1. The assessee is a limited company jointly promoted by the Government of Gujarat and the Gujarat State Fertilizer Co. Ltd., for the purpose of implementing a fertilizer complex at Narmada Nagar in Broach District. There are two main processing plants one for ammonia and another for urea, and there are various offsite plants dealing with the provisions of water, power, stems, etc. The company entered into various contracts with Linde of West Germany (Linde) for the ammonia plant and with Snamprogetti (S.P.) for the urea plant, the offsite plants being engineered and worked by Indian parties. Under the directions of KFW, the German Bank acting as financier, a consortium agreement was entered into between the assessee, Linde and S.P. for purpose of technical co-ordination between the various participants and, thereunder, Linde was appointed as consortium leader. The obligations of Linde for the above purpose were incorporated in a consortium agreement entered into between Linde, GSFC and SP on 18-10-1976 which in Annexure A thereof detailed the obligations and responsibilities of Linde. The consortium agreement was to supplement five different agreements entered into by the assessee with Linde prior to April 1976 and another agreement called the Ammonia Services Agreement, dated 10-5-1976. There were also four agreements for the urea plant dated 13-10-1976, subsequently modified on 19-10-1976, between the assessee and S.P. All these agreements were approved of by the Central Government. The details of the services to be rendered by the consortium leader, Linde, are contained in article 2 of the consortium service agreement. The following clauses of the consortium agreement and the consortium service agreement are relevant: 1.2. GSFC has selected LINDE AG for the award of the contract for the establishment of Ammonia Plant on the terms and conditions contained in the contracts concluded between GSFC and LINDE AG. 1.3. GSFC has selected SNAMPROGETTl for the award of the contract for establishment of Urea Plant on the terms and conditions contained in the contracts concluded between GSFC and SNAMPROGETTl.
1.5. The foreign exchange requirements of the Ammonia Plant are to be provided by KFW. 1.6. KFW required that the parties hereto shall form a Consortium to ensure necessary co-ordination and that various guarantees agreed to by LINDE AG and SNAMPROGETTl in their respective supply and Engineering Contracts are duly fulfilled.
3.1. The Consortium Leader has the full responsibility according to the conditions of this Consortium agreement, for the fulfilment of all process guarantees for the Ammonia and Urea Plants.
3.2. The Consortium Leader shall provide adequate, requisite and timely services as per Article 3.5 so as to enable the Ammonia Plant contractor and the Urea Plant Contractor to achieve the fulfilment of the performance guarantees of the Ammonia Plant and the Urea Plant.
5.1. The Consortium Leader shall be entitled to peruse the whole or part of such drawings, specifications, contracts, purchase orders, time-schedules, etc., issued by the PARTNERS, as may be activities as per Annexure I. The Consortium Leader shall also be entitled to inspect offices and workshops and check the progress of work, to perform his activities as per Annexure I. The partners shall be obliged without any cost to the Consortium Leader to comply expeditiously with all reasonable instructions the Consortium Leader may consider necessary for the correct execution of its activities in order to fulfil his obligations under this Consortium Agreement.
If the Consortium Leader is of the opinion that either of the partners is failing to comply with his contractual obligations as per the Ammonia and/or Urea Contracts and/or the Consortium Agreement, the Consortium Leader shall give notice to the Partners concerned requesting him to improve and/or correct the matters complained of within an agreed period.
In case of difference of opinion the matter will be mutually discussed between all Parties. If an agreed solution cannot be arrived at and the Consortium Leader's advice is not implemented, the Consortium Leader shall stand absolved of the liability arising out of such non-implementation.
5.2. The Consortium Leader shall be entitled to actively participate in the finalizing of the performance test procedure for the Urea Plant, for the purpose of co-ordination. Such procedure shall be mutually settled between the Parties. The technical part of contracts for offsites, affecting the Consortium Leader's responsibilities, shall be subject to the Consortium Leader's approval prior to execution.
5.4. The Consortium Leader shall decide when and where meetings between the Consortium Leader and the Partners shall take place. He shall also decide about the number and qualifications of the personnel the Consortium Leader uses to observe his obligations under this Consortium Agreement. It is estimated that at least 150 men/ months will be required for assignment outside the Consortium Leader's home office. For the Consortium Leader's home office activities, at least 10,000 hours are estimated to be required.
8.1. IMPORTED AND INDIGENOUS EQUIPMENT WITHIN THE COMBINED AMMONIA AND UREA PLANT BATTERY LIMITS The Consortium Leader shall be responsible for the safe, guaranteed performance of the Ammonia and Urea Plants within the combined Ammonia and Urea Plant Battery Limits as per Annexure III, operation jointly and delivering the product to specifications as detailed in the respective Ammonia and Urea Contracts.
8.1.3. The Consortium Leader shall be liable for coordination of Battery Limit between the Ammonia and Urea Plants as follows : 9.3. GSFC shall reimburse to the Consortium Leader taxes, if any, payable in India on the face and rates to be received as per Article 11. Any credit against tax in the Federal Republic of Germany which the Consortium Leader obtains as a result of tax payment in India will be passed on to GSFC. The Consortium Leader shall receive from GSFC a lump sum fee of DM 10,00,000 (Deutsche marks one million), which shall be paid to the Consortium Leader in Deutsche Marks into LINDE AG's account in the Federal Republic of Germany as follows : (2) 30%24 months after the effective date of the Consortium Agreement.
(3) 30% on the date of mechanical completion of the Ammonia Plant and Urea Plant subject to furnishing of performance Bond as per Article 10.1.
(4) 30% on the date when the Consortium Leader has fulfilled has obligations under this Consortium Agreement.
(a) Any engineering work not envisaged in the Ammonia Contract, which is carried out outside the Consortium Leader's home office shall be reimbursed by GSFC according to the rates and conditions agreed upon for LINDE's service of the expatriate personnel under the Ammonia Contract.
(b) Any engineering work not envisaged in the Ammonia Contract, which is carried out in the Consortium Leader's home office he shall be reimbursed by GSFC at the rate of DM 80 per hour. This hourly rate is subject to the same escalation as the rates for the expatriate personnel.
(c) The rates as per 11.1.2. shall be paid by GSFC monthly, in Deutsche Marks into LINDE AG's account in the Federal Republic of Germany. The hours spent by home office engineering shall be invoiced by the Consortium Leader on the basis of the respective computer records, describing the activities by Code numbers.
2.1. The CONSORTIUM LEADER has the full responsibility according to the conditions of the Consortium Agreement, for the fulfilment of all process Guarantees for the Ammonia-Urea Plants.
2.2. The Consortium Leader shall provide adequate, requisite and timely services as per Article 2.5 so as to enable the Ammonia Plant contractor and the Urea Plant contractor to achieve the fulfilment of the performance guarantees of the Ammonia Plant and the Urea Plant.
3.2. Owner shall pay to Consortium Leader for each calendar day of absence of his Expatriates from his place of residence.- for a directing engineer or directing chemist DM 632- for an engineer, erection inspector or chemist DM 579- for a master erector or technician DM 424 These daily rates cover the time actually worked. Overtime and hours worked on Sundays and holidays will not be separately invoiced, provided that total working time of 50 hours a week is not exceeded.
The services rendered by the Expatriates will be invoiced to Owner monthly. Payment of the respective invoices, net, without deduction, will have to be made, within four weeks from the date of invoice, by transfer of the amounts involved to the account of the Linde Aktiengesellschaft, Hollriegeskreuth with the Deutsche Bank Ag.
Munchen, or any other bank indicated by Consortium Leader.
2. Generally, it is stated that the business carried on by Linde consisted of providing consultancy services in chemical engineering for which the payments under the above clauses were to be made from time to time.
3. By its letters dated 2-11-1978, 7-12-1978 and 28-2-1979, the assessee company wrote to the ITO giving details of the agreement the company had with Linde and its obligation to make remittances to the non-resident company which, according to the assessee, did not have any permanent establishment in India. According to the assessee and in the light of article III of the Double Tax Avoidance Agreement between the Government of India and the Federal Republic of Germany, the nonresident was not assessable on any of the amounts received by him through the assessee. On this basis, the assessee requested the ITO to pass orders under Section 195(2) of the Income-tax Act, 1961 ('the Act'), and to issue a no-objection certificate in order to enable them to remit the amounts to Linde under the agreement as and when payable without any deduction of tax. The assessee also addressed a letter, dated 31-1-1979 to the Commissioner to advise the ITO to issue the no-objection certificate asked for. By his letters dated 1-3-1979 and 7-9-1979 the ITO requested the assessee to deduct and pay to the credit of the Government tax at the rate of 40 per cent on the gross amount payable by the assessee to Linde, before making any remittance to the foreign company. The letter dated 1-3-1979 referred to 8 items of payment the net of which came to DM 23,60,380. Grossing this up for a tax at 40 per cent, the ITO worked out the gross figure at DM 39,39,967 and demanded a tax payment of DM 15,73,587. Under the letter dated 7-9-1979 relating to 13 remittances, the net total of which came to DM 16,43,855, the ITO grossed up that figure to DM 27,39,759 and directed the assessee to make a tax deduction of DM 10,95,904.
4. The Commissioner also by his letter dated 23-2-1979 disposed of the assessee's claim as to the non-taxability of the non-resident company upholding the view taken by the ITO to deduct tax at 40 per cent of the amount of the remittances and pay it to the credit of the Government.
5. The assessee remitted a sum of Rs. 63,73,302 till the end of August 1969. On 25-8-1979, the assessee again asked the ITO for a no-objection certificate with regard to the further remittances. The ITO had given directions to deduct tax at the rate of 40 per cent on the gross amounts. At this stage the company filed a special civil application in the Gujarat High Court under articles 226 and 227 of the Constitution of India contending that the tax deducted at source amounting to Rs. 63,73,032 was tax illegally recovered from the assessee and should be refunded to him. It was also prayed that the company be permitted to make further remittances to Linde without any deduction of tax. The Gujarat High Court passed orders on the petition on 18-10-1979.
Regarding the claim for refund of the amount of Rs. 63,73,032 the Court directed that if the petitioner preferred an appeal or appeals under Section 248 of the Act, ITO would not object to that appeal or appeals on the ground of limitation and he will have no objection if the delay in filing each appeal or appeals were condoned. As regards the request for permission to make further remittances without deduction of tax the High Court held as follows : If the petitioner makes a representation to the Commissioner, Baroda, for not to enforce the payment under Exh. 'G' as well as in respect of the amount of the last item in Exh. 'F', viz., gross amount (in DM) 3,09,412.08 and income-tax at 40 per cent (in DM) 1,23,764.83, till the disposal of the above-mentioned appeal by the AAC or the Tribunal and/or by the High Court, if a reference is made to the High Court till the disposal of such reference by the High Court, the Commissioner, Baroda, will recommend such representation for acceptance by the Central Board of Direct Taxes provided the State Government gives guarantee to the satisfaction of the Commissioner, Baroda, within two weeks for the payment of the amount mentioned in Exh. 'G' and the amount of income-tax (in DM) 1,23,764.83 being the last item of Exh. 'F' and interest on the said amount at the rate of 12 per cent per annum from the date on which the said tax was deductible to the date on which the said tax is paid, in case, the petitioner is held liable to deduct and pay the amount of tax in the appeal and/or the proceedings mentioned hereinabove. On compliance with the above, the ITO shall give a no-objection certificate to the petitioner in respect of the aforesaid remittance.
Under the above terms, the company furnished a guarantee from the Gujarat Government to the extent of Rs. 100 lakhs till September 1980 of which a sum of Rs. 57.32 lakhs stood exhausted immediately thereafter.
6. The assessee-company filed three appeals before the Commissioner (Appeals). By this time, the tax deducted at source and paid to the Government amounted to Rs. 73,43,385. These appeals are numbered as IT Appeal Nos. 1350, 1351 and 1352 (Ahd.) of 1980. The first appeal covers the 7 items of the ITO's letter dated 1-3-1979 involving income-tax deducted on Rs. 63,73,032 equivalent to DM 14,49,825. Appeal Nos. 1351 and 1352 (Ahd) of 1980 cover a total amount of Rs. 15,24,498 equivalent to DM 3,25,150. The above amounts of tax deducted at source were paid on 5-3-1979, 12-4-1979, 6-8-1979, 7-1-1980 and 18-1-1980.
7. The Commissioner (Appeals) treated these appeals as arising from the letters of the ITO dated 1-3-1979 and 7-9-1979. Since the appeals were filed quite some time after the above dates, the Commissioner (Appeals) treated these appeals as delayed, but after hearing the assessee and the circumstances such as approach to the Commissioner, the writ petition before the High Court, etc., leading to the delay, he condoned the delay and admitted the appeals.
On the merits of the case, he held that the amounts payable by the assessee to Linde was prima facie a payment in the nature of fees for services rendered. Since the assessee was not an agent of the non-resident according to the Commissioner, he had no right to argue about the nature of the income received by the non-resident. Whether the receipts in his hands would be covered by any provisions such as article III of the Agreement for avoidance of double taxation between India and Federal Republic of Germany, would come for consideration only when the question of assessment of the non-resident himself was considered. According to the Commissioner, the authority to decide whether the benefit of this agreement was available to the non-resident was the ITO who would make an assessment on the non-resident.
Provisions of article III of the agreement, therefore, could not, in the view of the Commissioner, be invoked by the assessee ; whether it constituted commercial or industrial profits or would otherwise be exempt could also, therefore, not be agitated by the assessee in connection with his claim for non-deduction of taxes at source or the refund of the taxes already deducted. What was payable by the assessee to the non-resident was prima facie, a payment of an income nature being fees for service rendered. Unless what was payable was not income in the hands of the non-resident such as for instance, a capital receipt, etc., exempt from tax, in the view of the Commissioner (Appeals), the assessee could not claim any right under Section 195(2) not to deduct the taxes. Referring to the expression 'denies his liability' obtaining in Section 248, the Commissioner held that the assessee could not substantiate this claim. He, therefore, dismissed the appeals. It is thus that the matter is in appeal before us.
8. A preliminary objection from the side of the revenue with regard to the maintainability of the appeal was taken but having regard perhaps to the compromise before the High Court, this point was not pressed.
Even though as per the express terms of the compromise before the High Court the concession related only to limitation, in view of its express withdrawal, we are not going to the preliminary objection.
9. The learned Advocate General, appearing for the assessee, has referred to the letters from the ITO dated 1-3-1979 and 7-9-1979 and taken us through the process of setting up the fertilizer plant under the several agreements including the consortium agreements dated 18-10-1976 between Linde, GSFC and S.P. All these agreements were approved by the Government of India. We were also taken through the several clauses of these agreements, both consortium and service agreements, to come to the conclusion that the amounts paid under the agreements to Linde were clearly exempt from tax in the hands of the non-resident under article III of the double taxation avoidance agreement between India and the Federal German Republic. Linde does not have a permanent establishment in India. The learned Advocate General has challenged the correctness of the Commissioner's observations that the liability to tax of the non-resident can be determined only in his own assessment, as and when made and the assessee who is to deduct tax at source is not concerned with it. The obligation to deduct tax rests only on assessability as is made clear by the provisions of Section 195. If the assessee could come to the conclusion either under the provisions of the Act or under any agreement such as the double tax avoidance agreement in the present case that the amounts ultimately received by the non-resident are not taxable there was no obligation on him to deduct the tax. Both the ITO as well as the appellate authorities are bound to decide these questions and give clear directions as to the deductibility of tax at source.
10. On merits, it is pointed out that what Linde does is not personal services of any type but commercial and industrial activities, directed towards the organisation and working of a huge fertilizer factory involving an investment of more than Rs. 400 crores. This is clear from the terms of the agreement detailing the responsibilities of the consortium leader, the non-resident, and the partners, viz., the assessee and S.P. The annexures to the agreement which details the activities to be performed by the assessee also indicate that what he does is an integrated business activity consisting of several facets resulting in an ultimate profit or loss. The entire approach is an integrated one for the manufacture of fertilizers and requires proper technical co-ordination between the various parties both local and foreign. The task of the consortium leader was to see that not only were the various engineering activities carried on by the several parties, according to the specifications in their respective contracts but also to incorporate modifications, wherever necessary, to match with the technical standards or specifications and to ensure that individual plant, battery limit and process parameters match. Linde is also responsible as consortium leader for ensuring guarantee performance of all the plants operating jointly or continuously, though each agency is responsible for fulfilling its obligations and guaranteeing performance, for which it had to satisfy the condition that each and every part of the project is according to specifications and it has taken necessary steps to fulfil its obligations under the guaranteed performance.
11. It is alternatively contended that at any rate the receipts are of the nature of industrial profits. Linde is involved in an engineering activity of a highly sophisticated nature and of extensive type where what he receives is remuneration for labour done in what is purely an industrial process and activity. It is claimed further in the alternative that the receipts are not in the nature of royalty.
Reference is made to Section 9(1)(vi) of the Act and Explanation 2 thereto in this connection. It is also pointed out that without prejudice to the above, even assuming that the tax was deductible on the remittance, the ITO erred in directing deduction of tax at the rate of 40 per cent instead of 20 per cent prescribed in Section 2(b)(iii)(B)(1) of Part II of the First Schedule to the Finance Act, 1979. The Commissioner also erred in upholding the enhanced rate. As a matter of fact, on account of the grossing up the actual deduction of tax came to nearly 66 per cent of the amounts remitted and not even 40 per cent.
12. For the department stress is laid on the order of the Commissioner (Appeals). Referring to the provisions of Section 248, it is pointed out that the section would apply only where an assessee completely denies his liability. There was no provision for apportionment of the liability under Section 248. To clarify the scope of the expression 'denying the liability' reference is made to the decision of the Full Bench Allahabad High Court in the case of CIT v. Geeta Ram Kali Ram  121 ITR 708 where the decision of the Supreme Court in the case of CIT v. Kanpur Coal Syndicate  53 ITR 225 was referred to.
According to the learned counsel, Section 195(1) levies the charge.
Without reference to the person affected, it is not possible to fix the liability or chargeability to tax of any amount remitted. Taking us through the provisions of the double taxation agreement between the Government of India and the Federal Republic of Germany, the learned counsel has referred to the provisions of articles III, XII and XVI and the scope of the expression 'sum chargeable under this Act' obtained in Section 195(2). The question is as to who should decide chargeability to tax of the non-resident. Article XVIII had also to be considered.
Reference was made to the decision of Supreme Court in Aggarwal Chamber of Commerce Ltd. v. Ganpat Rai Hira Lal 13. The payment is made under clause 9.3 of the agreement. The rate of tax should, therefore, be as provided in Section 195. Under the provisions of Sections 198 and 199 of the Act the remittance to a non-resident and the tax payable to the Central Government on the same on behalf of the non-resident also constitutes a payment to the non-resident. This being so, according to the learned counsel, grossing up of the amount was mandatory, and the tax to be deducted should be also on the grossed amount and not on the actual amount remitted.
14. On the question of taxability itself, it is pointed out that the mere application of the double taxation avoidance agreement would not lead to non-chargeability. In the first place, these payments are for professional or management services. The assessee has not given the complete details of the activities of the non-resident in India and this being so it is not possible to even claim that there is no permanent establishment either. Reading the entire double tax avoidance agreement as a whole the payment made to the non-resident was clearly chargeable to tax. Royalties, management charges and remuneration for labour or personnel services do not come under the exemption provisions of article III. In the present case, what the non-resident received can in no sense be regarded as commercial or industrial profits.
15. There appears to be some confusion with regard to the obligation of the assessee under the Act to deduct tax and any right of appeal on this point accruing to him. The provisions of Section 195(1) and (2) are as under : 195. (1) Any person responsible for paying to a non-resident, not being a company, or to a company which is neither an Indian company nor a company which has made the prescribed arrangements for the declaration and payment of dividends within India, any interest, not being 'Interest on securities, or any other sum, not being dividends, chargeable under the provisions of this Act, shall, at the time of payment, unless he is himself liable to pay any income-tax thereon as an agent, deduct income-tax thereon at the rates in force : (2) Where the person responsible for paying any such sum chargeable under this Act (other than interest on securities, dividend and salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the Income-tax Officer to determine, by general or special order, the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under Sub-section (1) only on the proportion of the sum which is so chargeable.
Under Section 195(1) a person responsible for paying to a non-resident 'any other sum' chargeable under the provisions of the Act, is bound to deduct income-tax at the rates in force unless he himself is liable to pay tax thereon as an agent of the non-resident. Where he considers that the whole of such sum is not liable to charge in the case of the non-resident under Section 195(2), he could make an application to the ITO to decide the proportion of such sum so chargeable for the purpose of deduction of tax. It is not in dispute in the present case that the assessee is not an agent either by appointment by the non-resident or even a statutory agent appointed under the Act. The liability to deduct tax, therefore, subsists if the sum payable to the non-resident is chargeable under the provisions of the Act. What requires notice, however, is that neither under the provisions of Section 195(1) or (2) has the ITO a jurisdiction to make a demand on the assessee or any person responsible for making a payment to the recipient. Under Section 195(2) the assessee could make an application to the ITO to determine the proportion of the sum chargeable to income-tax. Under Section 195(1) he himself could deduct tax on the entire payment. The basis of the deduction is the chargeability of the same under the Act but under neither of the above sub-sections of Section 195 has the assessee any remedy if the ITO does not pass an order determining a proportion.
Section 246 of the Act which provides an appeal to the AAC or to the Commissioner (Appeals) does not provide for an appeal against an order under Section 195(2). Of course, there is no order to be passed under Section 195(1). While therefore the letter written by the assessee to the ITO asking for a no-objection certificate and permission for not to deduct tax could perhaps be brought within the scope of Section 195(2) on the ground that any proportion would include a nil deduction of tax as well, the letters of the ITO dated 1-3-1979 or 7-9-1979 could not be regarded as having any validity in law. They are at best advisory. If the ITO treated the same as either orders or demands on the assessee to pay tax to the treasury, they have no legal validity. For this reason they deserve to be quashed and ignored.
16. The letters of the ITO dated 1-3-1979 and 7-9-1979, being devoid of legal validity and no appeal being provided against it under Section 246, in our view, the Commissioner (Appeals) erred in treating this as starting points for an appeal before him. His further treating these appeals as out of time in the context of any limitation provided in Section 246 for appeals to the AAC or Commissioner (Appeals) would be equally erroneous. Under Section 248, which is as under, a person having deducted and paid tax, who denies his liability to make such deduction, may file an appeal to the AAC or to the Commissioner (Appeals): 248. Any person having in accordance with the provisions of Sections 195 and 200 deducted and paid tax in respect of any sum chargeable under this Act, other than interest, who denies his liability to make such deduction, may appeal to the Appellate Assistant Commissioner or, as the case may be, the Commissioner (Appeals) to be declared not liable to make such deduction.
Deduction of tax refers to Section 195. The payment of tax likewise would refer to Section 200. There is no time-limit provided for filing an appeal under Section 248 to the AAC or to the Commissioner (Appeals). The relief that can be claimed in such an appeal would be only for a declaration that the assessee is 'not liable to make such deduction'. The primary basis for filing an appeal under Section 248 is that the person concerned should deny his liability to make such deduction. Denial of liability to make such deduction, in our opinion, includes also an admission of a liability to make a lesser deduction than 'at the rates in force'. Any objection, therefore, against deduction either fully or in part could be raised in an appeal under Section 248 before the AAC or the Commissioner (Appeals). The appeals filed by the assessee before the Commissioner (Appeals), therefore, are competent. Since on a plain reading of Section 248, there is no time-limit for filing such an appeal, that part of the Commissioner (Appeals)'s order dealing with delay in filing an appeal and condonation of the delay--all of which has proceeded on the basis that the appeal is against the letters or demands of the ITO-would be of no consequence in law. The Commissioner (Appeals), however, has condoned the alleged delay thereby exercising a power in favour of the assessee though he is not competent to exercise the same and even though it is not necessary to exercise the same. It is not, therefore, necessary for us to direct any particular modification of his order on this point.
17. Under Section 195 any person responsible for making a payment to the non-resident under circumstances stated therein is bound to deduct income-tax if the sum paid, not being dividends, is chargeable under the provisions of this Act. The point made out by the learned Advocate General in this regard that the assessee has, therefore, to determine the chargeability to tax of the non-resident in respect of the payments made to him, has to be accepted. In our view, the Commissioner (Appeals) is in error in holding that a question of chargeability to tax can be determined only in the regular assessment made on the non-resident and on particulars furnished by him at that time. The assessee as a payer of money to a non-resident has to decide as a pre-condition to deduction of tax the chargeability in the hands of the non-resident to tax of these amounts. If on a consideration of the facts and circumstances of the case and in law, the amounts paid are not chargeable to tax in the hands of the non-resident, the assessee is under no obligation to deduct tax thereon and pay it to the government.
Having deducted the same under Section 248, it is open to the assessee to file an appeal before the AAC or the Commissioner (Appeals) to be declared that he is not liable to make such deduction. Both the AAC or the Commissioner (Appeals) and on further appeal the Tribunal are, therefore, competent-in fact should decide this issue with regard to the assessability of the amount in the hands of the recipient-and are duty-bound to make a declaration that the assessee is not liable to make such deduction if it is found that the amount is not chargeable to tax.
18. The chargeability to tax envisaged by Section 195 deals with the liability under the provisions ' of the Act. These provisions include not only the sections of the Act themselves but also the Rules, Notifications and Agreements made thereunder. Under Section 49A of the 1922 Act [corresponding to Section 90], the Central Government could enter into an agreement with any country outside India for the avoidance of double taxation of income under the Act and under the corresponding law in force in that country. An agreement between the Government of India and the Government of Federal Republic of Germany for the avoidance of double taxation of income was entered into under the powers conferred by Section 49A and is notified by GDR 1090 dated 19-9-1960. The provisions of this agreement would, therefore, constitute 'provisions of the Act' for the purpose of determining the chargeability to income-tax for the purpose of deduction of tax at source. We have no hesitation, therefore, in holding that not merely the sections of the Act or the rules made thereunder but even the agreements under Section 49A with regard to double taxation avoidance have to be considered in determining the obligation of the assessee to deduct income-tax from payments made to the non-resident.
19. Even though an appeal under Section 246 does not lie to the Commissioner (Appeals) from any order of the ITO under Section 195-in fact there is no provision to pass an order by the ITO-an appeal under Section 248 lies to the Commissioner. Such an appeal can be filed by a person who has deducted and paid tax in respect of any sum chargeable under the Act in accordance with the provisions of Section 195 and Section 200. The primary condition for the maintainability of such an appeal under Section 248 being deduction and payment of tax and where this has been done, the appeal to the Commissioner (Appeals) and thereafter a further appeal to the Tribunal is maintainable. Three appeals have been filed before the Commissioner (Appeals). He has treated them as filed under Section 248 even though that part of his order treating these appeals as against the ITO's order would be erroneous. Appeals under Section 248 by a person who had deducted and paid tax from payments made to non-resident being competent, the appeals filed by the assessee before the Commissioner (Appeals), would, in our opinion, be competent. The competency would, however, be dependent on the deduction of tax and payment into the Government treasury. In respect of the three appeals filed before us, it would appear that the assessee has deducted and paid tax into the Government treasury, though it is not factually clear to us, since the assessee has provided or been permitted to provide a bank guarantee or a guarantee from the Government of India, as to what extent the tax has been deducted and paid into the Treasury. The appeal before the Commissioner (Appeals) and thereafter before us would be competent to the extent that any tax is deducted and paid. To the extent that the tax is not deducted and paid, an appeal before the Commissioner (Appeals) under Section 248, and thereafter before us would not be competent. The ITO is directed to verify the extent of tax deducted and paid by the assessee under Section 195 and Section 200 as a matter of fact, and give effect to our decision in this order only to that extent and to that part of the appeals where tax has been deducted and paid.
20. Mere furnishing of a bank guarantee or a guarantee provided by the State of Gujarat before the ITO or the acceptance of the same by him does not entitle the assessee to file an appeal under Section 248. Our declaration as to his liability to deduct tax or the extent of his such liability would not govern or be of any avail to the assessee with regard to the other amounts remitted by him to the non-resident in respect of which he has not deducted tax but claims immunity from such deduction on the ground of a guarantee either by the bank or the Government of Gujarat. The assessee cannot escape the consequences provided in Section 201 or other sections of the Act for non-deduction of tax by provision of such guarantee. In our view, even a compromise agreement with the department for such non-deduction or non-payment on the ground of furnishing of a guarantee from the State Government, even if it be entered into before the High Court as has been done in this case, cannot take the assessee outside the mandatory provisions of the statute with regard to deduction of tax at source.
21. On the facts, we hold that the assessee is obliged, under Section 195, to deduct the tax on the amounts paid to the non-resident as he is chargeable to tax on the same. The non-resident is performing certain services pursuant to the consortium agreement and the consortium service agreement in respect of the fertilizer project run by the assessee. The liability of the non-resident to be taxed on the receipts from the assessee has to be decided under the provisions of the Act read with the agreement for double tax avoidance with the Federal Republic of Germany. As claimed by the learned counsel for the department such a liability has to be spelt out by a reading of the agreement as an integrated one. Even so, in our opinion, the liability would arise only under the provisions of article III which is as under : Article III. (1) Subject to the provisions of paragraph (3) below, tax shall not be levied in one of the territories on the industrial or commercial profits of an enterprise of the other territory unless profits are derived in the first mentioned territory through a permanent establishment of the said enterprise situated in the first-mentioned territory. If profits are so derived, tax may be levied in the first-mentioned territory on the profits attributable to the said permanent establishment.
(2) There shall be attributed to the permanent establishment of an enterprise of one of the territories situated in the other territory, the industrial or commercial profits which it might be expected to derive in that other territory if it were an independent enterprise engaged in the same or similar activities under the same or similar conditions and dealing at arm's length with the enterprise of which it is the permanent establishment. In any case, where the correct amount of profits attributable to a permanent establishment is incapable of determination, or the ascertainment thereof presents exceptional difficulties, the profits attributable to the establishment may be estimated on a reasonable basis.
(3) For the purposes of this Agreement the term 'industrial or commercial profits' shall not include income in the form of rents, royalties, interest, dividends, management charges, remuneration for labour or personal services or income from the operation of ships or aircraft. . . .
Accordingly, tax is not to be levied in India on the industrial and commercial profits of an enterprise of the other territory unless profits are derived in India through a permanent establishment of the said enterprise situated here. There is no evidence to indicate that there is a permanent establishment of the non-resident in India much less that the amounts received by the non-resident through the assessee is derived from such establishment. Even so, the receipts would be liable by virtue of Sub-clause (3) of article III to tax. 'Industrial or commercial profit' does not include income in the form of rent, royalties, interest, dividend, management charges, remuneration for labour or personal services or income from the operation of ships or aircrafts. If the income is derived from any of these sources, that would clearly be assessable in India-not being covered by the provisions of article III. The main plank of the assessee's claim for non-taxability of the non-resident is that what the non-resident receives is industrial or commercial profits. It is true that the assessee carries on an industrial 'project' but what the non-resident does, even on his own admission, is furnishing of consultancy services in connection with the industrial project of the assessee. By no stretch of imagination, can consultancy services, even if that is accepted as the nature of the non-resident's activities in India, constitute an industrial activity. Industrial activity clearly anticipates manufacture or at least a distant connection with the same on one's own. Any ancillary activity, much less of an advisory or assistance nature, cannot constitute industrial activity. Profits earned from such assistance cannot, therefore, be regarded as industrial profits. Nor can the activity carried on by the non-resident in India come under the scope of the expression 'commercial profits'.
Commerce envisages trading activity, i.e., purchase and sale of a commodity. Admittedly, the non-resident has not entered into any business activity with the assessee or with anyone else. He is concerned with the agreements, consortium or service (sic), under which he is in receipt of amounts from the assessee. The setting up of a business dealing in commodities and earning a profit resulting from the difference in prices is the essence of commercial activity, which is conspicuous by its absence here. Prima facie, therefore, the receipts of the non-resident through the assessee are not the industrial or commercial profits of an enterprise.
22. On the contrary, what the non-resident does is an activity by way of supervision or more correctly, co-ordination by rendering technical advice in the project run by the assessee. The agreements also read with annexure 1 to the consortium agreement, indicate co-ordination of activities as the essence of the non-resident's work under the agreement The non-resident has also, by a proper supervision of and rendering advice on the various activities of the assessee and the other parties engaged in the project and also by co-ordinating their activities, to ensure the safe and guaranteed performance of the plants. Naturally, this involves perusal of drawings, specifications, etc., on the technical side ; contracts, etc., on the legal side and also time schedules and monetary commitments on the financial side.
Inspection of the workshops, consultation and supervision during the entire process starting with the erection, trial rounds, commissioning, etc., also forms part of the non-resident's activity. In our opinion, the entire integrated work for which the non-resident is responsible, would come within the scope of the activity of a single manager of a big factory or project as the chief executive. Apart from taking responsibility for the overall management, a chief executive also takes the responsibility for co-ordination of the activities of the various departments and departmental managers who themselves are responsible for their own activities. In this management function the chief executive also takes the help of technical people, tenders advice on his own and taken from others and ultimately guarantees the proper performance of the work in the factory. The function of the non-resident in the present case is very much analogous to the above.
Management or co-ordination of the activities in a factory need not be the work of an individual. It could be the work of a firm, a company or even an association who in their turn, appoints the other necessary experts, technicians, etc., to perform the task by the proliferation of members. Neither the association nor a firm or company converts what is purely personal and management services into a commercial or industrial activity. This is also similar to the work done by professionals, like doctors, accountants or lawyers. The Webster's Third New International Dictionary at page 1259 defines 'labour' as expenditure of physical or mental effort, to exert one's powers of body and mind. At pages 1372 and 1687 the following definitions of 'management' and 'personel services' appear : Management: Act or art of managing, more or less skilled handling of something (as a weapon, a tool, a machine)-The conducting or supervising of something (as a business)-the executive function of planning, organising, co-ordinating, directing, controlling, supervising any industrial or business project or activity with responsibility for results-judicious use of means to accomplish an end.
Personal Services: Economic service involving either intellectual or manual personal labour of the server rather than a saleable product of his skill (physicians, architects, garbage collectors/equally self personal service).
In the light of the above definitions and in the concept of co-ordination and management with the ultimate aim of guaranteed performance in a factory or a project, we cannot but hold that the receipts of the nonresident would certainly come under management charges or remuneration for labour or personal services which are excluded by the provisions of Clause (2) of article III. With the information, therefore, available to us and from the exposition of the activities of the non-resident given by the learned counsel for the department and the learned advocate general, we have, therefore, to hold that the receipts of the non-resident are clearly chargeable under the Act read with the provisions of avoidance of double taxation agreement between India and the Federal Republic of Germany.
23. The receipts of the non-resident through the assessee being chargeable to tax, the assessee is bound to deduct tax at source and pay the same to the government. This, however, does not justify the demands indicated by the ITO in his letters to be approved. The tax is to be deducted at the rates in force on amounts paid to the non-resident. This is provided in Section 195(1). Rates in force would have regard to the rates prescribed by the Finance Acts. A point has been raised before us that the assessee is entitled to deduct tax in the light of the provisions of First Schedule, Part II, item 2(b)(m)()(7) of the Finance Act, 1979, at the rate of 20 per cent and not any higher rate. This aspect of the matter has not been considered by the Commissioner (Appeals). According to the provisions of the Finance Act, where an agreement was made after 31-3-1976 the tax is to be deducted at 20 per cent on so much of the amount of such income as consists of lump sum consideration for the transfer outside India of, or the imparting of information outside India in respect of, any data, documentation, drawing or specification relating to any patent, invocation, model, design, secret formula or process, or trade mark of similar property ; and at the rate of 40 per cent on the balance, if any, of such income. Since on the facts available to us, it is not possible to decide whether the assessee's case would come under the above quoted provisions or any other provision on this point, the matter is remitted to the Commissioner (Appeals) for consideration afresh in the light of the facts and the provisions of the Finance Act.
24. The deduction is to be made, however, only on the actual payment to the non-resident. In our opinion, therefore, the ITO is in error in expecting or directing the assessee to make a deduction on the amount grossed up as he has done in the letters issued by him. This grossing up is done, as we understand, in view of the assessee's obligation, under the agreements with the non-resident to pay income-tax on behalf of the non-resident if that becomes payable. The question of deduction of tax on the amounts the assessee has to pay, by way of tax on behalf of the non-resident, would arise only when an assessment being made on the non-resident and a demand having been raised either on the non-resident or someone on his behalf-the assessee in this case. It is only at this juncture when under the agreement with the non-resident the assessee is obliged to pay the tax to the ITO due from the non-resident and he pays the same, he could be regarded as making indirectly or constructively a payment to the non-resident of the latter's tax dues thus incurring the obligation to deduct tax at source. The tax, therefore, the assessee has to deduct as indicated in the ITO's letter and the actual amounts that he appears to have paid after deduction seem to be far in excess of the amount he is obliged to pay even at the rate of 40 per cent and not 20 per cent as claimed by him. The tax to be deducted should be computed on the actual amount, without inclusion of the income-tax liability which the assessee remits to the non-resident. We direct that the excess tax deducted at source and paid, be refunded to the assessee as this has been wrongly paid.
25. It requires to be mentioned that even if and when the assessee has to deduct tax on the income-tax payable by him on behalf the non-resident after an assessment is to be made, the manner of arriving at the amount to be deducted which has been adopted by the ITO for grossing up is erroneous. When the assessee bears the tax of the non-resident under the agreement, the tax which the non-resident has to pay has to be calculated on a cascade basis while computing the tax on the tax until the final figure of tax comes to nil. For instance, in respect of the first payment mentioned in the ITO's letter dated 1-3-1979 of DM 81,736 remitted the tax to be paid would not be DM 54,490 on the grossed amount of DM 1,36,227 but something different.
The ultimate liability to tax would be : Remittance : DM 81,736 Tax (assuming it to be 40 per cent - this is not the rate at which tax at source is to be deducted but the rate at which the non-resident is to be taxed) at 40 per cent : 32,596 (sic)Tax on DM 32,596 at 40 per cent 13,040Tax on DM 13,040 at 40 per cent 5,216Tax on DM 5,216 at 40 per cent 2,088Tax on DM 2,088 at 40 per cent 836Tax on DM 836 at 40 per cent 336Tax on DM 336 at 40 per cent 136Tax on DM 136 at 40 per cent 56Tax on DM 56 at 40 per cent 24Tax on DM 24 at 40 per cent 12Tax on DM 12 at 40 per cent 8 ------------ The above is only illustrative to indicate that the method adopted by the ITO for grossing up requires reconsideration.