Citation Codes

Equivalent Citations

citation codes

Case Number

Case Referred Nos. 71 and 149 of 1990

Judges

S.V Maruthi
T. Ranga Rao, JJ.

Acts

Section 9(1)(vii) of the Income-tax Act (for short "the Act").
Section 2(24) defines "income". Section 2(24), Clause (iii),

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Smart Summary

Structured Summary of the Opinion

Factual and Procedural Background

This judgment disposes of two references (R.C. No. 71 of 1990 and R.C. No. 149 of 1990) by a common order because the questions referred were similar.

The assessee in both matters is a non-resident company named Clouth Gummiwerke ("NR"). National Mineral Development Corporation Limited ("NMDC"), an Indian company, filed the return as agent of NR. NMDC contracted NR to erect conveyor belts at the Bailadilla project. Under the contract NR was to depute two supervisors for two working days for belt changing and erection; a lump-sum charge (DM 33,000 in R.C. No. 71 and DM 32,542 in R.C. No. 149) was billed, and the engineers were to be provided free boarding, lodging, transport facilities and air fare.

The Income-tax Officer (ITO) held that the billed amounts were subject to taxation under Section 9(1)(vii) of the Income-tax Act and advised deduction of tax at source. The NMDC (as representative) paid tax amounts (stated as Rs. 1,19,450 and Rs. 1,20,674), remitted them, and filed returns claiming the amounts were not taxable. The Commissioner initially agreed with the assessee, but on appeal the Tribunal held the payments taxable under Section 9(1)(vii). At the instance of the assessee and the Revenue, the Tribunal referred specific questions to this Court concerning (a) whether the billed amounts were fees for technical services within Section 9(1)(vii), (b) whether incidental expenses (including air fare) should be included in taxable income, and (c) the correctness of grossing up income by calculating tax on tax until a zero difference is arrived at.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the billed amounts (Rs. 1,19,459 in R.C. No. 71 and Rs. 1,32,072 in R.C. No. 149 as stated in the references) were fees for technical services and would be deemed income under Section 9(1)(vii) of the Income-tax Act?
Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that only the net billed amounts (Rs. 1,19,459 / Rs. 1,32,072) could be treated as taxable and not the larger figures (Rs. 1,76,116 / Rs. 1,70,933) which included incidental expenses such as air fare?
Whether, on the facts and in the circumstances of the case, the Tribunal was correct in upholding the grossing up of income by calculating tax on tax until a zero difference is arrived at, rather than restricting grossing up to the tax on the net amount only?

Arguments of the Parties

Assessee's Arguments

The two supervisors deputed by the NR did not merely render supervisory or technical services but participated in construction of the plant; therefore, the payment should be regarded as consideration for construction (which is excluded from "fees for technical services" under Explanation 2 to Clause (vii) of Section 9(1)).
The assessee relied on this Court's judgment in CIT v. Superintending Engineer and on decisions of the Andhra Pradesh, Orissa and Delhi High Courts (including Frank Beaton v. CIT; CIT v. Barium Chemicals Ltd.; CIT v. American Consulting Corporation) to contend that the income cannot be grossed up (i.e., grossing up to include tax-on-tax was improper).

Revenue's Arguments

The sums billed (DM 33,000 and DM 32,542) are fees for technical services within Section 9(1)(vii) and therefore taxable.
Under Section 2(24)(iva) any sum paid by the representative assessee in respect of an obligation which, but for such payment, would have been paid by the beneficiary, should be added to the beneficiary's income; accordingly, tax paid by NMDC should be added to the income of the non-resident and tax computed by grossing up (including tax-on-tax) so that the true income is assessed. In support, Revenue relied on the Mysore High Court decision in Tokyo Shibaura Electric Co. Ltd. v. CIT.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
CIT v. Superintending Engineer (this Court)	Criticized the method of grossing up by working out "tax on tax" until a zero figure is arrived at; held that the Income-tax Officer's orders lacked guidance on the method used and that grossing up to tax-on-tax was not proper as applied in those cases.	The Court considered this authority but held that when Section 2(24)(iva) was not then in force the reasoning applied; however, with the specific provision (Section 2(24)(iva)) now in place the principle in that judgment is not applicable to the facts of the present case.
Tokyo Shibaura Electric Co. Ltd. v. CIT (Mysore High Court)	Permitted computation that effectively led to grossing up such that employer-paid tax becomes part of gross emoluments, illustrating how employer-paid tax may lead to further tax liability (example of tax-on-tax).	Revenue relied on this decision to support grossing up. The Court examined it but found that subsequent statutory change (Section 2(24)(iva)) alters the applicability of earlier conflicting authorities; the Court accepted that Section 2(24)(iva) supports adding such sums to income.
CIT v. American Consulting Corporation (Orissa High Court)	Held that the Income-tax Officer would be justified in adding to the net payment only the amount of tax payable by the non-resident and the tax deductible at source with reference to the gross figure (i.e., did not permit tax-on-tax grossing up).	Referred to in this Court's analysis of earlier conflicting authorities. The Court observed that such earlier principles were rendered in a pre-Section 2(24)(iva) context and are not applicable to the present facts in view of the express statutory provision.
Frank Beaton v. CIT; CIT v. Barium Chemicals Ltd.; CIT v. American Consulting Corporation (mentioned together)	These High Court decisions (Andhra Pradesh, Orissa and Delhi) had expressed the view that income cannot be grossed up (i.e., opposed tax-on-tax grossing up).	The Court noted these authorities but held that the insertion of Section 2(24)(iva) means the earlier principles are not applicable to the present case; the Court did not follow the non-grossing-up rule relied upon from these decisions for the facts at hand.

Court's Reasoning and Analysis

The Court's legal analysis proceeded in three main parts corresponding to the referred questions.

1. Whether the billed sums are "fees for technical services" under Section 9(1)(vii)

The Court examined Section 9(1)(vii) and Explanation 2 to Clause (vii). Explanation 2 defines "fees for technical services" as any consideration (including lump sum) for rendering managerial, technical or consultancy services, including provision of services of technical or other personnel, but expressly excludes consideration for construction, assembly, mining or like projects undertaken by the recipient or amounts chargeable under "Salaries".
The Court found that the two supervisors were deputed "only for the purpose of rendering technical services" and there was no disclosure that they were engaged in constructing the plant. Consequently, the billed amounts (DM 33,000 and DM 32,542) fell within the statutory definition of fees for technical services and were therefore deemed to accrue or arise in India under Section 9(1)(vii) and taxable.

2. Whether incidental expenses (air fare etc.) are taxable in the hands of the assessee

The Court considered Section 2(24), which defines "income" to include the value of any perquisite or profit in lieu of salary taxable under Sections 17(2) and 17(3).
Under Section 17(2)(iii)(c) the value of any benefit or amenity granted or provided free of cost or at concessional rate by an employer to an employee is a perquisite.
The Court concluded that the air fare provided by NMDC to the employees of the non-resident company falls within the meaning of "perquisite", and therefore constitutes income taxable under the Act.

3. Whether the technical fee should be grossed up (including tax-on-tax) or not

The Tribunal upheld grossing up of the technical fee. The Revenue urged that under Section 2(24)(iva) any sum paid by the representative assessee (NMDC) in respect of an obligation which would otherwise have been paid by the beneficiary (the non-resident) must be added to the beneficiary's income; thus the tax paid by NMDC should be added and tax computed by grossing up.
The assessee relied on earlier decisions (including this Court in CIT v. Superintending Engineer and various High Courts) that had restricted grossing up or disapproved of grossing up by calculating tax on tax until a zero figure is arrived at.
The Court reviewed those authorities. It recorded the criticism in CIT v. Superintending Engineer of an income-tax officer's method that may have worked out tax-on-tax until a "0" figure was reached and noted that other High Courts had favored adding only the tax payable by the non-resident (not tax-on-tax).
Crucially, the Court observed that those earlier judicial principles were laid down in a context where there was no express provision equivalent to Section 2(24)(iva). Because Section 2(24)(iva) is a specific statutory provision that directs inclusion of sums paid by a representative assessee in respect of obligations of the beneficiary, the Court held that the earlier contrary principles are not applicable to the facts of the present case.
On this statutory basis, the Court accepted the Revenue's contention and affirmed that the technical fee must be grossed up in the manner indicated (i.e., the tax element paid by the representative must be added to income for computation), thereby supporting the Tribunal's approach on grossing up.

Holding and Implications

The Court answered the referred questions as follows:

Question 1: Answered in the affirmative and against the assessee.
- The billed sums (DM 33,000 and DM 32,542 as billed by NR) are fees for technical services within the meaning of Section 9(1)(vii) and are taxable.

Question 2: Answered in the negative and against the assessee.
- The Court rejected the assessee's contention that only the net billed amount (excluding incidental expenses such as air fare) should be treated as taxable. The Court treated such incidental benefits (e.g., air fare provided by NMDC) as perquisites within Section 2(24) and Section 17(2)(iii)(c), and therefore taxable.

Question 3: Answered in the affirmative and against the assessee.
- The Court upheld the Tribunal's approach to grossing up by adding sums paid by the representative assessee (including the tax element) to the income of the non-resident and computing tax accordingly. The Court concluded that, in view of Section 2(24)(iva), earlier authorities disallowing grossing up are not applicable to the facts before it.

Direct effect: The reference was answered against the assessee on all three questions — the payments were held to be taxable fees for technical services; benefits such as air fare provided to the deputed personnel are taxable as perquisites; and grossing up (including the tax element paid by the representative assessee) is to be applied for assessment. The opinion bases these outcomes on the statutory provisions quoted and on the Court's analysis of prior decisions in the light of the insertion of Section 2(24)(iva).

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Clouth Gummiwerke Aktiengesellschaft v. Commissioner Of Income Tax (And Vice Versa)

1. These two RCs are disposed of by a common order as the questions referred are similar.

2. The following questions are referred by the Tribunal for the opinion of this court in R. C. No. 71 of 1990 :

"1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that Rs. 1,19,459 was fees for technical services and would be deemed as income under Section 9(1)(vii) ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that only Rs. 1,19,459 could be treated as taxable and not Rs. 1,76,116 which figure includes the incidental expenses in bringing the engineer to India ?

3. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in upholding the grossing up of income by calculating tax on tax until zero difference is arrived at and not merely restricting the grossing up of income to the tax on the net amount and no further ?"

3. In R.C. No. 149 of 1990, the following questions are referred :

"1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that Rs. 1,32,072 was fees for technical services and would be deemed as income under Section 9(1)(vii) ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that only Rs. 1,32,072 could be treated as taxable and not Rs. 1,70,933 which figure includes the incidental expenses in bringing the engineer to India ?

4. The facts in brief are as follows :

The assessee is a non-resident company by name Clouth Gummiwerke ("NR" for short). The return has been filed by National Mineral Development Corporation Limited ("NMDC" for short), an Indian company as the agent of NR. The NMDC entered into a contract with the NR for erecting certain conveyor belts at their Bailadilla project. The NR agreed to do the job of erection of conveyor belts through their engineers. As per the agreement, the NR was to depute two supervisors for a period of two working days for belt changing and erection of new belts, the lump sum amount of DM. 33,000 should be paid towards the charges, the engineers should be provided free boarding, lodging and transport facilities apart from air fare.

5. Accordingly, the NR carried out the erection and issued a bill for DM. 33,000 on October 20, 1978, in R.C. No. 71 of 1990 and DM. 32,542 in R.C. No. 149 of 1990. The Income-tax Officer held that the amounts of DM. 33,000 and DM. 32,542 would be subject to taxation and advised the assessee to deduct the tax. The assessee had paid a tax of Rs. 1,19,450 and Rs. 1,20,674, respectively. The amount was remitted thereafter. The amount of DM. 33,000 paid was understood to be free of Indian income-tax. The NMDC thereafter filed the return in which it was claimed that these amounts were not taxable. The Income-tax Officer held that it was taxable since the payments were covered by Section 9(1)(vii) of the Income-tax Act (for short "the Act"). The Commissioner agreed with the assessee. On appeal, the Tribunal held that the payments are taxable under Section 9(1)(vii) of the Act. However, at the instance of the assessee, question No. 1 set out in the earlier paragraph was referred for the opinion of this court.

6. The Income-tax Officer had brought to tax a sum of Rs. 1,76,116 which includes air fare, DA, etc. The Tribunal held that the air fare paid by the NMDC to the employees of the assessee-NR is not taxable for the purpose of income-tax. The Tribunal also held that the technical fees has to be grossed up for the purpose of income-tax. At the instance of the Revenue, the other two questions set out in the earlier paragraph were referred for the opinion of this court.

7. It is not disputed that the employees of the non-resident company were deputed to supervise the erection of the conveyor belts. Under Section 9(1) of the Act, the following incomes shall be deemed to accrue or arise in India :

"(i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India ..... (vii) income by way of fees for technical services payable by--(a) the Government ; or . . ."

8. Explanation 2 under Clause (vii) of this section says :

"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'."

9. From the above, it is clear that any fees paid for technical services is income within the meaning of Section 9 of the Act and, therefore, it is taxable. Under Explanation 2, as stated above, fee offered for technical services means any consideration paid for technical services and excludes consideration paid for any construction, assembling, mining or like project undertaken by the recipient. In other words, any fees paid for technical services is income, if it does not include any consideration paid for any construction undertaken by the recipient.

10. The argument of learned counsel for the NR company-assessee is that the two supervisors belonging to the NR company have not only to supervise erection of the plant but have to participate in the construction of the plant and, therefore, the activity taken up by the two supervisors includes construction and the amount paid towards technical services is not income for the purpose of Section 9 of the Act.

11. It is difficult to agree with the arguments of learned counsel for the assessee. The two supervisors were deputed only for the purpose of rendering technical services and nowhere is it disclosed that they were engaged for the purpose of constructing the plant. Therefore, the amounts of DM 33,000 and DM 32,542, respectively, are income under Section 9(1)(vii) of the Act and are taxable.

12. The next question is whether the expenditure incurred towards air tare is taxable in the hands of the assessee.

13. Section 2(24) defines "income". Section 2(24), Clause (iii), says "income" includes the value of any perquisite or profit in lieu of salary taxable under clauses (2) and (3) of section 17. Under Section 17(2)(iii)(c) of the Act the value of any benefit or amenity granted or provided free of cost or at concessional rate by an employer to an 'employee is a perquisite. Therefore, the air fare provided by the NMDC falls within the meaning of "perquisite" and, therefore, income and accordingly it is taxable.

14. As regards the third question, the Tribunal held that the technical fee has to be grossed up. The assessee relying on a judgment of this court in CIT v. Superintending Engineer contended that the Tribunal is wrong in grossing up of the technical fee. While learned counsel for the Revenue contended that under Section 2(24)(iva) of the Act, any sum paid by the representative assessee in respect of any obligation which, but for such payment, would have been paid by the beneficiary, is to be added to the income and, therefore, the tax paid by the NMDC is to be added to the income and tax is to be calculated by grossing up the said income. In support of this contention, he relied on the judgment of the Mysore High Court in Tokyo Shibaura Electric Co. Ltd. v. CIT . Counsel for the Revenue submitted if the fee paid for technical services is not grossed up by adding the tax element paid by the NMDC, the income would escape assessment.

15. Learned counsel for the assessee submitted that not only the Andhra Pradesh High Court, but also the Orissa and Delhi High Courts have expressed the view that the income cannot be grossed up and this court disagreed with the view expressed by the Mysore High Court in Tokyo Shibaura's case . Counsel also relied on a judgment of the Delhi High Court in Frank Beaton v. CIT ; CIT v. Barium Chemicals Ltd. and CIT v. American Consulting Corporation .

16. It is true that the Andhra Pradesh, Orissa and Delhi High Courts have taken the view that there cannot be any grossing up of the income. It is relevant to refer to the observations made by this court in CIT v. Superintending Engineer (supra) : The Bench consisting of Justice B.P. Jeevan Reddy (as he then was) and Justice Y.V. Anjaneyulu observed as follows (at p. 771) :

"The Income-tax Officer observed that, in all these cases, the Electricity Board agreed to pay all the tax liabilities of the non-resident companies arising on account of the supply of materials and the execution of the erection and commission of the equipment at Sileru. The Income-tax Officer, therefore, held that the net payments made had to be grossed up to determine the tax following the Mysore High Court in Tokyo Shibaura Electric Co. Ltd. v. CIT . The assessee has questioned the correctness of the grossing up in principle and the AAC as well as the Income-tax Appellate Tribunal upheld the view that the payments made had to be grossed up. We have perused the orders in all the three cases to find out on what basis the grossing up has been made. There is no guidance in the orders of the Income-tax Officer as to how the figure was arrived at. It is not known whether the Income-tax Officer adopted the system of grossing up by working out tax on tax until he arrived at a 'O' figure. If that was the basis followed, we do not think it as proper."

17. While holding the above, the learned judge relied on the judgment of the Orissa High Court in CIT v. American Consulting Corporation according to which 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 with reference to the gross figure arrived at as above.

18. While the Mysore High Court in Tokyo Shibaura's case held as follows (p. 289) :

"The computation of the gross amount of the remuneration varies according to the agreement or arrangement between the employer and the employee ; this will differ widely in detail. The simplest form would be one by which the employer paid the tax at the standard rate upon the net salary, in which case the employee would still be liable to tax on this additional emolument.

Example:

Salary ...

1,000 Tax thereon at 9s. 6d.

...

475

Gross emoluments ...

1,475 Tax at 9s. 6d. on 1,475 ...

700-12-6 Less : Tax paid by employer ...

475-0-0 Tax to be paid by employee subject to personal allowances Tax on 475 at 9s. 6d."

...

225-12-6

19. From the judgment of the Mysore High Court, it is clear that on the total salary the tax that was paid by the employer if added, the gross emoluments would be net salary paid plus the tax paid by the employer. On that amount, the total tax payable would be more. The difference between the actual tax paid by the employer and the tax actually payable is to be paid by the employee, While according to the judgment of this court in CIT v. Superintending Engineer the amount of tax payable by the non-resident should be added to the net payment and on that amount the tax deductible at

" source is to be determined. The said judgment was again followed by Justice B.P. Jeevan Reddy (as he then was) and Justice Y. Bhaskara Rao in C1T v. Barium Chemicals . It is also true that the Orissa High Court and the Delhi High Court have expressed a similar view. At this stage, we point out that at the time when the judgment of this court in CIT v. Super intending Engineer and the judgment of the Orissa High Court in CIT v. American Consulting Corporation were rendered, there was"

no express provision similar to Section 2(24) (iva) of the Act. Therefore, in view of the specific provision inserted under section 2(24) as clause (iva), we are of the view that the principle laid down in the judgments referred to above are not applicable to the facts of the present case.

20. In view of the above, it follows that the first question is answered in the affirmative and against the assessee ; question No. 2 is answered in the negative and against the assessee and question No. 3 is answered in the affirmative and against the assessee.

21. The reference is answered accordingly.

Clouth Gummiwerke Aktiengesellschaft v. Commissioner Of Income Tax (And Vice Versa)

Structured Summary of the Opinion

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Assessee's Arguments

Revenue's Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Clouth Gummiwerke Aktiengesellschaft v. Commissioner Of Income Tax (And Vice Versa)

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