TMI Blog1998 (8) TMI 49X X X X Extracts X X X X X X X X Extracts X X X X ..... ent should be determined with reference to the gross figure arrived at as above ?" The assessment years concerned are 1980-81 and 1981-82. The applicant-assessee is a non-resident company. It is incorporated in Indonesia and is a wholly owned subsidiary of Rope River Ltd. incorporated in Hongkong which is engaged in the business of undertaking rectification of different fertiliser plants throughout the world. It received certain amounts from FACT Ltd., Cochin Division, under a contract. The questions involved herein relate to the assessment of the said amount to tax under the Act. According to the assessee, the said amount is liable to be assessed under the Act treating it as business income whereas according to the assessing authority, it is liable to be assessed treating it as income falling under section 9(1)(vii) read with section 44D(b) of the Act. The assessing authority by annexures A-1 and A-2 orders treated the receipts accordingly and completed the assessment without allowing any deductions. The Appellate Assistant Commissioner of Income-tax as well as the Income-tax Appellate Tribunal dismissed the appeals filed by the assessee and confirmed the assessments. It is agai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amounts received by the assessee will squarely fall under the definition of fees for technical services in Explanation 2 and, therefore, the provisions of section 9(1)(vii) of the Act are attracted. In support of his submission, counsel referred to the agreement (annexure-D) and relied on the preamble and clauses 1.1, 1.2 and 1.3 under article 1 regarding employment clauses 2(1)(a) and (b) particularly and also clause (c), 2(2)(a) of article 2 regarding performance of time and further relied on article 6 in that regard. He further submitted that clause 2(1)(b) of article 2 clearly shows that the responsibility of purchase of the material and the installation of the same is that of the FACT and, therefore, it is evident that the construction or assembly, if any, is that of FACT only. With reference to clauses 1(1) and 1(3) of article 1 and clauses 2(1)(a) and 2(2)(a) counsel submitted that the responsibility of the assessee is only to render technical services in the form of advice and assistance in rectifying the defects in the existing plant. It is accordingly submitted that the services rendered by the assessee are purely technical services of the nature specified in Explanation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot arise." Absolutely no discussion is seen made by the assessing authority with reference to the agreement in the assessment order for 1980-81. But in the assessment order for 1981-82, it is seen that another assessing authority has considered the question with reference to the agreement and observed that the exemption from the definition contained in Explanation 2 is with regard to the consideration for construction, assembly, mining or like project. It is stated that the scope of work by Asian Development Services given in annexure-II to the agreement indicates that their role is purely to assist with design, inspection and supervision. The alterations that are necessary for the machinery already installed are to be carried out by the FACT, Cochin Division, itself and not by the Asian Development Services. No payment has been made to the assessee for construction, assembly, mining or like project. Therefore, according to the assessing authority, the assessee's claim that the fees received by the assessee are to be treated as a business receipt and that the income should be computed with reference to sections 28 to 43 cannot be accepted. It is further stated that the fee has be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d agreement. The assessee-company was engaged by the FACT for the purposes of rectifying the defects and the nature of the defect is mentioned in the preamble of the agreement, namely, NPK granulations plant at Ambalamedu, is not giving the designed performance and, therefore, the company intended to make necessary alterations and thereby bringing the plant to full production/designated performance. In order to rectify the defects in the NPK granulations plant and to bring the same to full production/designated performance, the company itself thought that alterations may be required. In order to find out as to what exactly are the defects, it may even be necessary to dismantle the whole plant and reassemble or reconstruct the same. As already stated, alterations are also contemplated in the agreement. But in order to determine the matter effectively and satisfactorily, it is necessary to ascertain as to whether in fact any such dismantling, reassembling or like project was done in the instant case. None of the authorities have considered the matter in that perspective also. As already stated, even all the terms of the agreement were not considered. Now we will deal with the conte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the work demands is vested in the assessee, of course, subject to approval by the company. Article 3 deals with technical advisers' personal supervision. Counsel laid particular emphasis on article 4 which deals with guarantees and also article 5 which deals with compliance with applicable laws and regulations. According to them, a reading of articles 3, 4 and 5 will clearly show the nature and the work undertaken by the assessee. Clause 5.2 of the agreement provides, it is stated, that the assessee shall assume complete responsibility for compliance with the provisions of all applicable laws relating to social security, workmen's compensation and unemployment, insurance or other measures for the protection of workers as may now be effective or hereafter be applicable to the services to be furnished by the assessee or by their sub-contractors, if any, and also that they shall have exclusive liability for the preparation and filing of reports required under such laws, and shall hold, the company harmless from any penalties imposed as a result of failure to comply with such laws. Added to this counsel relied on article 7 which provides for inspection of work by the company and arti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provides for the assessee to maintain all records connected with the execution of the project, as is evident from clause 7(C) of Schedule A and also from clause 2 regarding terms of payment in Schedule B. We do not find that the assessing authority or the appellate authority has considered any such documents while considering the question of applicability of section 9(1)(vii) of the Act with particular reference to Explanation 2 thereof. We also find that the Tribunal without adverting to any of those documents has entered a finding that there was neither any construction nor any assembly, that the work undertaken by the assessee is not remotely connected with construction and that there is no remote relation with the assembly. This factual finding, it would appear, was entered by the Tribunal purely on a consideration of the preamble to the agreement. No factual details were available on record to show the nature of the work actually done by the assessee in relation to the agreement. The above finding arrived at by the Tribunal without considering the aforesaid documents and simply relying on the preamble to the agreement can only be characterised as unreasonable and perverse. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hnical service was in connection with the construction, assembly or any like project taken by Chemtex. Whether the exclusion part of Explanation 2 would at all be attracted to the facts and circumstances of the present case would depend upon the nature of work for which those technicians had come to India and the particular nature of the work they did in India. Since no materials have been adduced before the Income-tax Officer in that regard and, consequently, the matter has not been considered from the said angle, it would be meet and proper for us to remit the matter to the Income-tax Officer with a direction that he would give liberty to the petitioner to adduce relevant evidence with regard to the nature of services rendered by the foreign technicians for which the payment in question is sought to be made and to find out whether it would come within the exclusion part of Explanation 2 to section 9(1)(vii) of the Income-tax Act. The Income-tax Officer, after giving opportunity to the petitioner and on consideration of the materials to be produced before him, would hear and decide the same in accordance with law." The above observations equally apply to the present case also. F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In the instant case, the entire amount received by the assessee has been treated as fees for technical services as provided under the Explanation to section 9(1)(vii) of the Act and by applying the provisions of section 44D, the entire amount was brought to tax by applying the provisions of section 115A of the Act. In such circumstances, according to learned counsel, there is no provision available under the Act for grossing up of the total income by applying the formula of 100/60. Counsel, therefore, submitted that in a case where the income is subjected to tax under section 9(1)(vii) of the Act read with section 44D there is no scope for applying the grossing up method and that the Income-tax Appellate Tribunal has committed a serious error in holding that the tax liability of the assessee had to be added for the purpose of arriving at the total income exigible to tax under the Act. Learned senior standing counsel appearing for the Revenue on the other hand, submitted that section 28(iv) is not the only provision under which the grossing up of income is permissible. According to him, even if the income sought to be taxed is not business income still section 115A of the Act ena ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be paid without any deductions for taxes or otherwise. 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. The Appellate Assistant Commissioner determined the income accruing to the non-resident and directed the Income-tax Officer to gross up the amount by adding the tax component. But the Tribunal held that the actual amount remitted should be taken as the total income and tax should be collected from the agent on that amount. The High Court on a reference held that under clause H of the agreement, there were no express words to the effect that the assessee had undertaken the liability to deduct tax on the income earned by the foreign company in India. But the said words must be deemed to be implicit in clause H. It was accordingly held that the proper course was to gross up the figures by adding the tax component to the actual amount remitted as held by the Appellate Assistant Commissioner. For arriving at the said conclusion, the court applied the method of grossing up adopted in CIT v. Superin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a non-resident pursuant to which amounts were paid to the non-resident, if the contract provides that tax liability, if any, in respect of the amounts so paid to the non-resident is to be borne by the resident company the assessee is bound to add the tax liability in his total income for the purpose of determining the tax liability of the non-resident. We, therefore, hold that the Appellate Tribunal was perfectly justified in holding that the amount of tax payable by the non-resident has to be added to the income remitted to the non-resident and the tax payable by the non-resident should be determined with reference to the gross figure arrived at as above. However in view of the fact that we are remanding the matter to the assessing authority to consider the question as to whether the various amounts received by the assessee under the contract will fall within Explanation 2 to section 9(1)(vii) of the Act with reference to the various documents and the terms of the contract and since a decision on the said question has a bearing on this question also, we are not answering the second question also, though we have laid down the principles regarding the method of grossing up. Accord ..... X X X X Extracts X X X X X X X X Extracts X X X X
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