble supreme court considering its great public importance in the case of electronic corpn. of india ltd. (supra) their lordships of honble supreme court have observed that for extending the operation of law to persons outside the territory of india, a nexus with something in india is necessary and we find that the existence of such nexus in the case on hand is very much evident from the facts of the case as well as the material available on record.17. as regards the other contention of the learned counsel for the assessee that the fees was not payable by the assessee-company to m/s dml outside india, we find that this contention of the assessee can be better appreciated in the light of the manner and method of settling the accounts agreed upon by the concerned parties as under :(1) the hzl project incharge certified the bills raised by m/s dml for services rendered by them and forwarded the same to the crown agents, u.k.(2) the crown agents being representative of oda of the u.k. government, released the payment from the amount of grant.(3) the crown agents intimated to the office of caaa full details regarding the payment made by them to m/s dml.(4) the office of the caaa sent a demand notice to the assessee-company requesting for deposit of amount paid by crown agents to m/s dml, in equivalent rupees.(5) on receipt of the demand from the office of the caaa, the assessee-company approached the ministry of mines, government of india for release of budgetary support.(6) on receipt of such request from the assessee-company, the ministry of mines, government of india released budgetary support to the assessee-company.(7) on receipt of budgetary support from ministry of mines, the assessee-company made a rupee payment to caaa to the extent of budgetary support received by them.18. from the perusal of the above, it is evident that the amount of fees for technical services was never payable by the assessee-company to m/s dml outside india. as already discussed, the liability towards fees payable by the assessee-company to m/s dml, did arise in pursuance of the agreement entered into between them, but because of the manner and method of payment agreed upon by and between the concerned parties under the peculiar facts and circumstances of the case, the same was never payable by the assessee-company to m/s dml outside india. we may note here that the learned departmental representative has not raised any material arguments before us to controvert the contentions raised by the learned counsel for the assessee in this regard. as such, considering all the facts and circumstances of the case, we find that the amount of fees for technical services was not payable by the assessee-company to m/s dml outside india and this being the position, we are of the opinion that there was no reason/basis to treat/consider the expenses claimed by the assessee in respect of the same as 'not deductible' by invoking the provisions of section 40(a). in that view of the matter, we hold that the learned commissioner (appeals) was not justified in confirming the disallowance made by the assessing officer on this count under section 40(a). his impugned order on this issue is, therefore, reversed and the assessing officer is directed to allow the claim of the assessee on this issue.19. in the result, this appeal of the assessee is allowed.

Judgment:
ORDER

P.M. Jagtap, A.M.

This appeal of the assessee is directed against the order of the learned Commissioner (Appeals), Udaipur, dated 18-11-1998.

2. The only issue arising out of this appeal relates to the disallowance of Rs. 4,22,37,000 claimed by the assessee under section 35AB of the Income Tax Act, being 1/6th of the expenditure incurred for acquisition of technical know-how, for the reason that no tax was deducted at source.

3. The relevant facts of the case giving rise to this appeal are that an agreement was entered into between the Government of India and the Government of United Kingdom called as 'UK-India HZL AID Arrangement, 1987' in terms of which the latter agreed to grant to the former aid and assistance for the development of a zinc and lead mining complex and smelter complex. For the purpose of disbursing the financial aid, the U.K. Government placed the funds with its agent M/s Crown Agents in U.K. The Government of India nominated the assessee vide letter No. 8(4)86-MET.2/Vol. III, dated 19-11-1988, for the setting up of an integrated project consisting of zinc-lead mines at Rampura Agucha and Lead Zinc Smelter at Chanderiya. The financing pattern of the project, inter alia, included U.K. Government grant-in-aid 73.30 million which was subsequently revised to 83.60 million. An amount of Rs. 300 crores was also garnered through issue of bonds for the purpose of meeting the project cost. In respect of the U.K. aid extended by the Government of India to the assessee, it was to account to the Government of India towards its utilisation in the form of equivalent counterpart rupee deposit payment to office of the Controller of Aid. Accounts and Audit (hereinafter referred to as the CAAA), Department of Economic Affairs, Ministry of Finance, on receipt of the budgetary support from Ministry of Mines. The relevant terms and conditions are more specifically and elaborately spelt out in the sanction letter. The assessee-company thus received benefit of technical know-how for use of the same in its business through the good offices of the Government of India for which payment was made as per the manner and method specified in the said sanction letter.

4. The project was executed in phases and a total sum equivalent Rs. 24.63 crores was paid by the Crown Agents in U.K. to M/s Davy Mackee (Stockton) Ltd., U.K. (hereinafter referred to as the DML) who provided basic engineering technology and know-how to the assessee-company for the commissioning of the lead zinc smelting plant at Chanderiya. These payments were made by the Crown Agents to M/s DML, out of the amount of grant made available to them by the U.K. Government towards their fees in respect of services provided to the assessee. As per the governments direction the assessee-company adjusted the equivalent amount paid by the Crown Agents to M/s DML in the form of budgetary and equity support to the Government of India, as per the procedure laid down in the terms and conditions specifically set out in the letter dated 13-3-1987, issued by the Under Secretary, Overseas Development Administration (QDA). The HZL Project Incharge certified the bills to the extent of expenditure incurred with reference to the technical know-how as per the basic engineering agreement and forwarded the same to Crown Agents, U.K. The Crown Agents being representative of the ODA of the U.K. Government in turn released the grant amount for making payments to M/s DML. Thereafter the Crown Agents intimated to the office of the CAAA, Government of India, full details regarding such payments released by them and thereafter the office of the CAAA sent a demand note to the assessee-company requesting for deposit of amount paid to M/s DML by the Crown Agents in equivalent rupees to the credit of Government of India. On receipt of such demand from the CAAA the assessee approached the Ministry of Mines for release of budgetary support and on receipt of the same, the assessee-company made rupee payment to CAAA, Government of India, of an amount equivalent to fees paid to M/s DML, by the Crown Agents for services provided in connection with the basic engineering technology and know-how for the commissioning of lead zinc smelter plant at Chanderiya. This amount being a lump sum consideration for acquiring technical know-how for the purposes of its business, the assessee-company claimed deduction under section 35AB in respect of 1/6th of the amount so paid in computing the profits and gains of the business for the year under consideration. The assessing officer, however, disallowed the claim of the assessee on this count under section 40(a) considering that the tax has not been deducted under Chapter XVII-B from the corresponding amount payable outside India. The matter was carried before the learned Commissioner (Appeals) who upheld the action of the assessing officer. Aggrieved by the same, the assessee is in appeal before us.

5. The learned counsel for the assessee submitted before us that the expenditure claimed by the assessee under section 35AB has been disallowed by the revenue authorities by invoking the provisions of section 40(a). He further submitted that as per said provisions, amount of interest, royalty, fees for technical services or other sum chargeable under the Income Tax Act, 1961, which is payable outside India is not deductible in computing the income under the head 'Profit and gains of business or profession' if tax has not been deducted by the assessee on the same under Chapter XVIIB. In this regard, he contended that the assessees case does not fall in the ambit of section 40(a) for two reasons, firstly the fees payable to M/s DML, for technical services was not chargeable under the Income Tax Act, 1961, and secondly, the amount of fees was not payable by the assessee to M/s DML, outside India.

6. As regards the chargeability of the said fees in the hands of M/s DML under the Income Tax Act, he contended that sections 4 and 5 are relevant in this regard and M/s DML being a non-resident, the scope of the income chargeable to tax is determined by sub-section (2) of section 5 which includes all income from whatever source derived that accrues or arise to a person in India during the relevant year. He further contended that the Income deemed to accrue or arise in India is defined in section 9 and the income by way of fees for technical services received by non-resident can be treated as income deemed to accrue or arise in India as per clause (vii) of sub-section (1) of that section only if the same is payable by a person who is a resident. In this regard, his contention was that the amount of fees for technical services was never payable by the assessee to M/s DML, a nonresident and, therefore, the said amount was not chargeable in its hands under the Income Tax Act, 1961. He also contended that the amount of fees in this case was received by M/s DML, from Crown Agents and both these parties being nonresident, the validity of application of section 9(1)(vii) of the Income Tax Act, 1961, to such transactions involving extra territorial operation is also in jeopardy in view of Article 245(2) of the Indian Constitution. In this regard, he pointed out that an identical question, in view of its great public importance has already been referred by the Honble Supreme Court to its Constitutional Bench in the case of Electronic Corpn. of India Ltd. v. CIT : [1990]183ITR43(SC) .

7. As regards his second plea, he contended that as per the terms and conditions of the agreement entered into between the assessee-company and M/s DML, the amount was never payable by the assessee to M/s DML outside India. In this regard, he invited our attention to payment terms specified in article 4 of the said agreement (p. 50 of the assessees paper book) and pointed out that as per the said payment terms assessee was only to make the payment to Government of India in India and as such it cannot be said that the said amount was ever payable by the assessee to M/s DML outside India. He also explained the entire modus operandi with reference to relevant documents placed at pp. 27 to 39 of his paper book to substantiate his contention that the amount of fees was never payable by the assessee to M/s DML outside India. He, therefore, contended that on both these counts, the tax was not deductible from the amount of fees for technical services and know-how provided by M/s OML under Chapter XVII-B and there was no reason for the authorities below to disallow the said expenditure claimed by the assessee, by invoking provisions of section 40(a) which had no application in the case.

8. The learned Departmental Representative, on the other hand, submitted that there is no dispute regarding the allowance of expenditure under section 35AB, but the assessee having failed to deduct the tax at source from the amount of such expenditure, the same have been specifically disallowed in accordance with the provisions of section 40(a). Relying on the decision of the Honble Supreme Court in the case of CIT v. Moon Mills Ltd. : [1966]59ITR574(SC) , he contended that even if the expenditure is genuine, the same can be disallowed under the overriding provisions of section 40(a) and the principles of commercial expediency do not apply in respect of such specific disallowances. He further submitted that the project executed by the assessee was not entirely financed by the U.K. Government and the assessee-company raised the funds by issuing bonds also. He, further, contended that the entire amount paid to M/s DML as a part of the said cost cannot be considered as met out of the grants given by the U.K. Government. He further contended that M/s DML is a commercial establishment and there is no dispute about the fact that the services were provided by that company to the assessee-company on commercial basis as per the terms and conditions spelt out in the agreement. According to him, the fees for the said services was payable by the assessee and the same also stood paid as per the payment for terms agreed between the parties. In this regard, he contended that the manner and method of such payment cannot change the character of the transaction. He further submitted that M/s DML was not the party to the agreement entered into between Indian Government and U.K. Government and it was just a contractor approved for supply of services. He further contended that even though the payment by the assessee to DML was routed through Government of India in terms of an agreement, no concession as regards the non-deduction of tax at source from such payment was given in the said agreement. He, therefore, contended that the assessee having clearly failed to deduct tax at source from the payment of fees to DML, the authorities below were fully justified in invoking the provision of section 40(b) and in disallowing the relevant expenditure. He also contended that the learned counsel for the assessee has raised various new contentions before the Tribunal in support of assessees case and the same having not been put forth before the authorities below, the matter may be restored back to the assessing officer in order to give him an opportunity to consider these contentions.

9. The learned counsel for the assessee clarified that the contentions raised by him are on legal aspects and all the relevant facts being available on record, the same may be considered by the Tribunal. He also contended that the amount of fees was paid by the Crown Agents to DML directly from the funds appropriated by the U.K. Government out of the grant amount and, therefore, it was impossible for the assessee having no control over the said payments whatsoever, to deduct the tax at source. He further contended that the decision of the Honble Supreme Court : [1966]59ITR574(SC) (supra) cited by the learned Departmental Representative is not applicable in this case since the assessee has challenged the applicability of section 40(a) itself in the facts and circumstances of the case.

10. We have considered the rival submissions in the light of material available on record and precedent relied upon at the Bar. It is observed that the assessee-company claimed 1/6th of the amount paid as lump sum fees for acquiring technical know-how for the purpose of its business from M/s DML as business expenditure under section 35AB. It is also observed that the allowability of the said expenditure under section 35AB has not been disputed by the authorities below and the claim of the assessee on this count has been disallowed specifically under section 40(a) for assessees failure to deduct and pay tax on the said amount under Chapter XVIIB. In this regard, the learned counsel for the assessee has contended before us that the provisions of section 40(a) have no application in the assessees case for the reason that the fees for technical know-how was not chargeable under the Income Tax Act, 1961, as per the provisions of section 9(1)(vii) read with section 5 and also for the reason that the amount of said fees was never payable by the assessee to M/s DML outside India. In this regard, the learned Departmental Representative has contended, inter alia, that these contentions now raised by the learned counsel for the assessee before the Tribunal were not raised before the authorities below and, therefore, the same should not be entertained. We, however, find that these new contentions raised by the learned counsel for the assessee relate to the legal issues and considering that the facts for appreciating the same are available on record before us, we proceed to discuss and decide the issue raised before us in the light of the said contentions raised by the learned counsel for the assessee.

11. To appreciate the contentions of the learned counsel for the assessee, it may be useful to refer to the relevant provisions of section 40(a) which are extracted below :

'Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head 'Profits and gains of business or profession.

(a) In the case of any assessee

(i) any interest (not being interest on a loan issued for public subscription before the 1-4-1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable outside India, on which tax has not been paid or deducted under Chapter XVII-B.'

The first contention of the learned counsel for the assessee is that the amount of fees for technical services was not chargeable under the Income Tax Act, 1961, as per the provisions of section 9(1)(vii) read with sections 4 and 5. In this regard it is observed that the provisions relating to charge of income-tax are contained in section 4(1)fr of the Income Tax Act which reads as under :

'Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions (including provisions for the levy of additional income-tax) of, this Act in respect of the total income of the previous year of every person :

Provided that where by virtue of any provision of this Act income-tax is to be charged in respect of the income of a period other than the previous year income-tax shall be charged accordingly.'

From the perusal of the aforesaid provisions it is apparent that the income-tax is chargeable under the Income Tax Act, 1961, being a Central Act, in respect of the total income of the relevant previous year and the scope of such total income in the case of a person who is a non-resident in India, which is relevant in the instant case, is defined in sub-section (2) of section 5 as follows :

'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.

12. As far as clause (a) of sub-section (2) of section 5 is concerned, it appears from the facts of the case that although an amount equivalent to fees paid by the Crown Agents to M/s DML was paid over by the assessee-company to the Government of India, there is nothing on record to suggest/indicate that the said amount was received by the Government of India on behalf of M/s DML inasmuch as the payments had already been made by the Crown Agents to M/s DML out of grants received from the U.K. Government. As a matter of fact, the said amount received from the assessee-company was adjusted/reimbursed by the Government of India in the form of budgetary and equity support provided to the assessee-company. It is thus clear that the fees for technical services was neither received nor was deemed to have been received in India during the year under consideration by or on behalf of M/s DML and this being the position, the same cannot be said to have covered in clause (a) of sub-section (2) of section 5.

13. As regards the income deemed to accrue or arise in India, as envisaged in clause (b) of sub-section (2) of section 5 it is observed that the same is defined in section 9(1) and clause (vii) of the same, being relevant in the present case is extracted below :

'The following incomes shall be deemed to accrue or arise in India :

(vii) income by way of fees for technical services payable by

(a) the Government; or

(b) a person who is a resident, except where the fees are payable in respect of services utilised in business or profession carried on by such person outside India; or

(c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India.'

14. In the light of the aforesaid provisions, the learned counsel for the assessee has contended before us that the fees for technical services was never payable by the assessee or even by the Government of India to M/s DML and, therefore, the same does not fall within the ambit of clause (vii) of section 9(1). In this context it is pertinent to find out whether the said fees was ever payable by the assessee to M/s DML and for this purpose, a useful reference can be made to the agreement entered into between the assessee-company and M/s DML, on 28-3-1987, article 3 of which relating to fees (para 3.1, 3.1.1. arid 3.1.2) being relevant in the present context is reproduced below :

ART. 3 : FEES

3.1

The total fees payable by the owner to the contractor for the entire scope of work and services covered in this contract shall be as specified hereunder :

3.1.1.

For Phase-I as per art. 2.1 above :

3.1.1.1

Fee upto preparation of Basic

4,111,284

Engineering package as defined in Annexure-I Appendix-III including partial payment of licence fees for know-how.

Plus

DM 4,778,128

3.1.1.2

Technical Assistance fees during

132,600

preparation of Firm Cost Estimates

Plus

DM 177,822

(estimated on basis of 24 man months)

3.1.1.3

Total 3.1.1.1 + 3.1.1.2

4,243,884

Plus

DM 4,955,950

(Pounds Sterling four million two hundred forty-three thousand eight hundred and eighty four only and Dutch Mark four million nine hundred fifty-five thousand nine hundred and fifty only.) .

3.1.2

For Phase-II as per art. 2.2 above :

3.1.2.1

Licence know-how and basic

Plus

6,817,410

engineering fee for total implementation as defined in Annexures-I and II (this includes fee as per art. 3.1.1.1)

DM 10,405,936

3.1.2.2

Training-fee (125 man months as per

Plus

213,700

art. 4.4)

DM 283,500

3.1.2.3

Technical Assistance fees for

Plus

2,235,750

supervision of Firm Cost Estimates,

DM 4,553,397

Detailed Engineering Construction and commissioning including supervision of operation upto six months from start up prior to guarantee tests as per art. 4.3 read with clause 1.6 of Annexure-I and 1,0 of Annexure-II hereof (estimated on the basis of 435 man months) (this includes the fee at art. 3.1.1.2. above).

3.1.2.4

Total fees (3.1.2.1 + 3.1.2.2 + 3.1.2.3)

Plus

9,266,860

DM 15,242,833

(Pounds Sterling nine million two hundred sixty-six thousand and eight hundred and sixty only and Deutch Mark fifteen million two hundred forty-two thousand and eight hundred thirty-three only.)

15. A perusal of the above article reveals that the fees was payable by the owner i.e., the assessee-company to the contractor i.e., M/s DML for the entire scope of work and services covered in the said contract and phasewise details of the same were also clearly specified in the said agreement in para No. 3.1.1. It is thus evident that as per the terms and conditions of the said agreement. M/s DML was to provide the technical services to the assessee-company for which fees was payable by the assessee-company, Although the said fees was ultimately paid to M/s DML by the Crown Agents out of the grants made available by the U.K. Government and the assessee-company paid over the equivalent amount to Government of India which was never meant for further transfer to M/s DML as per the manner and method of payment agreed by and between the concerned parties, we are of the opinion that the factual position which still remains unchanged is that the fees was payable by the assessee-company to M/s DML against the technical services which ultimately stood paid by the assessee-company to Government of India on one hand and received by M/s DML from U.K. Government through the Crown Agents on the other. In that view of the matter, we find no merits in the contention of the learned counsel for the assessee that the fees was never payable by the assessee-company to M/s DML and, therefore, the income from the same having not been deemed to accrue or arise in India within the meaning of section 9(1)(vii), was not chargeable under the Income Tax Act, 1961. We, therefore, reject this contention of the learned counsel for the assessee and held that the liability in respect of fees for technical services provided by M/s DML to the assessee-company had actually accrued as per the terms and conditions of the agreement entered into by these two parties and this being the position, the said amount was chargeable under the Income Tax Act, 1961, as per the provisions of section 9(1)(vii) read with sections 4 and 5.

16. The learned counsel for the assessee has also contended that the recipient of the fees i.e., M/s DML as well as the person responsible for making the said payment i.e., Crown Agents, being the persons who are non-resident in India, the provisions of section 9(1)(vii), even though held to be applicable in the present context, would have extra-territorial operation and the Parliament as per Article 245 of the Constitution is not empowered to enact law which operates extraterritorial. In this regard, we may observe that the Tribunal is not right forum to raise the issue relating to the competence of Parliament to enact the relevant provisions of law nor it is authorised to adjudicate upon the constitutional validity of the existing provisions of law already enacted by the Parliament. In any case, a question involving identical issue has already been referred to its Constitutional Bench by the Honble Supreme Court considering its great public importance in the case of Electronic Corpn. of India Ltd. (supra) their Lordships of Honble Supreme Court have observed that for extending the operation of law to persons outside the territory of India, a nexus with something in India is necessary and we find that the existence of such nexus in the case on hand is very much evident from the facts of the case as well as the material available on record.

17. As regards the other contention of the learned counsel for the assessee that the fees was not payable by the assessee-company to M/s DML outside India, we find that this contention of the assessee can be better appreciated in the light of the manner and method of settling the accounts agreed upon by the concerned parties as under :

(1) The HZL Project Incharge certified the bills raised by M/s DML for services rendered by them and forwarded the same to the Crown Agents, U.K.

(2) The Crown Agents being representative of ODA of the U.K. Government, released the payment from the amount of grant.

(3) The Crown Agents intimated to the office of CAAA full details regarding the payment made by them to M/s DML.

(4) The office of the CAAA sent a demand notice to the assessee-company requesting for deposit of amount paid by Crown Agents to M/s DML, in equivalent rupees.

(5) On receipt of the demand from the office of the CAAA, the assessee-company approached the Ministry of Mines, Government of India for release of budgetary support.

(6) On receipt of such request from the assessee-company, the Ministry of Mines, Government of India released budgetary support to the assessee-company.

(7) On receipt of budgetary support from Ministry of Mines, the assessee-company made a rupee payment to CAAA to the extent of budgetary support received by them.

18. From the perusal of the above, it is evident that the amount of fees for technical services was never payable by the assessee-company to M/s DML outside India. As already discussed, the liability towards fees payable by the assessee-company to M/s DML, did arise in pursuance of the agreement entered into between them, but because of the manner and method of payment agreed upon by and between the concerned parties under the peculiar facts and circumstances of the case, the same was never payable by the assessee-company to M/s DML outside India. We may note here that the learned Departmental Representative has not raised any material arguments before us to controvert the contentions raised by the learned counsel for the assessee in this regard. As such, considering all the facts and circumstances of the case, we find that the amount of fees for technical services was not payable by the assessee-company to M/s DML outside India and this being the position, we are of the opinion that there was no reason/basis to treat/consider the expenses claimed by the assessee in respect of the same as 'not deductible' by invoking the provisions of section 40(a). In that view of the matter, we hold that the learned Commissioner (Appeals) was not justified in confirming the disallowance made by the assessing officer on this count under section 40(a). His impugned order on this issue is, therefore, reversed and the assessing officer is directed to allow the claim of the assessee on this issue.

19. In the result, this appeal of the assessee is allowed.