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Commissioner Of Income-Tax v. Barium Chemicals Ltd.
Judgment Summary (extract from the provided opinion)
Factual and Procedural Background
The Income-tax Appellate Tribunal, Hyderabad referred a question under section 256(1) of the Income-tax Act, 1961. The assessee, Barium Chemicals Limited (an Indian company), entered into an agreement dated 9 July 1967 with a foreign company, Chemical and Technical Service Limited. Under that agreement the assessee agreed to remit specified amounts to the foreign company; clause H(1) provided for payments "without any deductions for taxes or otherwise."
During the previous year relevant to assessment year 1968–69, the assessee remitted certain amounts to the foreign company and did not deduct tax at source as required by section 195. The Income-tax Officer added a tax component and determined a taxable figure. On appeal, the Appellate Assistant Commissioner fixed the income accruing to the non-resident company at £2,000 and directed the Income-tax Officer to value the perquisite by treating the obligation to bear tax as a perquisite (grossing up by including the tax component).
The Department did not appeal against the quantification of income by the Appellate Assistant Commissioner; only the assessee filed an appeal. The Income-tax Appellate Tribunal concluded that, construing clause H, the assessee had not undertaken liability to pay tax and that the statutory liability of the non-resident continued; accordingly it held that the question of assessing the tax perquisite in the hands of the assessee as agent of the non-resident would not arise. The Tribunal's conclusion on that point was the specific question referred to this Court.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that the question of assessing the tax perquisite in the hands of the Indian company in its capacity as the agent of the non-resident company would not arise?
- Whether the amount to be treated as the total income of the non-resident should be "grossed up" by adding the tax component (i.e., the tax which ought to have been deducted under section 195) or whether the actual amount remitted (here, £2,000) should be taken as the total income and any tax collected from the agent only on that figure?
Arguments of the Parties
Assessee's Arguments (as presented in the opinion)
- The assessee's counsel submitted that the total income earned by the foreign company in India amounted to only £2,000.
- Although the assessee (as agent) failed to deduct tax at source, that failure only meant the assessee would be liable to pay tax due on £2,000; the tax liability should be limited to that amount.
- The assessee expressed willingness to pay the tax assessed on that £2,000 figure.
Department's Contentions (as recorded)
- The Department contended that the £2,000 remitted represented the net amount after what should have been a deduction of tax, and therefore the true total income must be higher.
- To reach the correct total income, the tax component that ought to have been deducted must be added to the actual remittance; in short, the income of the foreign company in India would be £2,000 plus the tax which should have been deducted previously (i.e., gross up).
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Tokyo Shibaura Electric Co. Ltd. v. CIT, [1964] 52 ITR 283 (Mysore High Court) | Where a contract clause provides that payments shall be made "without deductions for taxes ... which shall be assumed by" the agent, the agent has undertaken the liability to pay the tax and the tax component should be added (grossed up) to determine total income. | The Court relied on the principle in Tokyo Shibaura to support the construction that, even absent express words, a clause stating remittance "without any deductions for taxes" reasonably implies an undertaking by the agent to bear the tax; therefore grossing up is appropriate. |
| CIT v. Superintending Engineer, [1985] 152 ITR 753 (this Court) | Where a contractual covenant requires another party (e.g., a payer) to discharge the non-resident's income-tax liability, the Income-tax Officer is justified in adding to the net payment the amount of tax payable by the non-resident and in determining tax deductible at source with reference to the gross figure so arrived at. | The Court directed that authorities should adopt the method of grossing up adopted and accepted by this Court in this decision; it identified that method as the appropriate technique for computing the grossed-up figure and the deductible-at-source determination. |
Court's Reasoning and Analysis
The Court proceeded by construing clause H(1) of the contract, which expressly provided for payments "without any deductions for taxes or otherwise." The Court observed that clause H, on its face, conflicted with the statutory obligation in section 195, which requires any person remitting a sum chargeable under the Act to a non-resident to deduct tax at source.
The Court reasoned as follows:
- Section 195 imposes a statutory obligation to deduct tax at source when remitting sums to non-residents; parties cannot contract out of this statutory duty.
- Where an agreement provides for remittance "without any deductions for taxes," that provision should be read, reasonably and contextually, as importing an obligation on the payer to bear and discharge the tax component itself rather than as evidence that the payer was ignorant of the statute or intended to nullify it.
- The absence of explicit phrasing such as "which shall be assumed by" (found in the Tokyo Shibaura contract) or wording like clause 13 of the contract in CIT v. Superintending Engineer did not prevent the Court from holding that an undertaking to pay the tax could be implicit in clause H.
- On this basis, the Court concluded that the proper course is to "gross up" the income — i.e., determine the total income of the non-resident by adding the tax component which ought to have been deducted to the net amount actually remitted.
- The Court further noted a related procedural/method issue about the precise method of grossing up. Although that specific method question was not referred expressly, the Court directed that the authorities should adopt the grossing-up method used in CIT v. Superintending Engineer, [1985] 152 ITR 753, 771, so as to avoid further controversy.
Holding and Implications
The Court answered the referred question in the negative: it held that the Income-tax Appellate Tribunal was not justified in concluding that the question of assessing the tax perquisite in the hands of the Indian company (as agent of the non-resident) would not arise.
Holding: The Appellate Assistant Commissioner was correct in directing the Income-tax Officer to value the perquisite by adding the tax component to the actual amount remitted (i.e., to gross up the figure).
Implications and immediate consequences:
- The decision is in favour of the Revenue and against the assessee; the correct approach is to determine the non-resident's income by grossing up the remitted amount to include the tax which should have been deducted under section 195.
- The Court directed that authorities adopt the method of grossing up applied by this Court in CIT v. Superintending Engineer, [1985] 152 ITR 753, 771, to resolve the calculation methodology and to avoid further controversy on the point.
- No costs were awarded.
This summary is confined strictly to the material and reasoning contained in the provided opinion and does not add information beyond that text.
Jeevan Reddy, J.:— The Income-tax Appellate Tribunal, Hyderabad has referred the following question under section 256(1) of the Income-tax Act, 1961:
“Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that the question of assessing the tax perquisite in the hands of the Indian company in its capacity as the agent of the non-resident company would not arise?”
2. The facts relevant to the question are that the assessee-company, Barium Chemicals Limited, Ramavaram, entered into an agreement with a foreign company, viz., Chemical and Technical Service Limited, on July 9, 1967, whereunder, the assessee-company undertook to remit certain amounts to the foreign company from time to time. During the previous year relevant to the assessment year 1968-69, the assessee-company remitted certain amounts to the foreign company. No tax was deducted at source by the assessee-company as required under section 195 of the Income-tax Act. For that reason, the Income-tax Officer added the tax component and worked out the total taxable income at a particular figure. On appeal, the Appellate Assistant Commissioner determined the income accruing to the non-resident company at £ 2,000 and held “in the instant case, it is quite clear from the agreement that the appellant company had to bear the tax, if any, that may arise in respect of the payments made and to that extent, the benefit that arises to the non-resident firm, is a perquisite includible. As I have now fixed the total income accruing at £ 2,000, the Income-tax Officer is directed to value the perquisite on this basis (taking it as tax on tax and including this amount) and computing the business income and allow relief accordingly.” Against the order of the Appellate Assistant Commissioner quantifying the income, no appeal was preferred by the Department. Only the assesseecompany filed an appeal. The Income-tax Appellate Tribunal held that under clause ‘H’ of the contract between the parties, the assessee-company had not undertaken the liability to pay tax and, therefore, it is not possible to come to the conclusion, in the present case, that the payments made to the foreign company were free from income-tax. It observed further that the statutory liability accruing to the non-resident company continued to exist and that, therefore, the question of assessing the tax perquisite as directed by the Appellate Assistant Commissioner in the hands of the assessee (Indian company) in its capacity as the agent of the non-resident company would not arise.
3. Clause ‘H’ (1) of the contract between the parties reads thus:
“Phase I:
Irrevocable confirmed letter of credit on Barclays Bank Limited (Foreign Exchange Branch), London, for £ 15,950.00 OD payable as follows:
With order…£ 3,000.00 OD.
Three monthly payments of £ 3,000.00. OD payable four months after signing of the contract without any deductions for taxes or otherwise.”
4. A reading of the above clause shows that the assessee undertook to remit to the foreign company certain amounts “without any deductions for taxes or otherwise”. This contract is clearly in the teeth of section 195 of the Income-tax Act, which obligates every person paying any sum, chargeable under the provisions of the Act to a non-resident (foreign company) to deduct the tax on such amount at the prevailing rates.
5. Now, the question is at what figure should the income earned by the foreign company in this country be determined. According to the assessee's counsel, the total income earned by the foreign company in India is only £ 2,000. It is true, he says, that the agent of the foreign company (assessee) has failed to deduct the tax when paying the said amount, but, that only means that the assessee will now be liable to pay the tax due on £ 2,000 and that amount alone, it could be made liable for. The assessee-company, he says, is prepared to pay the tax assessed.
6. On the other hand, the contention of the Department is that £ 2,000 could be remitted only after deducting the tax from the total income. Therefore, to arrive at the total income earned by the foreign company in India, the tax component should be added to the actual amount remitted to the foreign company. In other words, the income earned by the foreign company in India would be £ 2,000 plus the tax which ought to have been deducted before the actual amount was remitted.
7. In other words, the question at issue is whether we should gross up the amount by adding the tax component or should we take the actual amount remitted as the total income and collect the tax from the agent on that amount.
8. A similar question arose before the Mysore High Court in Tokyo Shibaura Electric Co. Ltd. v. CIT, [1964] 52 ITR 283. There, the relevant clause between the Indian agent and the foreign company read as follows (p. 285):
“D. All payments to be made hereunder shall be made in the City of Tokyo, Japan, in any currency acceptable to the Japanese Government without deductions for taxes or other charges assessed in India, which shall be assumed by REMCO. (REMCO is the Indian company).”
9. The Mysore High Court held that under the aforesaid clause, the assessee has undertaken the liability to pay the tax due on the income earned by the foreign company in India and the tax component should be added and the total income should be arrived at by grossing it up.
10. Recently, a Bench of this court also had to deal with a similar clause in CIT v. Superintending Engineer, [1985] 152 ITR 753. There, there was an agreement between the Andhra Pradesh State Electricity Board and a foreign company and according to clause 13 of the agreement, the liability of the non-resident company to pay the income-tax on the profit earned by such non-resident company had to be discharged by the Electricity Board. Construing the said clause, this court held thus (p. 771):
“Based on this covenant, the Income-tax Officer would be justified in adding to the net payment made only the amount of tax payable by the non-resident and the tax deductible at source determined with reference to the gross figure arrived at as above.”
11. It is true that under clause H of the present contract, there are no express words to the effect that the assessee has undertaken the liability to deduct the tax on the income earned by the foreign company in India. But, in our opinion, the said words must be deemed to be implicit in clause H. The reason for our opinion is this:
Section 195 casts a statutory obligation upon every person in this country to deduct tax at the prevailing rates from out of any sum which is remitted to a non-resident/foreign company. It is not open to the parties to contract out of this statutory obligation. When the assessee in this case agreed to remit a particular amount without any deduction for taxes or otherwise, it would be reasonable to construe that the assessee has undertaken to pay taxes thereon by itself, It is not possible to agree that the assessee was not aware of the legal position and that in ignorance of it, it agreed to remit the entire income earned by the foreign company to it. A more reasonable way of understanding the clause would be to hold that the assessee-company undertook to discharge the tax obligation attaching to the income earned by the foreign company by itself. The mere absence of the words “which shall be assumed by REMCO” occurring in the contract considered in Tokyo Shibaura Electric Co. Ltd. v. CIT, [1964] 52 ITR 283 (Mys), or the absence of the words like those occurring in clause 13 of the contract considered in CIT v. Superintending Engineer, [1985] 152 ITR 753 (AP), should not matter. When the assessee agreed to remit a particular amount without deducting taxes, it must be understood that it agreed to bear and pay the tax component. In such a case, the proper course is to gross up the figure.
12. We, therefore, answer the question referred to us in the negative. We hold that the Income-tax Appellate Tribunal was not justified in its conclusion and that the Appellate Assistant Commissioner of Income-tax was right in directing the Income-tax Officer to value the perquisite by adding the tax component to the actual amount remitted. Another question has been agitated before us relating to the method of grossing up. This aspect has not been expressly referred to us. But, with a view to put an end to further controversy and also because there is already a decision of this court on this question, we are of the opinion that the authorities shall adopt the method of grossing up adopted and accepted by this court in CIT v. Superintending Engineer, [1985] 152 ITR 753, 771.
13. The question referred is answered accordingly, i.e, in favour of the Revenue and against the assessee. No costs.
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