1. The short controversy in this appeal is whether the sum of Rs. 41,271 dollars paid to the assessee-company by Hindusthan Paper Corpn.
Ltd. is assessable to tax in India. The facts and circumstances surrounding the aforesaid payment may be noted first in order to appreciate the rival submissions. 2. The appellant is a non-resident Canadian company engaged in the business of consulting engineers. It entered into an agreement with Hindusthan Paper Corpn. Ltd., on 4-8-1975, in accordance with which the appellant company agreed to render to the Indian company "such technical assistance in the shape of supervision of detailed engineering, supervision of construction and erection, and assistance in start-up and commissioning of the said newsprint plant and/or factory. . . on the terms and conditions and in the manner hereinafter appearing. . . ". Article I of the agreement defined the nature of assistance. According to it, the appellant company were to render, furnish and/or make available to the Indian company 'in India' certain engineering, management, consultancy and other assistance for the use and benefit of the Indian company. One of such services to be rendered was "supervision of detailed engineering, supervision of construction and erection, and assistance in start-up and commissioning of the said plant for the said purpose ... in India".
The appellant company were further to provide to the Indian company certain qualified and experienced engineers (to be stationed in India) for the period shown and to be responsible for their proper and efficient work. One project manager for two years, one structural engineer for two years, two mechanical engineers for one and a half years, one electrical engineer for one and a half years, one instrument engineer for 1 year, one field engineer (mech.) for two years and one assistant field engineer for one year were to be posted. According to the agreement "the above engineering staff shall supervise and provide guidance for the detailed design, purchasing and field supervision on the project to be performed by the client and its Indian consultants, and assist in the start-up, commissioning and testing of the project".
'Sandwell's resident staff', it was agreed, shall work the same work a week and shall observe the same statutory holidays 'as the Indian company's staff'. Sandwell were also to provide "from its home office, staff specialists and executives who shall visit the client's office and/or the mill site, to provide information and data from time to time and to give such assistance as in Sandwell's opinion is required". The above 'resident Sandwell staff' was to provide the expertise to guide the Indian consultants in completion of the work not completed during the design development phase of the project. The above 'resident Sandwell staff' were also required to provide proper guidance and assistance for the detailed design work carried out by the Indian companies, Indian consultants and the construction work carried out by the Indian company's contractors, who were to provide guidance and assistance for the commissioning of the plant. Sub-clause (r) of clause 1 of article II provided, inter alia, that "All such engineers, supervisors, technicians, consultants, surveyors, staff, labourers or artisans shall be under the client's overall direction and control.
Such personnel shall be bound by any advise, direction and/or instructions to be given, rendered and/or exercised by the said technical personnel of Sandwell". Clause 2 of article II provided for the Indian company to provide without charge to Sandwell all necessary office space, equipment and facilities in India and the Indian company was also to arrange all necessary visas and permits for free entry into, departure from, and travel within India for Sandweli's personnel.
Sub-clause (d) of clause 2 of article II further provided that the Indian company shall make arrangement for payment of all taxes, etc., directly to the tax authorities that may be levied within India upon Sandwell and Sandwell's employees. Clause 2 of article III provided that the overall supervision of the construction and erection of the said plant shall be that of Sandwell and the Indian company was to depute its technicians "to render full co-operation to Sandwell and procure or cause to be procured full co-operation and assistance from its contractors to the said technicians of Sandwell employed in India".
Vide clause 4 of article III, Sandwell were to "furnish the engineering and other personnel required to perform the services to be provided by Sandwell under this agreement. . .". Article IV of the agreement provided for the charges to be paid by the Indian company "for the personnel listed in article 1, paragraph 3, as being supplied by Sandwell to be resident in India for the periods noted, together with whatever services Sandwell may provide from their home office. . .".
The payments were of two types, the first being known as time charges, and the second being the other charges. Time charges provided for in paragraph 1 of article IV, were to be paid by the Indian company to Sandwell, i.e., the assessee-company. In addition to the said time charges, the Indian company was to provide the following to the resident staff of Sandwell vide clause 3 of article IV : (a) A living allowance of Rs. 3,000 per month to those resident engineers that would be staying in India alone, and Rs. 4,000 per month to those resident engineers that would be staying in India with their families.
(e) An allowance for expenses incurred by the employee while travelling at the stipulated rates, etc. On the basis of the above clauses the assessee-company was paid during the accounting period under consideration by way of 'time charges' 41,271 dollars. The assessee-company returned its income for the assessment year 1977-78 showing the aforesaid gross income and deducting therefrom 9,040 dollars by way of expenses. The ITO, however, disallowed the claim of expenditure to the extent of 3,040 dollars and allowed 6,000 dollars only by way of expenditure, Inasmuch as the Indian company was to pay tax on behalf of the assessee-company, the net income of Rs. 2,64,532 was grossed up to Rs. 6,01,900.
3. The assessee-company appealed against the aforesaid order to the learned Commissioner (Appeals). One of the grounds raised before the learned Commissioner was that 'the fees were not taxable at all for the know-how was imparted outside India'. The learned Commissioner rejected the assessee's appeal and pointed out that what was being brought to tax was not to the fees for imparting technical know-how, which was admittedly imparted outside the country, and which was, therefore, not taxable. What the ITO had taxed was the time charges, which had been given by the Indian company to the assessee-company for the services, which were rendered by the personnel of the assessee-company in India.
The observations of the learned Commissioner (Appeals) on this point may be extracted here as follows : The appellant entered into another agreement on 4-8-1975 which came to be known as 'Detailed Designs & Constructions Supervision Agreement'. This was approved by the Central Government. The agreement provided for imparting technical information and rendering services outside India through its own personnel and inside India through personnel to be deputed by the appellant for employment with Hindusthan Paper Corporation Limited. The ITO has stated that only technical know-how fees received in India is taxable. The amount of such receipts was dollars 64,460.95 out of which a sum of dollars 23,189.97 has been paid as salary to technicians employed by Hindusthan Paper Corporation Limited under the second Agreement. The ITO has proceeded to compute the total income of the appellant accordingly. The appellant has received dollars 64,460.95 for services rendered in India and therefore there is no basis in the claim of the appellant that such income is not taxable. The ground is accordingly rejected.
4. The aforesaid order of the learned Commissioner (Appeals) is assailed before us by the assessee on whose behalf it is stated before us that the 'time charges' in question which the assessee prefers to call as fees was on account of services of the technicians who were the employees of the Hindusthan Paper Corporation Ltd., for whom approval under Section 10(6)(vii)(a) of the Income-tax Act, 1961 ('the Act') was obtained by the Indian company. The finding of the ITO that dollars 41,271 were chargeable to tax was, thus, not correct. On behalf of the revenue, the orders of the authorities below were strongly relied upon.
5. From the narration of the terms of the contract between the assessee-company and the Indian company, which have been extracted by us above, one thing is clear, namely, that there is no basis whatsoever in the contention of the assessee-company that the services were not rendered in India by the resident technicians, they were working in India and they rendered their services in India. The time charges payable in respect of their services were paid not to the technicians but to the assessee- company and to this extent the assessee-company did derive the pecuniary benefit and advantage from the services rendered by the technicians of the assessee-company in India. There is no merit whatsoever in the asscssee's contention that the technicians in question were the employees of the Hindusthan Paper Corpn. Ltd. In terms, it has been stated in the agreement that the employees were 'Sandwell resident staff' and for making available their services the assessee-company was paid by the Indian company the time charges as per the agreement. The said time charges have direct nexus with the services rendered by the technicians in India and, therefore, it has to be held that the said income was earned in India and it accrued and arose on account of the services rendered by the technicians in India.
Their assessment was, in the circumstances, entirely justified.
6. The assessee-company also objected to the grossing up of the income for the purposes of determining the tax liability. According to them relevant tax had been paid by the Indian company after the relevant previous year and, therefore, the tax so paid should not have been considered for the purpose of grossing up of the income for the year under consideration. Reliance was placed in this connection on the decision of the Hon'ble Orissa High Court in the case of CIT v.American Consulting Corpn.  123 1TR 513.
7. On behalf of the revenue, the aforesaid submissions were resisted and the orders of the authorities below were supported.
8. We have carefully gone through the decision relied upon by the learned counsel for the assessee. It appears to us that the said decision does not help the assessee. What the Tribunal had held in the aforesaid case of American Consulting Corpn. (supra) was that the undertaking of the company to meet the tax liability of the non-resident company was in the nature of a benefit or perquisite contemplated by clause (iv) of Section 28 of the Act introduced by section 7 of the Finance Act, 1964 and that, for the period prior to the amendment, the benefit or perquisite was not liable to be charged to tax under the head 'Profits and gains of business or profession'.
Clause (iv) of Section 28 was applicable to the assessment year under consideration and, therefore, the arguments on the basis of which the Tribunal had given relief to the American Consulting Corporation was not available to the assessee in the present case. The grossing up appears to us to be entirely justified and, accordingly, we uphold the order of the learned Commissioner (Appeals) on this point.