TMI Blog1987 (10) TMI 98X X X X Extracts X X X X X X X X Extracts X X X X ..... come of Rs. 2,13,237 as the income of the assessment year 1982-83. But the IAC (Asstt.) proceeding on the basis of taxable receipt of Rs. 31,76,373 raised it to Rs. 25,33,718. 2. The main controversy in this appeal is what was the trading or taxable receipt of the appellant company. The Indian Company claimed that it was only 5 per cent of the gross or total expenditure incurred by it on behalf of the English Company. The appellant company contended that it was doing liaison work for the English Company for which it got remunerated by the payment of additional 5 per cent of the actual operating cost incurred in connection with the liaison work. The IAC (Asstt.) ignoring the finding of the earlier years, held that his trading or taxable receipt was the full amount of remittance consisting of actual operating cost plus addition 5 per cent for remuneration due to the appellant company for services rendered by it to the English Company. According to the IAC (Asstt.) the agreement defined 'service fee' as 'shall mean the annual fee payable by Rolls Royce Ltd., the English Company to the Rolls Royce India Ltd., the Indian Company, calculated and payable in accordance with clause (5) he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of the Act cannot also arise. The legal principle laid down in Tattersall's case has been followed in many Indian cases, a list of which is given below : (i) Addl. CIT v. Netal Krishana Sahgals (P.) Ltd. [1983] 141 ITR 681 (Delhi). (ii) Bengal Assam Investors Ltd. v. CIT [1983] 142 ITR 156 (Cal.). (iii) Lal Chand Gopal Das v. CIT [1963] 146 ITR 355 (All.). (iv) CIT v. A. V. M. Ltd. [1984] 48 ITR 324 (Mad.). 3. Even if there were some instances where expenditure was first incurred by us and thereafter reimbursed by Rolls-Royce Limited, U. K., such reimbursement of expenses cannot also be regarded as income against which claim for expenses might arise. This principle is well settled by the decision of the House of Lords in Owen v. Pook (Inspector of Taxes) [1969] 74 ITR 147. The Calcutta High Court has also held likewise in CIT v. Dunlop Rubber Co. Ltd. [1983] 142 ITR 493. The point made in this regard in the earlier note is, however, not relevant as, in fact, there has not indeed been any reimbursement of revenue expenses during the relevant previous year. All revenue expenses incurred by us during the year ending31 December 1981were, in fact, met by us out of advan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... brought out in the preamble above. It was emphasised by him that the main object in bringing into existence the RR India, the appellant company, was only to sub-serve and fulfil the need of the English Company for ensuring market support and availing commercial information. The agreement defined the obligation of RR India in clause (2), reproduced below : "Duties of RR India RR India will carry out the following duties to such extent as Rolls-Royce may require from time to time : (i) To obtain and report to Rolls-Royce on a regular basis such marketing information as in considered to be relevant to Rolls-Royce's interests. (ii) To disseminate such marketing and commercial information relating to Rolls-Royce may require. (iii) To provide administrative and secretarial assistance locally for the Service Representatives deployed in the Territory. (iv) To provide a liaison service between Rolls-Royce and relevant department of the Government of India and other customers of Rolls-Royce in the Territory in all matters of supply of products and services. (v) To monitor the effectiveness of Rolls-Royce's commercial advisers and to report regularly thereon. (vi) To look a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RRI in the territories of India, Bangladesh, Nepal, Sri Lanka, and Bhutan is 5 per cent of the total expenses of RRI (including depreciation) incurred on behalf of RR in connection with the provision of the said services, the entire expenditure incurred on this account by RRI being reimbursed by RR and it has always been so intended between the parties hereto and always so understood." In light of the aforesaid it was asserted by Mr. R. Ganesan, that there was no possibility of treating the 105 per cent of the expenditure-the actual operating cost plus 5 per cent of the remuneration as the taxable receipt of the appellant company. The learned counsel referred to a string of judicial pronouncements to support the aforesaid plea that the receipt of the company should be limited to only 5 per cent of the expenditure which was its remuneration and not the 105 per cent of the gross expenditure consisting of both actual operating cost and 5 per cent thereof as the remuneration which were fully reimbursed by the English Company. 9. Learned Departmental Representative on the other hand made out, inter alia, two pleas-Firstly, the judicial pronouncements did not apply to the facts of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... defeated by a consideration of the fact that the two agreements-the one made on1-7-1979and the other on20-5-1980, were entered into by the two companies as principal to principal. Even a consideration of the engagement of the premises, occupies by the Indian Company and its personnel under contractual agreements between the Indian Company and the personnel cannot overshadow the paramount truth that the Indian Company as brought out on the preamble was created only to carry out the task appointed by the English Company. The English Company had brought the Indian Company into existence to sub-serve its need of a company doing liaison work inIndiaand surrounding countries for it. The Indian Company had no independent activity, no other business except and apart from the liaison work for the English Company. This conclusion is not only based on a consideration of the preamble but also the permission of the Reserve Bank ofIndiato allow the company to take a liaison office inIndia. The Reserve Bank ofIndiain its letter dated26-9-1979agreed to allow the Indian Company to establish a liaison office subject to the following stipulations : "We advise that we are agreeable to your establish ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diaas the agent of the English Company and bind and saddle the English company with liability under an agreement entered into by the Indian Company acting on its own and not under the authority and command of the English company. Clause (4) aimed at limiting the poser of the Indian Company to represent and to represent and saddle the English Company with liability. Otherwise it us not possible to think of it as an independent unit doing its business on its own irrespective of its agreement with the English Company. Its very existence as has been asserted by Mr. R. Ganesan was rooted in the need of the English Company to derive benefit from the liaison work inIndiaand surrounding countries performed by the Indian Company and we may add who would do no other trading or business. It could not under the inhibition placed by the permission accorded by the Reserve Bank ofIndiaundertake any liaison work for any one else. The English Company had not only undertaken to meet the full cost of expenditure incurred by the appellant company for carrying out its appointed task of doing the liaison work but also had met the cost of setting up a liaison office. No doubt, the Indian Company had enga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it on behalf of the English Company was to be deducted to arrive at the taxable profit and not by limiting the taxable receipt to 5 per cent remuneration paid by the English Company to the Indian Company under the agreement. Need we emphasise that settlement prescribed under clause (5) was not only to make advance payments but also to clear up the liability for expenditure by reimbursement of the expenditure. The English Company reimbursed every penny of the expenditure incurred by the appellant company. No one on these facts could hold that the Indian Company, a mere agent, was liable for the profit resulting from the transactions entered into by the agents on behalf of the principal which the latter refrains from repudiating. There is no instance when the English Company repudiated the liability for undertaking the expenditure by the Indian Company. A consideration of the remuneration payable to the Indian Company also rules out the possibility of taking the Expenditure incurred by the Indian Company on behalf of the English Company as its own expenditure. If the Indian Company was incurring the expenditure on its own where was the need for the English Company to remunerate it ? ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oss account in Rolls-Royce plc's books of account. 2. All monies advanced by Rolls-Royce plc to Rolls-Royce India Limited are for the purposes of defraying operational costs. Any unexpanded advances held by Rolls-Royce India Limited are refundable to Rolls-Royce plc and are recorded as recoverable from Rolls-Royce India Limited in the books of account of Rolls-Royce plc." What is the true purport of the agreement is to be found out not only from interpretation of the terms but also the way in which the two parties to the agreement had understood the purport of the various stipulations of the agreement. It is the surest way to find out the true intention of the parties underlying the stipulations and provisions in the two agreements. It is not generally the case but there are occasions when the draftsman is not able to clothe the intention in suitable and proper language. Therefore, it becomes necessary to make out the true intention from the conduct and understanding of the parties as to what they had agreed to mean by from a certain stipulation inserted in the agreement. There is no room for doubt that taking into account the conduct and understanding of the two parties, only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was a case of clarifying the intention of the parties which they felt was obscure in the language of clause (5). No offence could be possibly taken to the memorandum on the ground that it was an afterthought. It was not. Memorandum had been executed long before the IAC had started making the assessment for the year in issue overruling the finding of his predecessor incorporated in the assessment for the preceding year 1980-81. 14. Therefore, whatever way we took at the issue, whether from the object for realising which the appellant Indian Company had been created or from the nature of its duties or obligations imposed under the agreement or from the limitations placed on its authority to represent the English Company or by the limitations placed on the activity of the Indian Company by the agreement as well as the permission of the Reserve Bank of India to enable it to set up a liaison office in New Delhi or from the consideration that the cost of setting up of liaison office was met by the English Company in full or from the interpretation of the two agreements or from the understanding of the respective parties about the true purport of the relevant stipulations or from the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... repairs and owners of aero-engines, motor cars and carriages, cabs, omnibuses, wagons, carts, cycles, ships, boats, and other marine vessels, aeroplanes, airships, and all other land, sea, or air carriages and conveyances, in whatsoever manner and by whatsoever powers the same may be propelled or driven, and to buy, sell, let out on hire, or act as factor or agent for the purchase or sale of, or otherwise deal in aero-engines, motor cars and motor vehicles and boats of every description, aeroplanes, airships, and every kind of aircraft and component parts, fittings and accessories of all kinds for the same, and all articles and things used in the manufacture, maintenance and working thereof. (B) To carry on business as engineers, machinists, smiths, fitters, electricians, brass-founders, iron-founders, tube-makers, metalworkers, wiredrawers, rope-makers, rubber or rubber substitute manufacturers, oil-refiners, automobile store; garage and aerodrome keepers, storers, and suppliers of and dealers in petrol, paraffin, oils and other fluids, generators and distributors of electricity and suppliers of motive power of any description for all kinds of motor vehicles and boats. (C) To ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "2. Duties of RR India RR India will carry out the following duties to such extent as Rolls-Royce may require from time to time (i) To obtain and report to Rolls-Royce on a regular basis such marketing information as is considered to be relevant to Rolls-Royce's interests. (ii) To disseminate such marketing and commercial information relating to Rolls-Royce's products as Rolls-Royce may require. (iii) To provide administrative and secretarial assistance locally for the Service Representatives deployed in the Territory. (iv) To provide a liaison service between Rolls-Royce and relevant departments of the Government of India and other customers of Rolls-Royce in the Territory in all matters of supply of products and services. (v) To monitor the effectiveness of Rolls-Royce's commercial advisers and report regularly thereon. (vi) To look after Rolls-Royce visitors inIndiaand arrangements for stay and itinerary. 3.4 Clause 3 provided for the establishment of the offices of RRI and is extracted here as follows : "Offices of RR India (a) RR India shall as soon as practicable establishment a liaison office inNew Delhiand such other similar offices within the Territory ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f advance payments made to date during that Year of Account. (iii) Following verifications of each such quarterly statement Rolls-Royce will calculate the amount by which the Service Fee has been overpaid or underpaid and Rolls-Royce or RR India (as the case may be) will promptly make an adjusting payment to rectify such overpayment or underpayment" 3.7 Clause 6 pertained to the reimbursement of initial setting up costs and read as follows : "Setting up Costs All costs and expenses incurred by RR India (as authorised by Rolls-Royce prior to commitment either specifically or generally) in establishing a liaison office in New Delhi or otherwise in setting up operations shall be reimbursed by Rolls-Royce in full in Sterling in the UK as soon as practicable after such costs and expenses are incurred but in any event within eight weeks from date they are incurred and notified to Rolls-Royce." 4. On20-5-1980, a supplemental agreement was entered into between RR and RRI which purported to "reiterate and clarify the position with regard to the remuneration payable under the Formation Agreement by RR to RRI so as to put the same beyond any doubt." The relevant part read as below ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yearly basis) the following particulars/documents : (a) A certificate from the auditors to the effect that during the year no income was earned by/or accrued to the liaison office inIndia. (b) Details of remittances received from abroad duly supported by bank certificates. (c) Certified copy of the audited final accounts of the liaison office inIndia. (d) Annual report of the work done by the liaison office in India, stating therein the detail of activities taken up/services rendered in India and also actual export/import, if any, effected during the period in respect of which the office had rendered liaison services. 3. We further advise that maintenance of an account in the name of your Head Office in the books of the liaison office inIndiawill require prior permission of the Reserve Bank." 6.1 In accordance with the above permission the assessee opened a liaison office inIndia, and for that purpose, it leased out suitable building and also engaged staff. Total expenditure incurred during the accounting period under consideration on the maintenance of the staff and the office and other related subjects inIndiais aggregated to Rs. 29,76,865. In terms of pound, this cam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3,877 ------ 10,137 Add : Depreciation charged : 7,495 ------ 17,632 Converted to Indian currency @ Rs. 100=pound 5,782 3,04,946 Less : Depreciation : 91,709 -------- 2,13,240" 6.3 The working of the net surplus on account of foreign exchange amount to pound 3,877 appears at page 28 of the paper book. It is seen therefrom that pound 3,877 was credited to the Profit and Loss Account of 1981 and as is seen from the computation above, the said sum is part of pound 14,014, the other sum being pound 10,137, being 5 per cent of pound 2,02,743 (i.e., the aggregate revenue expenditure incurred by the assessee-company). There is apparently an account where these two figures appear separately, but the same has not been placed on record. The assessee is claiming depreciation separatel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the assessee on behalf of RR. (ii) That the assessee's only income was service commission computed at the rate of 5 per cent on the total expenses incurred and the assessee's accounts were made out on this basis. In support of it, reliance was placed on the copy of the P L A/c filed at page 17 of the paper book and on the agreement dated 20-5-1986, which according to the assessee, clarified the position as above is beyond any shadow of doubt. Attention was also invited to the assessment orders for assessment years 1980-81 and 1981-82, in which the above submission of the assessee was accepted. According to the assessee, there was no justification to depart from these assessment orders, while framing the present assessment." (2) That the monies, which the RR gave to RRI was in the nature of an 'advance', and the 'advance' did not bear the character of income. Reference was made to clause 5(b) of the Agreement dated1-7-1979in support of the above submission and to page 63 of the paper book containing account of RRI with Grindlays Bank, wherein the remittances from U. K. are deposited first and withdrawals are made subsequently from such deposits. The initial nature of rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hough Agreements dated 1-7-1979 and 20-5-1980 should be read together it has not to be forgotten that the latter agreement was not in substitution of the original agreement, but only in explanation and clarification of it, that it, in no way, affected or changed the character of the receipts of RRI from RR; they were trading receipts to begin with and they continued to be so even under the Agreement dated 20-5-1980, that the expenses incurred by RRI were its expenses, the employees were its employees and the leased premises were its, that the privity of contract existed between RRI and its employees and its lessor, that that RR had nothing to do with the employees or the lessor or within any other expenditure, for that matter, that the basic question to be asked in the present case was : Are the receipts in the course of business, and are they trading receipt ? Are the expenses incurred by the assessee in the course of its business, for carrying out its contractual obligations ? That the answers to the above questions were in the affirmative, that the amounts were received by the assessee in the normal course of its business and not as a bailee or as a trustee, that the expenses of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng that strikes one on perusal of the facts of this case is the corporate character of both RR and RRI. May be that RR is the holding company and RRI is it subsidiary but, for that reason, their separate entities are not lost. RRI is an independent judicial entity, having its own Memorandum, assets and business machinery. It entered into agreement with RR on1-7-1979in pursuance of its own object clause and to pursue its own business, which, to begin with, consisted of providing marketing support and commercial information service to RR. The obligations, which it undertook, in terms of the said contract, are listed in clause 2 of the agreement, which has been extracted in extenso above. In brief, they included collecting of commercial intelligence marketing information in India and its neighbouring countries for Rolls-Royce and to disseminate such marketing information in the market, as RR may like to be consumed by the Indian and other markets, to provide Secretarial and administrative assistance to the Service Representatives of RR in India, to provide liaison service between RR and its customers or potential customers regarding supply of RR's products and servicing and to look af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Agreement to "mean the annual fee payable by RR to RRI calculated and payable in accordance with clause 5 hereof". Sub-clause (a) of clause 5 provided the basis for calculating the service fee. According to it, "The service fee shall be calculated for each year of account at a fixed rate of 105 per cent of the Actual Operating Costs, incurred during the year of account to which the service fee relates". It is clear from the aforesaid wordings that the basis of calculation of service fee is the actual operating costs of RRI. If it is 100, the fee will be 105. In other words, the service fee was to be the amount which will compensate the RRI for all its actual operating costs cent per cent, and then leave it with a surplus of 5 per cent of the said cost. The agreement dated20-5-1980does not improve upon or alter the aforesaid implication of sub-clause (a). It also does not claim to do so. It is at pains to emphasise that it was only reiterating and clarifying the position, as already existed, vide sub clause (a). In the process, it divides the "service fee" into two parts, one being 100, i.e., actual operating cost which will be reimbursed in full to RRI, and the other being 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... already existed, and as in fact also it did so, it will not in my opinion, be correct to say that the quality of the payment of 105 per cent visualized under the contract underwent any change as a result of the agreement dated 20-5-1980. Earlier also 105 per cent of the actual operating costs were to be paid; later also, the same amount is to be paid. Its bifurcation into two parts is only with a view to emphasise that the RRI's net surplus will be 5 per cent of actual operating cost, the remaining 100 per cent being just sufficient to make the both ends of RRI meet. It was so earlier also and the Agreement dated20-5-1980did not improve the situation. 11.5 Sub-clause (b) of clause 5 spells out the mode of payment of service fee. It is to be paid, not at the end of the year of accounting, but in advance for a period of four weeks at one time. As the actual will be known only at the end of the year of accounting, so a system had to be derived to calculate the advance to be paid. It was, therefore, stipulated that RRI shall prepare a budget forecast of its actual operating cost, and the advance shall be paid on its basis. The discrepancy between the budget and the actual shall be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndiaare of the assessee and so are the employees. It is, again, the assessee which approached the Reserve Bank ofIndiafor permission to set up its office inIndia, and the RBI accorded its permission to the assessee "to your establishing a liaison office atNew Delhi". (See page 187 of the paper book). In the face of these hard facts, it is impossible to accept the proposition that the expenses incurred by the assessee inIndiawere not its expenses. It paid salary to its directors and employees, it paid rents to its lessors, and it paid audit fee to its auditors. It is because of this, that the auditors of the company clarified in note 2 to their report that profit before taxation was stated after charging Depreciation, Audit fee and expenses, and Directors' remuneration aggregating to pound 64,237. If these were not the assessee's expenses, where was the question of deducting them from the assessee's gross receipts or giving an audit note to the above effect ? Even in its return, the assessee claimed depreciation. If it had been reimbursed to the assessee, being the expenditure of RR, where was the occasion of claiming it as a deduction from the assessee's income which as per the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p with RR or its work. RR is the client of RRI and RRI's employees discharge their duties to RRI, when they provide contracts-for services to RRI's client. There can, therefore, be no question of the reimbursement of the salary of the salary of the employees of RRI by RR, for the employees of RRI have not been deputed, to it for rendering services to it. RR pays to RRI for the services rendered, and merely because the compassion of such payment is related to the actual operating costs of RRI, the payment does not become ipso facto the re-imbursement of the costs. That may be the result of it, that may be the measure of it, but the true nature of the payment unalterably remains the quid pro quo for the rendering of the contracts-for service by RRI to RR. The ratio of Duncan Bros. does not, therefore, apply to the facts of the present case. There is in fact no similarity of facts in the two cases. 13. This being so, the expenditure of the assessee has to be subjected to scrutiny by the ITO, and if any expenditure comes within mischief of the restrictive sections like 40(c)(iii), 40A(5) or rule 6D, the same will apply to the assessee's case. The Income-tax Act, 1961 makes no distinc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the payment is made by RR to RRI. This basic character of the payment cannot be camouflaged under any subtlety of legal drafting-it is the amount, which has been earned by RRI by dint of rendering of the services to RR in terms of clause 2 of the Agreement, and the amount so earned would be its trading receipt coming to it directly as a result of its carrying on its business. It is the endeavour of every businessman to earn so much as will reimburse it its costs and leave with it some surplus. This is what the assessee is also doing. The mode of the calculation of the quid pro quo with reference to its "actual operating costs" will not, in my opinion, change its basic character of its being a trading receipt. 14.3 The assessee had placed reliance on due up Dunlop Rubber Co. Ltd.'s case in support of the proposition that amounts received as reimbursement of expenditure were not revenue receipt. The decision in that case turned on its own peculiar facts, and it cannot be held to be laying done such a wide proposition as the assessee's learned counsel canvassed. The relevant facts as weighed with their Lordships of Calcutta High Court may be noted. The assessee, a non-resident Engli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red all expenses of this joint effort and did not purchase the information. (iv) That the expensed incurred by the non-resident were far more than it realized from its subsidiaries and there was no profit element in such realizations form the subsidiaries. In the context of these facts, it was held that the receipts were by way of recoupment of joint expenses incurred by teahouses on its won and the "subsidiaries" behalf and were not income. 14.5 It is not possible to record such a finding in the present case. There is on goutiness of as to on which joint expenses have been incurred by RR RRI, which have been reimbursed by RR to RRI. Here, there is an agreement between RR RRI in terms of which RRI renders services to RR, and the latter pays to RRI stipulated payments computed with reference to actual operating costs of RRI. The payment on the hands of RRI is thus clearly a trading receipt. There is nothing done jointly for which the other joint owner of the result of the joint effort might be reimbursing part of the cost. No assistance can, therefore, be derived by the assessee form the Dunlop Rubber Co. Ltd.'s case. 15. The assessee's case, in fact, stands neatly covered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee be accepted for arguments sake) for rendering services in terms of the contract dated 1-7-1979 read with that dated 20-5-1980, and, therefore, they will even on this concessional hypothesis, constitute business receipts in terms of the ration of the above case. 17. In the end, I sum up the above discussion by holding- "(i) That the assessee has a separate and independent entity form that of RR, and that the Agreement dated.1-7-1979 was entered into on principal to principal basis, and so there is no question of the assessee incurring its actual operating expenditure on behalf of RR as its agent. The assessee's expenditure is not RR's expenditure. It is its own expenditure. (ii) That the above positions is reflected from the accounts kept by the assessee showing its true state of affairs in terms of its obligation under the respective company law. (iii) That therefore, the various restrictive provisions of the Income-tax Act, 1961 (from sections 30 to 43A, including the relevant rules) apply to the assessee, and the assessee's counsel has put forward not single argument in support of the proposition that the above restrictive provision will not apply to it. i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. They are : (A) To carry on business as manufacturer, builders, designers repairers and owners of aero-engines, motor cars and carriages, cabs, omnibuses, wagons, carts, cycles, ships, boats, and other marine vessels, aeroplanes, airships, and all other land, sea or air carriages and conveyances, in whatsoever manner and by whatsoever powers the same may be propelled or driven, and to buy, sell, let out on hire, or act as factor or agent for the purchase or sale of, or otherwise deal in aero-engines, motor cars and motor vehicles and boats of every description, aeroplanes, airships, and every kind of aircraft and component parts, fittings and accessories of all kinds for the same, and all articles and things used in the manufacture, maintenance and working thereof. (B) To carry on business as engineers, machinists, smiths, fitters, electricians, brass-founders, iron-founder, tube-makers, metal workers, wiredrawers. Rope-makers, rubber or rubber substitute manufacturers, oil-refiners, automobile store, and garage and aerodrome keepers, stores, and suppliers of and dealers in petrol, paraffin, oils and other fluids, generators and distributors of electricity and suppliers of mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Clause 2 provided for the duties of the RRI as : RR Indian will carry out the following duties to such extent as Roll-Royce may required from time to time : (i) To obtain and report to Rolls-Royce on a regular basis such marketing information as is considered to be relevant to Rolls-Royce's interests. (ii) To disseminate such marketing and commercial information relating to Rolls-Royce's products as Rolls-Royce may require. (iii) To provide administrative and secretarial assistance locally for the service Representatives deployed in the Territory. (iv) To provide a liaison service between Rolls-Royce and relevant departments of the Government of India and other customers of Rolls-Royce' in the territory in all matters of supply of products and services. (v) To monitor the effectiveness of Rolls-Royce's commercial advisers and to report regularly thereon. (vi) To look after Rolls-Royce visitors inIndiaand arrangements for stay and itinerary. 6. Clause 3 provided for the establishment of the offices of RRD as : "Offices of RR India (a) RR India shall as soon as practicable establish a liaison office in New Delhi and such other similar offices within the Territo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AP 13 (as the case may be) together with the total of advance payments made to date during that year of Account. (iii) Following verification of each such quarterly statement Rolls-Royce will calculate the amount by which the services Fees has been overpaid or underpaid and Rolls-Royce or RR India (as the case may be) will promptly make an adjusting payment to rectify such overpayment or under payment.". 9. Then by clause 6, it is provided that the expenditure incurred by RRI will be reimbursed to it in full by RR in the following terms : "Setting-up Costs All costs and expenses incurred by RR India (as authorised by Rolls-Royce prior to commitment either specifically or generally) in establishing a liaison office in New Delhi or otherwise in setting up operations shall be reimbursed by Rolls-Royce in full in Sterling in the UK as soon as practicable after such costs and expenses are incurred but in any event within eight weeks form day they are incurred and notified to Rolls-Royce." 10. Another point to be noted, in this connection, is that on 20th of May, 1980 a supplementary agreement was entered into between RR and RRI, the purpose of which was stated to 'reiterate and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 31 of the Foreign Exchange Regulation Act, 1973; that the liaison office in India would furnish every year a certificate from the auditors to the effect that during the year no income was earned by or accruing to the liaison office in India, along with details of remittances received from abroad duly supported by the bank certificates. A certified copy of the audited final accounts by the liaison office in India and finally an annual report of the work bone by the liaison office in India stating therein the details of activities taken up, services rendered in India and also actual export and import, if any, effected during the period in respect of which the office had rendered liaison services should also the furnished. It also proposed that maintenance of account in the name of RR which was described in this letter as Head Office by the assessee, in the books of the liaison office inIndiawill be shown only after permission of the Reserve Bank ofIndiato do so. 12. After, thus, obtaining permission from the Reserve Bank ofIndia, of the assessee-company, RRI opened a liaison office inIndiaby taking a suitable building on lease. It also engaged the staff as per the requiremen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntire expenditure was reimbursed the amount received towards reimbursement was in the course of business carried on by the assessee-company and, therefore, constituted its trading receipt. Thus, the receipts including the commissions received and form those gross receipts, only the permissible expenditure under the Income-tax Act should be allowed and the balance should be taken as income. It is in this view of the interpretation of the Income-tax act, that the IAC (Asst.) computed the income of the assessee at Rs. 25,33,718, negativing the assessee's claim the expenditure incurred by it having been solely, entirely, for and on behalf of and at the behest of RR did not become the expenditure incurred by the assessee at all and, therefore, the question of treating remittances received by way of reimbursement of the expenditure to so incurred shout not and could not be regarded as trading receipts, much less, as income. Since, the assessee got only reimbursement of the expenditure incurred by it on behalf of RR there was an element of income in it. Since, the assessee did not claim any portion of that expenditure as allowable in compacting its income, the question of disallowing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and assented with the view of the revenue stating that the reimbursement of expenditure and the amount received by way of remittances constituted trading receipts of the assessee. 16. Before I go to the reasons that prevailed with my learned brothers to come to their respective conclusions, I may have to notice what prevailed with the CIT (A) in declining to accept the claim of the assessee. In paras 3.6 and 3.7 of his order, CIT (A) has mentioned as under : "3.6 As such it is clear that the amount paid by Rolls-Royce U. K. was in the form of service fee. This Service fee was fixed at 105 per cent of the actual operating cost incurred during the year of account to which the Service fee related. In the circumstances, I am of the view that entire amount received from Rolls-Royce U. K. by the appellant has in the from of ordinary receipts of service fee received by any businessman or professional or company, etc., for the services rendered by him/it. Hence, entire receipt minus expenses admissible under the IT Act, 1961 were liable to income-tax. 3.7 I further agree with the IAC (Asst.) that memorandum dated29-5-1980cannot change the nature of receipt in the hands of the appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as borne out not only by the preamble to the agreement but also by the permission granted by the Reserve Bank of India whereby the Reserve Bank of India had specifically restrained RRI form carrying on any business of whatever kind other than performing the liaison work as mentioned in the agreement, a copy of which was filed before it. He held that on a careful consideration of agreement entered into between RR and RRI, RR and agreed to reimburse the entire expenditure by RRI in carrying out the appointed tasks by RRI. He held that though clause 4 of the agreement between RRI and RR had prohibited RRI from acting as the agent of RR, having regard to the other clauses of the agreement and the purpose for which RRI was brought into existence, RRI was acting as de facto agent of RR thought not as de jure agent of RR. He, therefore, held that the expenditure incurred by RRI and reimbursed by RR was not at all the expenditure of RRI. The reference to 105 per cent of the actual cost incurred in the agreement must be understood in such a way, as to mean that what was to be paid to the RRI was only actual expenses incurred by it for which it received advance money from RR plus 5 per cent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed by the IAC (Asst.) and directed him to take the remuneration of 5 per cent of the actual operating cost as the taxable receipt of the assessee-company and proceed to make the assessment accordingly. On other grounds no finding was recorded as assessment was set aside. 19. The learned Accountant Member, however, took a different stand. After exhaustively referring to the material placed on record, which was considered by the learned Judicial Member also he held that he assessee-company was trying to hide something from the department. By reconstructing the profit and loss account on the basis of figures available on record, he came out the conclusion that the assessee made an attempt at presenting a wrong picture of the accounts. According to the learned Accountant Member, RRI is an independent juridical entity having its own identity and the business machinery. It is not the agent of RR either factually or legally. Though RRI undertook all the jobs, they were not for and on behalf of RR as its agent but they were for the benefit of RR in the course of carrying out the obligations cast upon by RR on RRI. The activities carried on did not become the activities of RR even though ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gone any change. He also drew support for his view that the expenditure incurred was that of RRI and not that of RR, from the use of the expression in the agreement "total of revenue expenditure incurred by RRI for performing its obligation". The "revenue expenditure incurred by RRI" according to the learned Accountant Member, meant that the expenditure was incurred by RRI as its own and not as that of RR, even though in the process, RR was amply benefited. It is only by incurring this expenditure that RRI was able to earn commission by 5 per cent. It would be, therefore, misleading to say that the expenditure was incurred by RRI on behalf of RR. Though the copy of the profit and loss account as prepared by the assessee-company was file before the Bench, the learned Accountant Member constructed a profit and loss account on the basis of figures furnished and arrived at the profits which was shown in the statement filed by the assessee and since, to the profit and loss account the entire remittances were credited, he drew support for his view that the entire receipts constituted the trading receipts of the assessee in the sense that 105 per cent in entirety became assessee's trading ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , one has necessarily to go to the agreement, which is on pages 42 to 49 of the paper book. I have already extracted above the relevant clauses form the order of the learned Accountant Member. RR, whose registered office was at London was selling engine products to Ireland and other markets throughout the world using commercial information and marketing support derived from various sources. So, for RR on order to maintain its sales and to push them up further, it is of paramount importance to obtain commercial information and marketing support without which it would not be able to sell its engine products, which are of complex nature. Another aspect of paramount importance to RR is that under the sale agreement it entered into with its customers, it had accepted the service and support obligations to customers and to licensees of the engine products. RR had been specifically therefore thought of a source for perennial supply of information as part of its business activity. Thus RRI was incorporated for this specific purpose of providing marketing support and commercial information service relating to the territory, to which it is assigned and also for carrying out the service suppo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the assessee-company RRI were paid huge salaries and they were engaged by RRI. I do not have to refer to the duties that they include obtaining and reporting to RR on a regular basis the marketing information as is considered relevant to RR's interest, to provide administrative and secretarial assistance for the service representatives deployed in the territory assigned to RRI and to provide liaison service between RR and the relevant departments for the Government of India and other customers and to look after the visitors of RR in India by making arrangements for their stay and itinerary. Their duties are basically not for the benefit of RRI but for and on behalf of RR. For this purpose it had to establish of office inIndia. Even though RRI was empowered to employ competent engineers and other suitably qualified personnel to carry out its duties, the immediately next clause provided, which is clause 3(c) that RR and RRI should make appropriate arrangements in the U. K. for such liaison staff, as may be necessary to carry out the activities of RRI with the activities and requirements of RR. Clause 4 comes in, to specifically state, that no relationship of agency existed but t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ackground. So understood, I am of the view that the expenditure incurred by RRI cannot be said to be the expenditure incurred by it on its own behalf. The agreement of20-5-1980entered into with a view to provide clarification cannot be interpreted in a manner otherwise than as how the parties to it understood it. Therefore, in my opinion, it is not very appropriate to substitute the expression "on behalf of by" the expression as was brought to be done by the learned Accountant Member "for the benefit of". This is to say the least, would amount to rewriting the agreement between the parties. It is, no doubt, true that both the parties are two independent legal entities yet for the purposes of business that these entities were carrying on, they are one and the same within the meaning of the expression "same business" as enunciated by the Supreme Court in the case of Produce Exchange Corpn. Ltd. v. CIT [1970] 77 ITR 739. Judged from this angle there can be no doubt that RRI is not free to spend any money by way of expenditure. This is also brought out more clearly from a close reading of the agreement entered into between RRI and RR. The furnishing of budget, approval by RR, payment o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to be reimbursed to RRI becomes clear from the reading of sub-clause of clause 5. Sub-clause (ii) of sub-clause (b) of clause 5 provided that within 10 weeks of the close of the last business day, RRI will submit to RR a statement showing the actual operating costs incurred up to that day together with the total advance payments made up to that day. Thus, sub clause (iii) provided that following that verification, the RR will calculate the amount by which service fee has been over-paid or under-paid and make necessary adjustments. This clearly proves that the actual operating costs incurred by RRI inIndiais to be reimbursed. When the actual operating cost was reimbursed to it, the question would arises whether that constituted the income of the assessee. In my opinion, it does not constitute income. It is like a businessman 'A' carrying on business in Delhi asking his friend, another businessman 'B', let us say in Trivandrum, to buy for him rail-tickets or air-tickets and to make hotel arrangements and also for transport and agreeing to reimburse the expenses incurred later. The amount spent by businessman 'B' inTrivandrumwas fully reimbursed to him by the businessman 'A' atDelhi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re paid against the expenditure incurred by them for maintaining the rubber plantation and producing the rubber. It would, thus, be seen that the expenditure incurred by the assessee was her own expenditure and the reimbursement made not to the full extent but partly, was, held to be revenue receipt. Therefore, the primary fact to be established before a reimbursement of expenditure can be held to be a revenue receipt is whether the expenditure incurred was the assessee's own expenditure and whether it was incurred in the course of its business. If the expenditure incurred was in the course of its business, then the reimbursement would be his income. In the example, I have given above, the expenditure incurred by the businessman inTrivandrumis neither his expenditure nor incurred in the course of his business and, therefore, reimbursement of expenditure cannot be said to be a trading receipt. I am of the opinion that the Supreme Court decision relied upon by the learned Accountant Member may apply to a case where the expenditure was incurred by the assessee on its own in the course of its business but not to a case where the expenditure was incurred not on its own but on behalf of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d any expenditure on its own and never incurred any part of the expenditure as a deduction. It is the Income-tax Officer, who is forcing upon the assessee that some expenditure was incurred by him or must be deemed to have claimed some expenditure and, therefore, a portion of it would be disallowing by applying the restrictive provisions of the Income-tax Act all because the assessee-company received some reimbursement of the expenditure incurred. This, in my opinion, is not the correct appreciation of the situation. The correct appreciation of the situation is as was done by the ITO in the earlier assessment years 1980-81 and 1981-82. No departure should have been made from that view. So when the requirement of the Income-tax Act, namely, incurring of expenditure by the assessee and claiming the same a deduction was not fulfilled and without these two basic conditions being fulfilled, it is not permissible in my view to proceed to disallow the expenditure. When the reimbursement was not in respect of the expenditure incurred by the assessee on its own like in V. S. S. V. Meenakshi Achi's case, the same cannot be considered as revenue receipt. Unless, the receipt is considered as r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t before me during the course of the hearing except to strongly defend the view taken by the learned Accountant Member. The learned Accountant Member proceeded on the assumption that expenditure incurred by RRI was its own and, therefore, the reimbursement of it was trading receipt and, therefore, when the income is to be computed for the purpose of the Income-tax Act, the entire 105 per cent should be taken as trading receipts and from that only such expenditure which could be allowed as a deduction under the Income-tax Act, be allowed. The basic postulate of the learned Accountant Member was that the expenditure incurred by RRI was its own expenditure. Here, I find it difficult to travel with him. I am inclined to agree with the view expressed by the learned Judicial Member. Though the revenue refused to treat the agreement of20th May, 1980as of any consequence in validity both the learned Members have proceeded on the assumption that the agreement of20th May, 1980was a valid agreement intended only to bring out explicit what was implicit in the agreement. I do not have to express any opinion on this agreement even though the learned D. R. had made a submission that this agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly pointed out by the learned Judicial Member, the assessee-company RRI did not incur any expenditure in the true sense of the expression "incur" but it spent the money belonging to RR for the business purpose of RR, as its agent. Therefore, it was to hold out as an agent of RR. But the reservation in clause 4 of the agreement became necessary for, RR, did not want to entangle itself by the commitment, intended or unintended made or to be made RRI. This is not to be construed the RRI is not acting as agent of RR. As I pointed out earlier, there will be an apparent repugnancy in the agreement if RRI is read as not to act as an agent of RR. Therefore, in my opinion the ruling of the Supreme Court cannot be applied to the facts of this case but the ruling of the Calcutta High Court does seem to apply. 26. For these reasons I am in agreement with the view expressed by the learned Judicial Member. The matter will now be placed before the regular Bench to dispose of the appeal in accordance with the opinion of the majority. 27. Before I conclude I would like to draw sustenance for my view that that amount would only be called expenditure which an assessee incurs on a permanent basis ..... X X X X Extracts X X X X X X X X Extracts X X X X
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