TMI Blog1987 (11) TMI 125X X X X Extracts X X X X X X X X Extracts X X X X ..... ring the warranty period in the working of these machineries. However, after the expiry of the warranty period, certain problems were cropped up. The N.M.D.C. wrote to DEMAG regarding these problems and DEMAG by their letter dated 23rd April, 1979 agreed to rectify the plants and machineries on certain conditions. They would send one section Engineer and he should be given free accommodation and allowance of Rs. 300 per day of his stay in India. Certain machineries were also sent for which rent of DM 60 per day will be charged. Air ticket to and fro must be furnished to the Engineer. The company should be paid at the rate of DM 565 per calendar day for the period when their erection Engineer would be in India. After getting the approval of the Government of India for the visit of the erection Engineer, an agreement was entered into N. M. D. C. with DEMAG on 2nd December, 1980. The conditions laid down in the offer by the DEMAG were practically accepted. one further condition to which N. M. D. C. agreed was that the income-tax liability if any would be borne by N. M. D. C. 3. Accordingly one Engineer was sent to India and he stayed for 44 days. At the end of the period after the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T v. Hindustan Shipyard Ltd. [1977] 109 ITR 158. He also pressed into services, the exemptions given under s. 10(6). 7. Assuming it is taxable Sri Murthy submitted that what could be taxed is only a technical fees paid at the rate of DM 565 per day. The other items cannot be considered as taxable receipts of the DEMAG. He also submitted that in any case grossing up of the tax liability that is calculating tax on tax is justified on the facts of the case. 8. Dr. Prasad for the department submitted that the payment is clearly covered by the Explanation 2 to section 9(1) (vii). He pointed out that this Explanation includes the provision of services of technical or other personnel. Therefore, nothing further need be looked into. He then pointed out that the requirement of repairing the machineries should not be construed as an ordinary maintenance. He pointed out that highly skilled Engineers were required and DEMAG itself had referred to it as consultation services in their letter dated 23-4-1979 they have stated "In the following we offer you our consultation by one of our erection Engineers for attending both electrical and mechanical works and, in addition, the letting of measu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provision of technical or other personnel. Normally, managerial or technical consultancy services would be done by a non-resident company by utilising the services of their Managers and Technicians. The Company has to act only through its employers or Directors. Thus, the human element in such consultancy services is already implied. But, the Legislature in their wisdom had decided to add the words in parenthesis and so the provision of services of technical or other personnel for any purpose would be treated as technical services, be it for a small repair work or a large reconstruction work. We, therefore, do not find any reason why the technical consultancy in respect of repair works cannot be considered as technical fees. 10. Further, as Dr. Prasad has pointed, both the DEMAG and N. M. D. C. had understood that there is consultancy work involved in such services. The quotations from the correspondence given above clearly show that DEMAG considered it as consultancy work. We, therefore, hold that the receipts are technical fees. 11. Sri Murthy had relied on the decision of the Andhra Pradesh High court in the case of Hindustan Shipyard Ltd. Particular stress had been lai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re which normally could be met by the non-resident company would amount to income by way of case for technical services. We must remember that the department is relying on a deeming provision for bringing to tax these amounts. In other words, but for section 9(1)(vii), these receipts may not be taxable. The correspondence was between N. M. D. C. and DEMAG by post and the payment is effected in West Germany and therefore following the ratio laid down by the Supreme Court in the case of Carborundum Co. v. CIT (1977) 108 ITR 335, normally it could be held that the income accrues and arises out of India and therefore not taxable in India. It is to get over such difficulties that the statute was amended by introduction of section 9(1) (vii). Since it is a deeming provision, the section has to be.very strictly construed. Only that part of the receipt which could be clearly stated to be technical fees can be brought to tax. The expenses which DEMAG would otherwise incur but for the contract with N. M. D. C. would be deduction against the gross receipts. Not a deduction against the technical fees receivable. What would have been brought to tax would be the gross receipts less the expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee with the net amount stipulated in the contract. The grossing up had been resorted to by the Income-tax Officer because the contract dated 2-12-1980 had stated that the income-tax liability if any would be borne by N. M. D. C. 17. The Commissioner (Appeals) had not specifically adverted to this issue but she must be presumed to have decided it against the assessee because she has dismissed the assessee's appeal. 18. Before us, it was submitted that grossing up in such cases is not correct and for this proposition reliance has been placed on the decision of the Orissa High Court in the case of CIT v. American Consulting Corpn. (1980) 123 ITR 513. Now in our opinion, the Income-tax Officer is justified in grossing up the fee for technical fees in order to arrive at the tax payable thereon. The contract for payment of technical fee stipulates that N. M. D. C. should bear income-tax payable on these receipts. In other words, what DEMAG should get is the technical fee stipulated in the contract without the liability of payment of income-tax. Therefore, the technical fee payable by N. M. D. C. is that figure which after payment of income-tax would leave DEMAG with same amount con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the tax liability undertaken to be borne by Hindustan Steel Ltd., was only the amount of tax actually due. In other words, the Tribunal held that the income of the assessee has to be arrived at simply by adding the amount of tax due to the income from the business and not by grossing up the net income what is known as tax on tax basis. Having said that the provisions of section 28(iv) would be applicable, the Tribunal proceeded to determine the extent of such benefit. At page 520 the High court had extracted the finding of the Tribunal. To condense the passage extracted, it is enough to say that the amount to be added would turn on whether the non-resident was maintaining accounts on cash basis or mercantile basis. The High court was of opinion that this finding of the Tribunal was within the powers vested in them and therefore they would not incline to take a different view. 21. From the above, it would be seen that the case cited does not support the assessee's contention that no grossing up at all should be attempted. The issue before the High court was whether the finding of the Tribunal that the grossing up should be done by merely adding the tax payable on the income is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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