1. The appeal relating to the assessment year 1976-77 has been filed by Nagarjuna Fertilisers and Chemicals Ltd. as agents of L.H. Manderstaa and Partners Ltd. and the appeal for the assessment year 1978-79 has been filed by the revenue. Since some common issues are involved, they are dealt with together.
2. The assessee is a public company in joint sector during the years and is now said to be a Government company. The business of the assessee was to run a fertiliser factory and during the years under consideration, the project was being established. The assessee had engaged the services of L.H. Manderstan and Partners Ltd. of United Kingdom to act as experts for assisting the assessee in establishing the project. There was correspondence culminating in an agreed draft agreement. However, even before the agreement was signed, the services had already been rendered and the amount had become due. Hence, there was no occasion for signing a formal agreement. The assessee applied for foreign exchange for remitting the moneys. It was at this stage it was discovered that an approval from the Government of India from the relevant Ministry was necessary. After some correspondence, even this approval was obtained from the Ministry of Chemicals and Fertilisers, vide its order dated 14-4-1977 while warning that prior approval should have been obtained. It is the assessee's case that such technical services were by and large rendered from abroad and were not at all taxable during the assessment year 1976-77 because the specific clause making it taxable was introduced only with effect from 1-6-1976 by the Finance Act, 1976 and that even if it is taxable, it is exempt under proviso to Clause (vii) of Sub-section (1) of Section 9 of the Income-tax Act, 1961 ('the Act') as there is an agreement before 1-4-1976 and approval thereafter. The approval of the Government, as noticed earlier, was obtained only on 14-4-1977. The ITO, therefore, considered that the income had accrued to the assessee only in the assessment year 1978-79. He, therefore, proposed to treat the assessee as an agent of the non-resident for the assessment year 1978-79 by issue of a notice under Section 163 of the Act. He, however, sought to make a protective assessment, for the assessment year 1976-77. In this protective assessment, he brought to tax the entire receipt subject to the nominal deduction for expenses at Rs. 10,27,007 after grossing up the income by addition of Indian tax as the obligation in respect of tax liabilities had been undertaken by the assessee. The assessee went in appeal in respect of the orders for both the years. The first appellate authority cancelled the order under Section 163 for the assessment year 1978-79 on the ground that there was no amount earned by the assessee during the year necessitating the appointment of an agent under Section 163 for that year. He, however, held that the protective assessment should be taken as the real assessment as the income had accrued to the assessee during the year. Having held that there was a liability in view of the services rendered by the two experts in India, he remitted the matter of computation to the ITO after making some comments as to the deductibility of the expenses. He set aside the assessment for being re-done in accordance with law. The assessee is in appeal in respect of the assessment year 1976-77 challenging the above view of the Commissioner (Appeals), while the revenue is aggrieved by the finding of the Commissioner (Appeals), that the ITO's remarks do not lead to the conclusion that the assessee could be treated as agent of the non-resident for the assessment year 1978-79.
3. As regards the appeal for the assessment year 1976-77, the assessee repeated the argument that there was no business connection or any source for the non-resident in India. The dealings between the assessee and the foreign consultants were as between two principals. The services were rendered mostly abroad except for a few routine activities of the experts during their stay in India. The tenderess were from United Kingdom and the services relating to acceptance of the tenders, etc., were signed in United Kingdom. The learned representative took us over the correspondence and argued that bulk of the services were rendered abroad. Then he took us over the relevant provisions. He claimed that assessment on an agent could be only in respect of income deemed to accrue under Section 9 and that the specific provision relating to payment for consultancy services was only with effect from the assessment year 1977-78 and that it is clearly inferable that such income was not taxable in earlier years. At any rate, it was contended that there was no income arising in India.
It was further argued that the inference of the ITO that there was no agreement and that the approval was in a subsequent year was incorrect as a subsequent approval would relate back to the date of agreement.
Agreement, he argued, was finalised and it had been acted upon. Absence of a signed formal agreement did not rule out existence of an agreed contract of services. In fact, such a contract was approved subsequently by the Government of India itself. It was also suggested that the proviso exempting such fees once the agreement is prior to 1-4-1976 and approved by the Central Government should apply to the assessee whatever be the year of assessment. Once the provision is on the statute and does not specify the year of assessment, the exemption is available to the assessee. This provision was on the statute book on the date of assessment. It was also suggested that the foreign agent's accounting year ends on 30th June and on this basis the income of the non-resident would be assessable only for the assessment year 1977-78 and that the ITO was not justified in bringing to tax the income which had accrued to the assessee in the assessment year 1976-77 on the fees which was paid to the non-resident agent well after 30-6-1975. It is pointed out that the ITO himself has described the accounting period of the assessee as ending on 30-6-1975 and the certificate of the chartered accountants in the United Kingdom also mentions that the assessee's working of the taxable profits is based upon the accounts for the period from 1-7-1975 to 30-6-1976, an accounting period which falls in the assessment year 1977-78 and not in the assessment year 1976-77 when the assessment has been made. Without prejudice to all the earlier contentions, it was argued that the chartered accountants in the United Kingdom had worked out the profit attributable to the assessee's activities in India at Rs. 49,304 and this amount was shown in Part IV of the return while claiming exemption for this amount. This argument was specifically repeated by an additional ground as an alternate ground. As for the assessment year 1978-79, he relied upon the order of the first appellate authority and claimed that there was no taxable event during that year. It was also pointed out that there was no subsequent assessment within the time limit of two years from the end of the assessment year and that, therefore, there could not be any valid assessment thereafter. The issue, it was pointed out could be only academic. The learned departmental representative, on the other hand, justified the orders of the ITO for both the years. He pointed out that one of them was only protective. He further pointed out that the assessment for the assessment year 1976-77 has been set aside for being re-done in accordance with law. According to him, there could not be a further appeal against this order. Even otherwise, he claimed that the finding of the first appellate authority is correct. There is prima facie liability for this year. The income had certainly accrued to the assessee for services rendered in India and for information utilised in India. As for the actual computation of income, he pointed out that it was open to the assessee to reargue the entire matter afresh before the ITO. It was, therefore, unnecessary, according to the learned departmental representative, to agitate this question before us. He stressed the fact that the subsequent enactment, relating to technical fees and exemption introduced by the Finance Act, 1976 and the Finance (No. 2) Act, 1977, could not affect the liability for the assessment year 1976-77. According to him, there was no fresh impost on technical fees as the controversy relating to the extent of liability of technical fees had been very much there for earlier years also even prior to the introduction of the new clauses under Section 9. He, therefore, claimed that it was incorrect to assume that such fee was made taxable only from the assessment year 1977-78. He also reiterated the claim that there was neither agreement nor approval in the manner contemplated by law. As for the assessment year 1978-79, he repeated the argument that it is not necessary to go into the question of ultimate liability on the taxpayer on merits and that the order of the ITO is concerned merely with appointment of an agent. If there is any receipt of income, such appointment is valid. If. was claimed that the first appellate authority need not have prejudged the issue as he had done. The order of the ITO was, therefore, sought to be restored.
4. We have carefully considered the records as well as the arguments.
Though there is no formal agreement, the draft agreement has been acted upon by both the parties. Such an agreement was drafted after correspondence and it has been acted upon. We are, therefore, not impressed by the argument that there was no agreement during the year.
We also find that there is a clear approval by the relevant Ministry.
Hence, there is also an approval by the Government of India for this contract of services, the terms of which are available in the draft agreement. The consultancy services expected of the foreign company are listed out in an annexure to the draft agreement. The foreign company was to define the parameters of the project, specify the details for the invitation of tenders, prepare the plant and processing detailing the requirements, detailed performance undertakings, design/workmanship guarantees, substitution of indigenous as well as the services from Indian sources in place of foreign components and services, design capacity, standby reserve equipment, acceptable standards, maintenance, safety and provision for future expansion. It was also to design inspection testing, planning, documentation and reports, spare parts and special tools, construction regulations and administration, training of personnel, plant commissioning and testing, co-ordination of plant units and offsites and methodology of contacts with prospective bidders, evaluating the bids received, negotiations and review of schedules. They were further to advise design and procurement in the contract stage, supervision and evaluation of offers relating to equipment, their inspection, supervision of programme, liaison procedures, etc. Similar work was also contemplated during the various stages of construction and commencement of the project. The foregin consultant was also to act as representative of the assessee in Europe particularly in the United Kingdom and to deal with the United Kingdom contractors to ensure maximum help, minimum cost and peak efficiency based on good engineering standards and overall assistance from the foreign company in commencement of the project. After going through the agreement, we are not in a position to say that the relationship between the assessee and the foreign company did not constitute business connection. The work was to be started both in the United Kingdom and India. Two experts had been here for quite sometime and it will be futile to deny that no services were rendered in the taxable territories. The bills for their services apart from indicating their services abroad and their foreign trips also show that they have been frequently visiting India and two of them, viz., Mr. J.N. Spottiswood and Dr. Ferling were visiting Hyderabad frequently for fairly long durations, at times for a month or more. There were also number of other engineers who were also visiting for a few days and some of them went to the site for designing construction at Kakinada fertiliser plant. It is, therefore, not possible to say that no services were rendered in India. The agreement was more or less a continuous one showing a stable relationship for a number of composite services during the duration of the agreement in connection with the establishment of the fertiliser project. It is, therefore, not possible to say that there is no business connection and that no income at all arose in India. At the same time there is absolutely no basis for the presumption of the ITO that the entire income arose in India especially because the foreign company had to do considerable work abroad and had to depute its experts to foreign countries so that the latest technology for fertiliser project was brought to use by the Indian company. At any rate, there is no dispute that the assessee was having some services rendered by the foreign company abroad. We are not able to agree with the learned representative for the assessee that there was no income to the assessee within the meaning of Section 9. The assessee had business connection in India. The agreement itself was a source of income for the assessee in India. When services were undoubtedly rendered in India, it is possible to say that some income arose to the assessee in the taxable territory. If not, it could certainly be deemed to be accruing or arising in the taxable territories as a result of this assignment. However, for working out the income, the ITO followed a totally untenable basis by taxing practically the entire amount receivable by foreign company and/or its offices. The first appellate authority made some comments on the computation with which also the assessee is aggrieved. When there is a certificate from professional public accountants, we would imagine that there must be some reason for differing from the same before such a certificate is rejected. No such clear reasons are available. When services are rendered abroad, the salary payable to the staff cannot be restricted to be only the salary of those staff for the period deputed in India. At any rate, there is no firm basis for rejecting the certificate furnished by the assessee. We are not directing the ITO to accept the same, we are making these comments only to say that the ITO should not be inhibited by certain observations made by the first appellate authority. It is open to him to consider the issue afresh in accordance with law. He will also consider the certificate especially since the certificate is accompanied by the computation giving the basis for the allocation. The assessment that has been set aside will be remade in accordance with law.
5. We have yet to consider the assessee's claim that during the year it was not taxable at all in law. The assessee's argument is that the fees were specifically listed out and a basis for taxation spelt out in the statute by the introduction of clauses (v) to (vii) by the Finance Act, 1976, with effect from 1-6-1976. These provisions, no doubt, will not be available for the assessment year 1976-77. All the same, we will not be justified in holding that these fees were not hitherto liable to tax merely because they have been listed out separately and distinctly in the law as from 1-6-1976. It cannot be stated that such receipts were not taxable before. In fact, there has been considerable controversy as to the extent of liability and the place of accrual in respect of such fees depending upon the terms of each contract even for assessments for the assessment year 1976-77 and earlier. If there is income arising to an assessee in India by virtue of business connection or otherwise, such income was always taxable. When this was pointed out, the assessee had two more objections. One was the question of computation about which we have already decided in the preceding paragraph by leaving it to the Assessing Officer to consider the auditors' certificate and other materials in accordance with law. The other relates to the reference to the proviso to Clause (vii) of Sub-section (1) of Section 9 which while making such income taxable, provided as under : Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day of April, 1976 and approved by the Central Government.
The above proviso, according to the assessee, is applicable for all the years as well as the agreement was made prior to 1-4-1976 and had the approval of the Central Government. In this case, no doubt, the agreement, as had already been concluded by us in an earlier paragraph, was made prior to 1-4-1976 and that it had received the approval of the Central Government. However, we are unable to agree that this proviso which was inserted by the Finance (No. 2) Act, 1977, with effect from 1-4-1977, will apply for the assessment year 1976-77. If fees are payable under an agreement made prior to 1-4-1976 for the assessment year 1976-77 and later years, the exemption, in our opinion, would operate from the assessment year 1977-78 and not for the assessment year 1976-77. It is because we cannot assume the existence of a proviso in an assessment year when such a provision was not in the statute book as at the beginning of that assessment year. When this was pointed out to the learned representative of the assessee, he argued without conceding his other claims that the income actually arose to his client only in the assessment year 1977-78. It is pointed out that the necessary bills were raised only on 31-12-1975 and 31-3-1976. The non-resident's accounting year is the year ending 30th June every year.
In fact, the ITO himself in his order has mentioned the year ending 30-6-1975 as the accounting period in column 6 of the title to the assessment order. The certificate issued by. the chartered accountant also indicates that the foreign company has worked out the income with reference to the accounts for the year ending 30-6-1975 and 30-6-1976.
We do find that the invoices have been issued in the accounting period ending 30-6-1976 to the foreign company. If the income is held to arise to the assessee with reference to the invoice dates as the dates of actual accrual of income, there would be no income for the assessment year 1976-77. If the income falls for the assessment year 1977-78, it would be exempt under the proviso to Clause (vii) of Sub-section (1) of Section 9. In any event, for the assessment year 1977-78, the payment for mere utilisation of information in India will not be taxable by virtue of Clause (vii), but will be taxable only to the extent of services rendered in India. No doubt, some services had been rendered prior to 30-6-1975 as seen from the invoices. It appears that the services had been rendered in March 1975 and a small part of the total payment may well relate to the services rendered till 30-6-1975. Income to the extent of services rendered in India during this period alone, may be taxable for the assessment year 1976-77. All these aspects can also be gone into in the fresh assessment directed by the first appellate authority in accordance with law. Though we have made certain observations, it is not our intention that these also should bind the ITO. We have discussed the same at some length because we feel that the issues which are to be considered have to be highlighted while setting aside the assessment. Since the first appellate authority had not set out the issues clearly and had also given certain directions which do not appear, prima facie to be correct, we have to make the position clear and we have dealt with the issues without binding the ITO in any manner as to the working of the income which he may finally adopt in the assessment. It is open to the assessee also to agitate questions both legal and factual and it is the duty of the ITO to consider the same even by bringing on record any further relevant facts by either party (the ITO or the assessee), if necessary.
6. In the result, we confirm the order of the first appellate authority for the assessment year 1976-77 setting aside the assessment by making it clear that both parties will be free to go into all the facts and law relating to the assessment afresh in accordance with law.
7. As for the assessment year 1978-79, the only issue which is in dispute before us is the order appointing the Indian company as the agent of the foreign company. The claim of the revenue is that the first appellate authority had not considered the relevant question as to whether the Indian company was rightly appointed as an agent and that he had given importance to extraneous factors as to whether there was taxable income for the non-resident company during the year. We do not consider that the factor is extraneous. There was no taxable event during the year. Income cannot possibly accrue merely with reference to the approval by the Government of the agreement between the Indian company and the foreign company during the year. The services were rendered in the period relevant to the assessment year 1976-77 and largely in the assessment year 1977-78. The payment had not been made till the end of the accounting year relevant to the assessment year 1978-79, whatever might be the accounting year that might be considered as relevant. If there is no income, the question of appointment of an agent is academic. Even otherwise, it is academic because the time limit set out for making an assessment on an agent under Section 148 of the Act has already lapsed. No assessment has yet been completed and much less initiated within the time. Even on this ground it is academic. We do not, therefore, propose to go into the issue as to whether the agreement spelt out any stable relationship necessitating the appointment of the Indian company as the agent of the foreign company. The agreement has already been acted upon and the payment is pending and that is only because of the Reserve Bank regulations and income-tax dispute. No taxable event has occurred during the year and the agreement cannot be said to be in force. In any view of the matter, the order of the first appellate authority has to be upheld.Accordingly, we dismiss the departmental appeal.
8. In the result, both the appeals are dismissed in the manner indicated in the preceding paragraphs.