TMI Blog1963 (7) TMI 81X X X X Extracts X X X X X X X X Extracts X X X X ..... tricals Manufacturing Co. Ltd. (hereinafter referred to as the agent company ) under which the latter undertook in India the manufacture of house service meters with the aid of the licences and technical information, data and experience of the principal company aforesaid on certain terms and conditions embodied therein. The following clauses therein relate to the remuneration payable to the principal company : Article VII.--A. In addition to the reimbursements and payments elsewhere provided for in this agreement, REMCO agrees to pay to TOSHIBA as consideration for the licences and for the information, data and experience to be furnished hereunder, an amount in any currency acceptable to the Japanese Government equivalent to three per cent. of the net sales billed in rupees by REMCO directly or on its behalf of all watthour meters, as defined herein, manufactured by REMCO with an annual minimum royalty of 9,000 U.S. dollars payable in two equal half yearly instalments of 4,500 U.S. dollars, each not later than sixty (60) days from the end of March and September of each calendar year... D. All payments to be made hereunder shall be made in the City of Tokyo, Japan, in any c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missioner accepted the assessee's contention and modified the assessments holding as follows: ........This is a case where the payment of remuneration of royalty is governed by the terms of a written agreement. The quantum of royalty payable to the non-resident company for each year has been specifically fixed and it has also been provided as to where and how the payment has to be made. The only condition imposed in this respect is that the quantum of royalty ascertained in the manner provided for in the agreement should be paid without any deduction for taxes which are to be borne by the resident agent, i.e., Remco. If taxes payable in India are to be borne by the resident agent, it is a payment by the resident on behalf of the nonresident in respect of income accrued to the latter in the taxable territories. The fact that the liability to pay taxes was shifted to the resident agent with the consent of the latter does not in any way alter the fact that the payment on account of taxes is a payment on behalf of the non-resident. To the extent the taxes are borne by the resident agent it is income which accrued to the non-resident. I am, therefore, of the opinion that the fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch taxes are paid on his behalf by some other person in respect of a payment to be received as income, that also would be the income of the assessee, we fail to see how it is only the single point tax calculated on the basis of multi-point tax. Under the agreement, a certain fixed amount calculated in a certain manner is guaranteed to the principal company. But all liability in respect of that amount by way of tax has been undertaken to be paid on his behalf by the other party to the agreement. It is not as if, as was contended for the assessee before us, that on the analogy of section 18, the payer was entitled to deduct only the single point tax from the payment due to a non-resident as income. Here is a case of an agreement which distinguishes the liability cast on the payer under section 18. Under the agreement here the payer has himself to bear the taxes. He is not entitled to recover the same by deduction or otherwise from the recipient as would be the case if the liability fell under section 18. Therefore, in our opinion, if the amount ultimately to reach the principal company was the amount calculated in the manner laid down in paragraph A of the agreement, then the amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Japanese Government without deductions for taxes or other charges assessed in India, which shall be assumed by REMCO... Hence, the real payment made to the assessee is not merely that provided under clause A, but to that must be added the benefit accrued to it under clause D. It was contended on behalf of the assessee that the assessee is only liable to pay income-tax on the royalty received by it under clause A. The Appellate Assistant Commissioner has rightly remarked that the fact that the liability to pay taxes was shifted to the resident agent with the consent of the latter does not in any way alter the fact that the payment on account of taxes is a payment on behalf of the non-resident. To the extent the taxes are borne by the resident agent it is income which accrued to the non-resident. This conclusion was not seriously attacked before us nor could it have been properly assailed. Therefore, we have to reject the contention advanced by Sri T.V. Viswanatha Iyer, the learned counsel for assessee, that the tax should have been levied only on the income realised by the assessee as per clause A of the agreement. But the above conclusion does not dispose of the refe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uestion and Hartland v. Diggines [1926] A.C. 289; 10 Tax Cas. 247 (H.L.)., where there was no such contract, the arrangement being simply customary. In Jaworski v. Institution of Polish Engineers in Great Britain Ltd.* there was a service agreement to pay the employee a salary of 20 nett per month without any deductions and taxes, which will be borne by the association . The employers deducted tax from the salary under section 1 of the Income Tax (Employments) Act, 1943, and the employee brought an action to recover the amounts deducted on the ground that the deductions were in breach of his service agreement. It was held by the Court of Appeal, reversing the decision of Finnemore J. in the court below, that on construction, the agreement was one to pay net remuneration at the stated figure together with such sum as was necessary to leave that figure available to the employee after the association had borne the taxes referable to him, and that, accordingly, the agreement was valid. Though it was not necessary to decide the point the court also expressed the view that the agreement was not void by reason of its infringing the general rule 28(2) since it was doubtful whether s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... repayment of income tax for the year 1939-40 on a similar basis, but the Inspector of Taxes, having discovered that she had been required to pay over to the trustees the amount of tax repaid for the previous years, objected to the claim, contending (inter alia) that her annuity was not an annuity of such a sum as after deduction of income tax left 100, but an annuity of 100 plus the tax (if any) liable to be ultimately borne by her in respect thereof, and that, as she was not liable to income tax (her income being under the exemption limit of 125), her annuity for the purposes of the repayment claim was 100 and no more. On appeal the General Commissioners held by a majority that she was entitled to repayment on the basis that her income was 100 grossed at the standard rate. The House of Lords held that the decision of the majority of the General Commissioners was correct. This decision undoubtedly helps the revenue. The only distinguishing feature, which, in our opinion, is not material--is that in the will left by the aunt of the assessee it was specifically mentioned that the assessee was entitled to annuity at the rate of 100 free of tax. The House of Lords he ..... X X X X Extracts X X X X X X X X Extracts X X X X
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