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British Aerospace Aircraft Group Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Delhi
Decided On
Judge
Reported in(1987)21ITD26(Delhi)
AppellantBritish Aerospace Aircraft Group
Respondentincome-tax Officer
Excerpt:
1. both the appeals are by the assessee, a non-resident company. the assessment years involved are 1979-80 and 1980-81 with respective accounting periods having ended on 31-12-1978 and 31-12-1979.assessments for both the years have been framed under section 143(3) read with section 144b of the income-tax act, 1961 ('the act').2. returns of income for both the assessment years were filed on 29-9-1981. for the assessment year 1979-80 the income declared stood at rs. 2,87,45,611 while for the assessment year 1980-81 the said figure stood at rs. 5,82,86,500. assessment for the assessment year 1979-80 completed at rs. 4,50,90,966 while for the assessment year 1980-81 the assessed income stands at rs. 7,74,73,957. facts as also the stand of the lower authorities and the contentions raised on.....
Judgment:
1. Both the appeals are by the assessee, a non-resident company. The assessment years involved are 1979-80 and 1980-81 with respective accounting periods having ended on 31-12-1978 and 31-12-1979.

Assessments for both the years have been framed under Section 143(3) read with Section 144B of the Income-tax Act, 1961 ('the Act').

2. Returns of income for both the assessment years were filed on 29-9-1981. For the assessment year 1979-80 the income declared stood at Rs. 2,87,45,611 while for the assessment year 1980-81 the said figure stood at Rs. 5,82,86,500. Assessment for the assessment year 1979-80 completed at Rs. 4,50,90,966 while for the assessment year 1980-81 the assessed income stands at Rs. 7,74,73,957. Facts as also the stand of the lower authorities and the contentions raised on behalf of the assessee being identical for both the years, the reasoning of the learned ITO in the assessment order dated 11-3-1983 relating to the assessment year 1979-80 stands reproduced hereunder in verbatim : The assessee a non-resident company incorporated in UK entered into a contract with the Government of India, Ministry of Defence for manufacture of Jaguar aircraft by Hindustan Aeronautics Ltd., Bangalore. In this connection, the assessee and Government of India entered into various agreements like direct supply agreement, licence agreement, purchase agreement and the technical assistance agreement, etc. As per the direct supply agreement, the supplies were to be accepted by the Government of India at the supplier's works in UK. The payments of the supplies are to be made to the assessee in the UK. During the previous year no supplies were received and no payments have been made.

The assessee entered into an agreement with the Government of India for transfer of licence rights as per Clause 2 of the licence agreement as under : In consideration of licence fee and royalties referred to herein and in accordance with the terms and conditions of this agreement the licensor hereby grants to the licensee : 2.1.1 the exclusive rights to manufacture, assemble and test the licensed products and to manufacture, assemble, test and market the aircraft and the spares in India ; 2.1.2 the non-exclusive right to market the aircraft and the spares within the specified countries ; 2.1.3 the exclusive right to maintain, repair and overhaul the aircraft and the spares within India and the non-exclusive right to maintain, repair and overhaul the aircraft and the spares within India and the non-exclusive right to maintain, repair and overhaul the aircraft and the spares mentioned in Clause 2.1.1 within India and within the specified countries as the case may be.

In consideration of the rights granted under this agreement, it was agreed that a licence fee of 133000000 FF was to be paid to the licensor by the licensee as under : The sum of 14000000 FF already paid under the provisions of the intention to proceed.

2. The balance of the licence fees being 119000000 FF was payable in the amounts and at the times set out in para 9.1.2 of the licence fees agreement. The date of agreement of intention to proceed is 21-10-1978 on which date a sum of 14000000 FF was remitted which amount was received by the assessee, in November 1978. As against this remittance no tax was deducted by Hindustan Aeronautics Ltd. at the time of remittance.

The assessee referred to a letter dated 29-3-1979 addressed by the Ministry of Defence to it which laid down the manner in which a certain portion of the licence fee instalments were to be retained (15 per cent) for payment of taxes, etc., and the net amount was to be remitted. Even though for this year no tax was deducted out of the instalments of 14000000 FF, the assessee declared the net amount of instalment of 11900000 FF as its income of the year on cash receipt basis. This amount has been grossed up at 20 per cent and the gross receipt has been shown at 14875000 FF. A credit for tax deduction at source at 20 per cent of the rupee equivalent at 28745611 FF which worked out to Rs. 57,49,122 has been claimed.

It has been claimed that the instalment of licence fees received during the year out of a total lump sum consideration of FF 133 million and since it is a part of lump sum consideration, the grossed up amount of the net consideration received is taxable at 20 per cent. In this connection written reply dated 22-9-1982 has been received from the assessee, which has been duly considered.

The licence fee agreement is dated 12-4-1979 wherein a total consideration of FF 133 million was agreed upon. This was preceded by a payment of 14000000 FF under the provision of the intention to proceed in October 1978. The balance of 119000000 FF was to be received in instalments. It has been clarified by the assessee that prior to the date on which each instalment became due, the assessee had no right to receive the amount. This arrangement takes away the character of lump sum consideration of the total amount agreed to be paid under the licence agreement. As against assessee's claim that the licence fee instalments have become due as and when received, in fact, the entire licence fee amount became due on the date of agreement and as such this is liable to be taxed for the year 1980-81. However, since the payments received at the time of agreement for intention to proceed in 1978 being a part consideration of the total licence fee to be received, have been shown as income for the assessment year 1979-80, this is being assessed to tax for this year on a protective basis without prejudice to the department's right to include this amount in the total sum agreed upon assessable in the assessment year 1980-81.

The agreement for payment of licence fee stipulated that all taxes will be borne by the Government of India. As such the amount paid during the year at 14000000 FF has to be grossed up. The assessee claims that the net payment received should be grossed up at 20 per cent being instalment out of a total lump sum consideration. It has already been discussed above that the total consideration to be paid not in the nature of lump sum consideration and as such it is to be subjected to tax at 40 per cent.

3. At the first appellate stage, before the learned Commissioner (Appeals), the assessee raised the following five grounds in relation to the assessment year 1979-80 : (i) The licence fee taxable in the year under appeal should have been taken at 11.9 million FF instead of 14 million FF adopted by the ITO. The sum of 2.1 million FF withheld by the Government at the rate of 15 per cent should not have been treated as part of the income.

(ii) The ITO should have applied a tax rate of 20 per cent under Section 115A of the Act on the lump sum licence fee payable to the assessee which according to it was determined as a lump sum consideration, as against 40 per cent applied by the ITO. (iii) The ITO was not justified in completing the assessment on a protective basis as the amount due and received during the year under appeal taxable in the assessment year 1979-80.

(iv) Credit for tax paid by HAL which works out to Rs. 57,49,122 should have been allowed while computing the tax liability.

(v) Interest charged under Section 215/217 of the Act amounting to Rs. 84,77,101 should be deleted as the same has been wrongly charged. The appellant bad no liability for payment of advance tax and no such interest was chargeable.

4. For this assessment year, viz., 1979-80, the learned Commissioner (Appeals) allowed ground Nos. (iii), (iv) and (v) of the assessee while the assessee met failure on issues involved in ground Nos. (i) and (ii) above. The narration in the order of the learned Commissioner (Appeals) vis-a-vis ground Nos. (i) and (ii) raised by the assessee before him, reads as under : As discussed above the gross amount receivable by the appellant company at the time of signing the letter of intent was 14 million FF out of which 2.1 million FF has been withheld in accordance with the terms of the agreement contained in the letter of the Government of India dated 29th March, 1979, above. Whereas, no amount was withheld at the time of payment in October 1978, 15 per cent of 14 million FF was deducted at the time of payment of second instalment in April 1979 in respect of the payment made in October 1978 also.

It is contended by the appellant's counsel that the effective receipts in the hands of the appellant should be taken to be 11.9 million FF only as 2.1 million FF which was withheld by the Government was not an effective receipt but it was receivable on happening of certain event at a later date and was, therefore, a contingent receipt. This amount according to Sub-clause (f) of the clauses cited above would be payable by the Government of India to the appellant if for any reason whatsoever the company is unable to obtain the benefit of double taxation relief in UK. According to Mr.

Subramaniam, chartered accountant, representing the assessee, a non-resident can be taxed only in respect of any income which is received or deemed to be received in India in such year or which accrues or arises or is deemed to be accrued or raised in India during such year. According to this argument only 85 per cent of the gross amount receivable can be treated to be the income received in India or accruing in India. If, however, the remaining 15 per cent which has been withheld by the Government later on becomes payable to the assessee on account of its failure to obtain double taxation relief from UK Government, the tax liability should arise at that stage and not at the point of receipt or accrual of the instalment in India.

Mr. K.K. Mittal, IAC (Assessment), appearing on behalf of the department, has on the other hand argued that the entire amount of the instalment due on a particular date should be treated as income accrued or receivable by the assessee on the date when the instalment is due. Mr. Mittal has drawn attention to Section 9(1)(vi) read with Section 5(2) of the Income-tax Act, 1961, Section 9(1)(vi) lays down that any income by way of royalty payable by the Government will be deemed to be income accruing or arising in India to the non-resident company and the entire amount of such income which is payable as royalty shall be taxable in the hands of non-resident as accruing or arising to him during such year. Mr.

Mittal has also drawn my attention to his observations in para 3(1) of his directions under Section 144B of the Income-tax Act issued to the ITO before completing the assessment, as rightly observed by the IAC the withholding of 15 per cent out of each instalment payable to the assessee is only a method adopted by the contracting parties to settle their respective tax liabilities with the Government of India and UK. Therefore, what is due as income to the assessee in the year under appeal is the total amount of 14 million FF payable in October 1978 as per terms of the agreement. I have considered the arguments of the assessee's counsel as well as those of the IAC and I am inclined to agree with the IAC (Assessment) on this issue. The double taxation relief is to be secured by the assessee from the UK Government for the benefit of Government of India. In order to ensure that this benefit is not lost, the Government has decided and the appellant has agreed to withholding of 15 per cent of the gross amount payable under the contract. If the assessee succeeds in getting this benefit from the UK Government it will retain its 15 per cent as part of its income. If it does not succeed in getting the benefit from the UK Government, the Indian Government will refund 15 per cent withheld by it to the assessee. If the double taxation relief procured by the assessee from the UK Government happens to be in excess of the amount withheld by the Indian Government, i.e., 15 per cent they will remit the sum to the Government of India. If the benefit secured is less than 15 per cent the Government will reimburse them to the extent of shortfall. So, in any case, the appellant is assured of getting 10 per cent of amount payable under the contract either from the Government of India or from UK Government. The entire amount is receivable under the contract from the Government of India and can, therefore, be deemed to be income accruing or arising to the assessee under Section 9(1)00 of the Act, the same is, therefore, taxable in its hands under Section 5(2). There is nothing contingent about the payment of 15 per cent as pleaded by the assessee as the payment of full 100 per cent is assured to it under the terms of the agreement.

The ITO was, therefore, fully justified in treating gross amount of 14 million FF as the income accruing or arising to the assessee in India and bringing the same to tax after the necessary grossing up in the assessment year 1979-80. This ground of appeal is, therefore, dismissed.

The income-tax payable by the assessee on its income has to be determined in accordance with the provisions of Section 115. A rate of 20 per cent is applicable on the income by way of royalty so much of the amount of such income as consists of lump sum consideration for the transfer outside India of any date, documentation, drawing or specification relating to any patent invention, model, design, secret formula or process or trade mark or similar property. The rate of 40 per cent is applicable in respect of any income by way of fees for technical services, if any included in the total income.

According to the appellant's counsel the fee received during the year is a part of the lump sum consideration and, therefore, liable to be taxed at the rate of 20 per cent. The nature of income according to the appellant is to be determined in accordance with the terms and conditions of the agreement. The ITO has on the other hand observed in his order that the arrangement of making the payment in 10 instalments takes away the character of lump sum consideration from the total amount agreed to be paid under the licence agreement.

In the licence agreement entered into between the appellant-company and the Government of India, the foreign company is entitled to receive a lump sum consideration of 133 million FF in lieu of certain licensing rights granted by it. The concept of lump sum consideration in my view connotes a fixed consideration agreed to in advance as opposed to a consideration which is based on. the volume of the business as well as turnover and extent of production, etc. A lump sum consideration is different from a lump sum payment. In commercial parlance, a lump sum consideration is generally taken to be a consideration which has been fixed at a specified sum and which is not subject to change. It is not necessary in my view that a lump sum consideration should be paid in one instalment only. I understand that the normal practice in the case of all such collaboration agreements with foreign companies is to fix a lump sum consideration which is payable over a period of time during the operation of the contract. It is very rarely that the entire payment is agreed to be paid in a single lump sum. On the other hand there may be some contracts in which the payment of fee or royalty is dependent on the commercial results reflected as a percentage of sales or profit. In the present case, however, the payment to be made to the company is fixed and only the disbursement of the payment has been distributed over a period of time by dividing the sum into a number of instalments. This, however, does not change the character of the payment which will continue to be that of a lump sum consideration payable over a period of time. The appellant is, therefore, justified in claiming that the rate of tax should have been taken at 20 per cent. The ITO is directed to gross up the amount of 14 million FF at the rate of 20 per cent and recompute the rupee equivalent of the gross amount which should be taken as income of the appellant-company.

5. Since the other reasoning of the learned Commissioner (Appeals) is not necessary, it has not been reproduced and we like to clarify that the revenue is not in appeal, but the assessee is and for the assessment year 1979-80 following specific grounds have been raised before us : 1. Your appellants submit that the learned Commissioner (Appeals) X, has erred in upholding in assessing FF 14 million as the income from licence fee instead of FF 11.9 million effectively received by your appellants for the assessment year 1979-80. The amount of FF 2.1 million, being 15 per cent of FF 14 million, withheld by the Government be paid as not includible in the assessable income of the year under appeals 2, 3 and 4. See below* Your appellants crave leave to add, amend, vary, alter, omit or withdraw the above ground of appeal as they may be advised at any time before or at the time of the hearing.

2. That only the amount paid by Government of India during the relevant assessment year should have been brought to tax.

3. That the income should not have been brought to tax on grossed up basis.

6. Ground No. 4 taken by the assessee as above does not arise out of the order of the learned Commissioner (Appeals), hence does not survive for the adjudication and stands rejected, as such.

7. For the assessment year 1980-81 the facts of the case, the reasoning of the lower authorities and the grievance of the assessee remain the same and so are the stand of the learned lower authorities. There is one distinct feature and it is that for this year the assessee raised an additional ground of appeal regarding grossing up of total income at the first appellate stage and the assessee met with failure. There is another feature for this assessment year 1980-81 in as much as for this year the learned Commissioner (Appeals) exercised power of enhancement and the narration on the said issue is to the following effect : I would like to deal with the point regarding enhancement of income at this stage, for which I have already given a notice of enhancement dated 3-3-1984 to the assessee referred to in the beginning of this order. Although, the Income-tax Officer had taxed the gross amount of instalment of 14 million FFs. received in assessment year 1979-80 and I had upheld the action, the Income-tax Officer has allowed a. deduction of 2.1 million FFs. from each of the two instalments taxed in the assessment year 1980-81 being 15 per cent withholding by the Government of India in respect of the each instalment. This action of the ITO is obviously not correct and has resulted in underassessment by 4.2 million FFs.

Assessee's reply dated 16-3-1984 to my enhancement notice has been considered. Most of the objections raised have already been considered by me while deciding the issue in assessment year 1979-80. Only one new objection has been raised by the assessee, namely, that since they have adopted cash method of accounting, the amount withheld by the Government cannot be brought to tax unless it is received by them. This objection raised by the appellant is not correct and is not supported by assessment records. The assessee himself has been declaring its income on the basis of each instalment of 14 million FFs. becoming due minus 15 per cent withheld in respect thereto. Thus in assessment year 1979-80 although the assessee received a gross amount of first instalment amounting to 14 million FFs., without any withholding of 15 per cent, yet it declared a net amount of 11.9 million FFs only on the basis that only this sum was due to it. The department is also taxing the assessee on the basis of the instalments becoming due in each assessment year.

In this connection, I may point out that the Madras High Court has held in the case of CIT v. Standard Triumph (Madras) Co. Ltd. [1979] 119 ITR 573 that in the case of a non-resident, royalty income has to be assessed on accrual basis and not cash basis. This decision of Madras High Court was followed by the Income-tax Appellate Tribunal, Delhi Bench '33', New Delhi in the case of Prentice-Hall of India (P.) Ltd. v. ITO [IT Appeal Nos. 1888 (Delhi) of 1979, 882 and 1149 (Delhi) of 1980] for the assessment years 1975-76 and 1976-77 wherein they upheld that royalty income taxable in the hands of the non-resident company was to be taxed on accrual basis only and not on cash basis.

In view of the above, I do not agree with the objections raised by the counsel of the appellant to the proposed enhancement and direct that the withholding of 15 per cent of each of the two instalments amounting to 2.1 million FFs. in each case and total of 4.2 million FFs. should not be deducted from the gross amount of two instalments to be taxed in the assessment year 1980-81. Thus the amount of two instalments to be taxed will be 28 million FFs. and not 23.80 million FFs. as taxed by the Income-tax Officer.

8. For this assessment year, viz., 1980-81, the grounds raised before us, read as under : 1. That on the facts and in the circumstances of the case the learned Commissioner (Appeals) X, has erred in enhancing the income of licence fee by FF 4.2 million. This amount of FF 4.2 million, being 15 per cent of FF 28 million withheld by the Government of India, be held as not includible in the assessable income of the year under appeal.

2. That withholding of FF 2.1 million for the first instalment received in October 1978 from the second instalment received in May 1.979 be adjusted while computing the assessable income for the above year.

3. That only the amount paid by the Government of India during the relevant assessment year should have been brought to tax.

4. That the income should not have been brought to tax on grossed up basis. The grossing up of income should be done on the basis of decision in the case of CIT v. American Consulting Corporation [1980] 128 ITR 513 (Ori.).

9. At the outset we like to say that ground No. 5 for this year does not survive since it does not arise out of the order of the learned first appellate authority, hence stands rejected.

(i) determination of taxable income for both the assessment years involved and whether it should be the actual receipt or else the income as has been taken by the lower authorities ; and (iii) whether grossing up is warranted on facts and in law and if so, the quantum thereof.

11. We have heard at length Shri G.C. Sharma, the learned senior advocate and Shri S.D. Kapila, the learned senior departmental representative at length, since the appeals were heard extensively on 19-12-1984 and again on 2-1-1985. We have also perused carefully the assessee's paper book which is a common one in relation to both the years under appeal and contains 38 pages including copy of letter dated 29-3-1979 addressed by the Government of India to the assessee-appellant. We have also perused Clause 14 'General obligations' said to be appearing in the main agreement entered into by the Government of India and the assessee-appellant vis-a-vis 'direct supply agreement' between the Government of India the assessee since that clause only deals with taxation matters (sic). The agreement has been claimed by the Government of India, Ministry of Defence in the Department of Defence Production, in a letter addressed to the ITO, as a 'classified' and voluminous document and the Government of India has categorically stated that it could not be furnished. In fact, the said agreement is not required for our purposes, inasmuch as Clause 14.2 which deals with 'General obligations' in the main agreement is only material for our purposes and the other material communication (document) is letter dated 29-3-1979 addressed to the assessee by the Government of India, Ministry of Defence in the Department of Defence Production which deals with the specific issue-'Taxation matters'.

The rights and obligations of the supplier in relation to taxation in India are set out in the letter from the Government of India dated 29th day of March, 1979 a copy of which is annexed hereto as part of annexure 13 and which shall form a part of this agreement provided that all taxes and duties payable outside India in performance of this agreement or otherwise related or incidental thereto shall be borne and paid exclusively by the supplier.

Extracts from letter dated 29th day of 1979 to the extent it is material for our purposes and the subject-matter involved in the present appeals, reads as under : I am directed to refer to your letter No. RHE/ac/ND 0057 dated 7th February, 1979 on the subject noted above and to say that the rights and obligations of British Aerospace (B.Ae.) in respect of payment of dues, fees, taxes, imposts and other like charges in India are set out below : 1. It is confirmed, subject to what is stated in paragraphs 2 and 3 below, that all taxes, duties and levies arising or payable in India shall be borne by the Government of India whether directly in respect of the direct supply agreement, licence agreement, purchase agreement and the technical assistance agreement or directly or indirectly in respect of monies receivable under the abovementioned agreements by B.Ae. All taxes, duties and levies arising or payable outside India shall be borne by B.Ae. whether directly in respect of the performance of the above agreements or directly or indirectly in respect of the monies receivable under the above agreement by B.Ae.

2. It is agreed that the licence fees specified in the licence agreement are the amounts which will be received by B.Ae. after all tax liabilities in India have been taken into account.

The following procedure will apply in the case of licence fees namely : (a) The Government of India may withhold an amount not exceeding 15 per cent of each instalment of the licence fee as it becomes due under the licence agreement.

(b) When the tax liability for a licence fee instalment has been assessed, the Government of India will promptly pay to B.Ae. any amount by which the tax liability for each of the payment is less than 15 per cent.

(c) The Government of India will promptly forward to the B.Ae. a certificate and a copy of the assessment order showing the actual amounts of tax which have been levied and paid in respect of each of the licence fee instalments.

(d) If the Government of India fails to forward such certificate and assessment order as required under preceding sub-paragraph within 5 (five) years of the date of payment, the Government of India shall then forthwith pay to B.Ae. an amount not exceeding 15 per cent of the particular licence fee instalment concerned or the amount which was withheld by the Government of India from the payment, whichever is the lesser.

(e) B.Ae. will endeavour to seek relief regarding double taxation in the UK for the amount of tax paid by the Government of India.

(f) If, for any reason whatsoever B.Ae. is unable to obtain the benefits of double taxation relief in the UK in respect of taxes withheld by the Government of India from the licence fee for the year in which the licence fee is assessable in the UK, B.Ae. will notify the Government of India which will promptly pay to the B.Ae.

the amount of the licence fee instalment concerned not exceeding 15 per cent or the total amount which was withheld by the Government of India from that instalment, whichever is the lesser.

(g) In the event that subsequent to the further payment being made by the Government of India to B.Ae. under the preceding sub-paragraph, B.Ae. is successful in obtaining double taxation relief in the UK in respect of the same tax, then B.Ae. shall promptly pay to the Government of India an amount equal to the relief so obtained.

(h) If the double taxation available to B.Ae. in the UK is in excess of 15 per cent, B.Ae. will promptly forward to the Government of India the excess of such amount.

13. With the above facts as the background, Shri G.C. Sharma, the learned senior advocate, claims that the actual payment by the Government of India to the assessee should be subjected to assessment and charge of income-tax under the provisions of the Act, and further that no grossing up is warranted either on facts or in law. The case of the revenue is that the impugned orders of the learned first appellate authority for both the years, merit to be upheld, since under the terms of the agreement the payment is what becomes due and accordingly accrues and is payable and the actual receipt has got nothing to do with the amount to be subjected to tax, since the amount payable has to be distinguished from the actual payment. However, it is a common ground and common case of both the parties, that the assessments have been framed for both the assessment years by invoking Section 9(1)(vi) of the Act.

(1) The following incomes shall be deemed to accrue or arise in India- (b) a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or (c) a person who is a non-resident, where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India : 15. The first point made out by Shri Sharma, the learned senior counsel, is that the assessee has accounted for the receipts on receipt basis, i.e., that the assessee has declared the income on cash basis, hence the actual amount received is to be the income and for this proposition, he has pressed into service Section 145(1) of the Act. He has further contended that the method of accounting employed by the assessee being on 'cash basis' there is no justification for taking of the income as has been taken by the lower authorities. The learned departmental representative in his reply to this point has contended that since the assessee is a non-resident, in view of decision of the Tribunal, Delhi Bench 'B' in the case of Prentice-Hall of India (P.) Ltd. v. ITO [IT Appeal Nos. 1888 (Delhi) of 1979, 882 and 1149 (Delhi) of 1980], the cash basis system is not available to the assessee. He has further contended that a non-resident assessee is not entitled to declare the income on cash basis, since with a non-resident assessee it cannot be a method of accounting. Additionally, he has relied on the decision of the Hon'ble Supreme Court in the case of Keshav Mills Ltd. v. CIT [1953] 23 ITR 230.

(1) Income chargeable under the head 'Profits and gains of business or profession' or 'Income from other sources' shall be computed in accordance with the method of accounting regularly-employed by the assessee: Provided that in any case where the accounts are correct and complete to the satisfaction of the Income-tax Officer but the method employed is such that, in the opinion of the Income-tax Officer, the income cannot properly be deduced therefrom, then the computation shall be made upon such basis and in such manner as the Income-tax Officer may determine.

The above section speaks of a method of accounting regularly employed by the assessee and a regular method of accounting presupposes maintenance of accounts and speaks of a regular source of income being there. Since the assessee who is a nonresident has an income from royalty payable by the Government of India under the terms of the agreement entered into by the Government of India with the assessee and since within India the assessee is not maintaining any accounts, in our opinion, 'cash basis system' is not available to the assessee ; there being no method of accounting regularly employed by the assessee on the facts of the case.

16. In the case of Keshav Mills Ltd. (supra) their Lordships have held that (as per majority view). [It is clarified here that Section 13 referred to below has a reference to the Indian Income-tax Act, 1922) and is comparable to Section 145(1) of the Income-tax Act] : While in the case of a resident the mercantile system of accounting regularly adopted by him is obligatory on the income-tax authorities for computation of his income, it is doubtful whether that position would be available to a non-resident who maintains his books of account outside British India according to the mercantile system.

Section 13 would only be relevant where the total profits of the assessee have to be computed, in which event he would be entitled to claim that they should be computed according to the system of accounts maintained by him. But the section would hardly be relevant where stray items of income are caught in taxable territories as received in taxable territories by a nonresident.(p. 232) Now on the facts of the assessee's case, it is not the assessee's case that the assessee is maintaining any account books qua this source of income much less, that it can be said to be employing 'cash system' as a regular method of accounting. With these reasoning, on the facts and in the circumstances of the case, the stand of the assessee stands negatived.

The next point made by the learned counsel for the assessee is that within the meaning of Section 9(1)(vi) the word 'payable' should be interpreted as payable by the Government of India to the assessee in the accounting period relevant to the assessment year under appeal and in the context of agreement entered into between them and further to be read along with Government of India's letter dated 29-3-1979 to the assessee. Shri Sharma has, as such, emphasised that the withholding of an amount not exceeding 15 per cent of each instalment of the licence fee as it became due under the agreement should be interpreted as not payable in the accounting period relevant to the assessment year under appeal since the said payment is a contingent one and is payable after a period which is uncertain one and that too after certain other eventualities arise. The learned departmental representative in reply to this has contended that 'payable' has to be interpreted as payable under the agreement, i.e., which becomes due and which accrues and arises and in contradistinction to the word 'receipt'. The learned departmental representative has further contended that words 'due' and 'payable' are interchangeable and withholding of 15 per cent amount out of each instalment has to be interpreted in the context of term (2)(a) which emphasises that withholding is out of amount of instalment which becomes due. Accordingly he has contended that withholding is out of amount due, i.e., amount payable, hence within the meaning of Section 9(1)(vi) the amount of instalment has to be taken as the amount payable and not the actual amount paid.

17. Again referring to paragraph 2 of letter dated 29-3-1979, issued by the Government of India to the assessee, we have to hold that the agreement vis-a-vis licence fee specified in the licence agreement has to be the amount which will be received by the assessee after all taxliabilities in India have been taken into account. This paragraph 2 of letter dated 29-3-1979 when read with term 2(a) makes it amply clear that withholding of amount not exceeding 15 per cent of each instalment of the licence fee as it becomes due under the licence agreement is withheld for taxation purposes, i.e., to meet the tax liabilities in India and in this view of the matter the withheld amount cannot be said to be payable by the Government of India to the assessee under Section 9(1)(vi). There is no escape from this inference, so we hold accordingly.

18. That apart, when we read paragraph 2 of letter dated 29-3-1979 along with sub-paragraphs (a) to (h), it becomes patently clear and is amply evident on the surface of it that the amount to be withheld and not exceeding 15 per cent of each instalment of the licence fee as and when it becomes due under the agreement is subject to certain adjustments and becomes payable in certain eventualities and that process is a long drawn process, since the assessee has to seek relief under the double taxation in the UK for the amount of tax paid by the Government of India, and so on, hence the 15 per cent amount withheld from each instalment becomes contingent in nature and cannot fall in the category of income accruing or arising to the assessee in the accounting period relevant to the assessment year under appeal, much less, it can be said that this is payable by the Government of India to the assessee in the accounting period when each of the instalment becomes due under the agreement. On this reasoning also when this withheld 15 per cent instalment under the agreement becomes contingent, it cannot be a subject-matter of assessment for the said accounting period since contingent payment cannot be enforced as a liability by the claimant from the payer. In the case of E.D. Sassoon & Co. Ltd. v.CIT [1954] 26 ITR 27 (SC) and again referred to by their Lordships of the Hon'ble Supreme Court in a subsequent case of CIT v. Shri Goverdhan Ltd. [1968] 69 ITR 675 at pp. 680-81 their Lordships have observed that 'accrue' means to increase, to augment to be added as increase, to arise or spring as a natural growth or result. In order that income, profits or gains may accrue to a person it is necessary that he must have acquired a right to receive the same or a right to the income, profits or gains has become vested in him though its valuation may be postponed and though its materialisation may depend on the contingency that the making up of the accounts would show income, profits and gains. In the case of CIT v. Ashokbhai Chimanbhai [1965] 56 ITR 42 at pp. 45-46 their Lordships of the Supreme Court have held that, ". . .

the two words ['accrue' and 'arise'] are used to contra-distinguish the word 'receive'. Income is said to be received when it reaches the assessee: when the right to receive the income becomes vested in the assessee, it is said to accrue or arise." The crucial question that is to be asked is as to whether on the facts and in the circumstances of the case, has the assessee a right to the withheld 15 per cent amount of instalment in the accounting period relevant to the assessment year under appeal and whether the assessee could have enforced that right against the Government of India in the said accounting period The answer to the question is certainly in the negative, since what the Government of India has withheld is the amount to meet tax liabilities in India and the adjustments provided in paragraphs 2(a) to 2(h) of the letter dated 29-3-1979 will certainly not give the assessee a right to enforce it in the accounting period, this withheld amount of each instalment. Yet again paragraph 2 of the above letter reads, 'it is agreed that the licence fees specified in the licence agreement or the amounts which will be received by the B.Ae. after all tax liabilities in India have teen taken into account'. This paragraph makes it amply clear that 'licence fees' is the amount to be received by the assessee after all tax liabilities in India have been taken into account and withholding of 15 per cent is for that purpose. Giving due consideration to the reasoning, we are of the opinion, and do hold accordingly, that the actual received amount during the accounting periods relevant to the assessment years under appeal are the amounts payable by the Government of India to the assessee under the agreement and within the meaning of Section 9(1)(vi).

19. That leaves us now with the second issue, viz., grossing up of the amount and again we refer to paragraph 2 of the above letter.

Unnumbered paragraph 1 of the said letter is also relevant, since it speaks of the fact that all taxes, duties and levies arising or payable in India shall be borne by the Government of India. Paragraph 2 of the said letter again emphasises the fact that licence fees specified in the licence agreement for the amounts which will be received by the assessee after all tax liabilities in India have been taken into account and withholding of 15 per cent is in that direction, hence on the facts and in the circumstances of the case, the grossing up has to be there. Section 115A is the relevant section dealing with this issue and the relevant provision, for our purposes, reads as under: (1) Subject to the provisions of Sub-sections (1A) and (2), where the total income of an assessee, being a foreign company, includes any income by way of- (b) royalty or fees for technical services received from Government or an Indian concern in pursuance of an agreement made by the foreign company with Government or the Indian concern after the 31st day of March, 1976, and where such agreement is with an Indian concern, such agreement is approved by the Central Government ; It is pertinent to note here that under Explanation (c) to Sub-section (1) of Section 115A royalty is defined to 'have the same meaning as in Explanation 2 to Clause (vi) of Sub-section (1) of Section 9'.

20. The Hon'ble Orissa High Court in the case of CIT v. American Consulting Corporation [1980] 123 ITR 513 was seized of a similar situation. There also in the case of a non-resident corporation the taxes in India were to be paid by the Indian company under an arrangement entered into between the non-resident corporation and the Indian company and their Lordships while referring to the said agreement held that it did not admit of a system of a tax on tax since what was available to be added under the contract was addition of that benefit which the corporation had enjoyed by being free from the liability of income-tax. Their Lordships, as such, held that the value of benefit of perquisite which arose to the non-resident corporation by way of its tax liability having been met by the Indian company, the benefit and perquisite had to be limited to the amount of actual tax due. Their Lordships, as a net result, held that in the circumstances, grossing up was not permissible. The ratio of the said decision cannot be applied since Section 115A was brought on the statute book with effect from 1-6-1976 by 'insertion' by the Finance Act, 1976 and assessment years involved in the case before the Hon'ble Orissa High Court were 1964-95, 1965-66 and 1966-67, hence no grossing up provision was there. Accordingly on this issue we do uphold the grossing up of 20 per cent as upheld by the learned Commissioner (Appeals). We will also add that on this issue the revenue is not in appeal against the order of the learned Commissioner (Appeals) while the assessee is.

21. In the net result, the appeals stand allowed to the extent as above and our final conclusions are as under : (i) taxation income for both the assessment years involved in these appeals is the amount paid by the Government of India to the assessee-appellant in the relevant accounting period ; and (ii) the grossing up on the facts and in the circumstances of the case has to be to the extent of 20 per cent, i.e., as per Section 115A and as held by the learned Commissioner (Appeals).


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