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inspecting Assistant Vs. Cutler Hammer Europa Ltd. - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Bangalore
Decided On
Reported in(1986)16ITD280(Bang.)
Appellantinspecting Assistant
RespondentCutler Hammer Europa Ltd.
.....both the appeals is about the taxabilityof the fees received by the non-resident company from the indian company.2. during the previous year relevant to the assessment year 1980-81, the assessee received a sum of $ 17,342 from kudremukh iron ore (kiocl) towards services rendered by one of the engineers of the assessee-company who was sent to supervise the erection and commissioning of the machinery at kudremukh iron ore plant. the i ac held that the fees received by the non-resident company for the services rendered by its engineer amounting to $ 17,342 or rs. 1,41,511 were taxable as income deemed to accrue or arise in india under section 9(1) of the income-tax act, 1961 ('the act'). he held that the amount could be considered as fees for technical services as denned in section.....
1. These appeals are by the revenue. The common point in both the appeals is about the taxabilityof the fees received by the non-resident company from the Indian company.

2. During the previous year relevant to the assessment year 1980-81, the assessee received a sum of $ 17,342 from Kudremukh Iron Ore Co.

Ltd. (KIOCL) towards services rendered by one of the engineers of the assessee-company who was sent to supervise the erection and commissioning of the machinery at Kudremukh Iron Ore Plant. The I AC held that the fees received by the non-resident company for the services rendered by its engineer amounting to $ 17,342 or Rs. 1,41,511 were taxable as income deemed to accrue or arise in India under Section 9(1) of the Income-tax Act, 1961 ('the Act'). He held that the amount could be considered as fees for technical services as denned in Section 9(1)(vii) and the same did not come within the exception mentioned in Explanation 2 to that Sub-section. The Commissioner (Appeals) held that the fees was received as consideration for construction, assembly, mining or like project and, therefore, came within the exception provided under Explanation 2. He, accordingly, deleted the addition, in the absence of a business connection of the non-resident in India. The revenue is in appeal.

3. It is seen that a non-resident company entered into two contracts.

One was for making available the services of an engineer to supervise the erection of the machinery sold by the company to KIOCL. Another was for direct supply of the machinery required by KIOCL. Section 9(1)(vii) reads as follows : (b) a person who is a resident, except where the fees are payable in respect of services utilised in 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 fees are payable in respect of services utilised in 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: 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.

Explanation 2 : For the purposes of this clause, 'fees for technical services' means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head 'Salaries'.

It is obvious that the assessee itself did not enter into a direct contract with KIOCL for construction, assembly, mining or like project. The Explanation makes it clear that to escape from the net of taxation such a contract should be undertaken by the recipient of the fees. The assessee supplied the machinery. It was the duty of KIOCL itself to erect the machinery. In order to see that the erection is properly made the assessee deputed an engineer to supervise the assembling of the machinery at the plant site. The responsibility for assembling the plant was not that of the non-resident assessee at all. That work was not undertaken by it.

The provision of the services of an engineer to supervise the work does not amount to the assessee entering into a contract for assembling the machinery. A contract for assembling the machinery envisages that the entire staff required for assembling the machinery should be brought or employed by the assessee-company. The staff required for the purpose was employed by KIOCL. It also purchased the necessary accessories for that purpose. All that it got from the non-resident company was a supervisor. It is, therefore, obvious that the case does not come within the exception carved out by Explanation 2 to Section 9(1)(vii) and the Commissioner (Appeals) was in error in deleting the addition. A similar decision has been taken by us in Income-tax Appeal Nos. 1048 (Bang.) of 1982 and 192 (Bang.) of 1983 dated 10-1-1984.

On the same lines, we hold that the Commissioner(Appeals) was in error in deleting the additon of Rs. 1,34,062 for the assessment year 1981-82.

4. There is one other point which is peculiar to the assessment year 1980-81 only. The non-resident company supplied machinery worth $ 17,88,337 to KIOCL. The IAC, who made the assessment, held that the company had business connections in India. He observes that the assessee-company is a subsidiary of Cutler Hammer Ltd., USA. The Indian company, Bharatia Cutler Hammer Ltd. was an agent of the assessee-company. The nonresident company had collaboration with Indian agents till September 1977. It withdrew its financial interest in the Indian company because of Foreign Exchange Regulations Act but continued technical collaboration. The Indian company represents the assessees who are in USA and UK. The Indian company renders technical services to various customers in India and submits quotations to Indian parties for import of various equipments. For doing services to the foreign company, the Indian company receives commission ranging between 5 and 10 per cent of the cost of components imported by the customers.

The non-resident company's sales to Indian customers are secured through the Indian agent. The assessee-company secured the order for supply of 6.6 KV Motor Control Centres (MCC) from KIOCL through services of Bharatia Cutler Hammer Ltd. A global tender was floated by KIOCL in 1977. The quotation of Cutler Hammer Europa Ltd., i.e., the assessee non-resident company, was accepted in the face of stiff competition. The assessee succeeded in clinching the deal through the services of the Indian company who were looking after the interests of their principal. The Indian company agreed not to claim any agency commission as a special case, since the contract would raise their status in India. On these facts, the IAC held that the assessee had business connection in India. On the above facts, he held that income could be deemed to have accrued or arisen to the non-resident company in India because of the business connection. Such income was estimated at 5 per cent of the sale price of machinery to KIOCL. This came to Rs. 7,29,641 which was included in the total income of the assessee.

5. It was pleaded before the Commissioner (Appeals) on behalf of the assessee that the order for purchase of machinery was not executed in India but was received by the Indian company since the directors could not prolong their stay in India. The sale proceeds were paid in UK. The Indian company was never a regular agent of the assessee-company. The question of waiving their commission did notarise. Parts of the depositions made by Shri H.S. Nagaraja, an official of the company before the IAC have been extracted in the appellate order. In one statement, it is stated that Bharatia Cutler Hammer Ltd. had rendered only follow up services of assisting Cutler Hammer Europa Ltd. in begging the contract from KIOCL. It was also stated that although the Indian company was receiving commission for sale of components of Cutler Hammer group of companies, it agreed not to claim any agency commission on the sale of 6.6 KV MCC as a special case. The Commissioner (Appeals) held that there was not a regular principal-agent relationship between the UK company and the Indian company in respect of the transaction in question. The assessee is not a subsidiary of an American company, as presumed by the IAC. The companies are independent in terms of their shareholdings. Since the companies belong to the same group and manufacture the same products, there are some business transactions with regard to the component and spare parts dealt with by them. The Indian company receives commission on some of these transactions but the supply of machinery to KIOCL is a separate category by itself. The Indian company received no monetary consideration as far as this transaction is concerned.

He then examined the question whether the association of the Indian company with the negotiations could be termed as business connection.

Although the Indian company and its representatives were actively associated with the procurement of the purchase order by the assessee-company sach activities did not constitute business connection. After considering various case laws, he held that the activities of the Indian company did not amount to establishment of a business connection in India so far as the sale of 6.6 KV MCC to KIOCL was concerned. He, accordingly, deleted the addition made by the IAC.The revenue is in appeal on this point also.

6. The learned departmental representative took us in detail through the orders of the authorities below. He submitted that the Indian company was already in receipt of commission on sales made by the foreign principal. It would normally have been entitled to a commission on the sale of 6.6 KV MCC also but for its generous gesture to waive the same. Therefore, there was a relation of principal and agent between the nonresident assessee and the Indian company, i.e., there was already an established business connection. But for the waiver of the commission the Indian company would have received Rs. 7,29,162. In the present case, the point is not the taxability of the income accruing to the Indian company. It is the taxability of the income deemed to accrue or arise to the foreign company. Once a business connection is established the taxing authorities should see what portion of the sale proceeds could be deemed to be the income accruing or arising in India. The commission foregone by the Indian company gives a measure of the income deemed to accrue to the non-resident company. It is in this fashion that the income under Section 9(1)(i) has been determined. He submitted that the facts on record amply justify the inclusion of the same sum in the asses-see's total income.

The learned representative of the assessee relied on the order of the Commissioner (Appeals). He submitted that the purchase contract was separate being a direct supply of machinery from England to KIOCL. No 286 INCOME-TAX TRIBUNAL DECISIONS [ Vol. 16 profit accrued in India or could be deemed to accrue in India. He, accordingly, submitted that the order of the Commissioner (Appeals) should be sustained.

7. We have heard the rival submissions. In the case of CIT v. Hindustan Shipyard Ltd. [1977] 109 ITR 158 (AP), it was held that there must be something more than mere transaction of purchase and sale between principal and principal in order to bring the transaction within the purview of 'business connection' : (a) In CIT v. Fried Krupp Industries [1981] 128 ITR 27 (Mad.) and Addl. CIT\. Bharat Fritz Werner (P.) Ltd. [1979] 118 ITR 1018 (Kar.), it was held that where a person purchases machinery or goods from a foreigner without anything more, and the purchased machinery or goods is utilised in commercial operations in India by the Indian purchaser, then the Indian merchant is earning his own income. The foreigner in such a principal to principal transaction has nothing to do with the Indian assessee's operations in India. The foreigner, by selling machinery or goods abroad, had no further interest in the business in India. In such transactions, there is no continuity of business relationship and no question of business connection does generally arise.

(b) In CIT v. R.D. Aggarwal & Co. [1965] 56 ITR 20 (SC), the assessee canvassed orders from dealers in Amritsar for the supply of goods and communicated them to certain non-resident exporters. The assessee had no authority to accept the orders on behalf of the non-residents. The orders were accepted by the non-residents. Price was received by them and delivery also given outside the taxable territories. No operations such as procuring raw materials, or manufacture of finished goods took place within the taxable territories. The assessee was entitled to certain COTI-mission on these sales. The Supreme Court held that there was no business connection between the assessee and the non-residents. Business connection may take several forms ; it may include carrying on a part of a main business or activity incidental to the main business of the non-resident through an agent or it may merely be a relation between the business of the non-resident and the activities in the taxable territories which facilitates or assists the carrying on of that business. The question has to be determined on the facts and in the circumstances of each case. The expression 'business connection' postulates a real and intimate relation between the trading activity carried on outside the taxable territories and the trading activity within the territories ; the relation between the two contributing to the earning of the income by the non-resident in his trading activity.

(c) We now refer to certain departmental instructions. In a Circular No. 17(XXXVII-I) of 1953, dated 17-7-1953, it is stated as follows : Non-resident exporters - Where the transactions of sales and purchases are as between principal and principal, no liability of the exporter arises in India on accrual basis, and the resident importer cannot be held to be the agent of the exporter on the basis of such transactions. It is difficult to lay any hard and fast criteria for determining whether the transactions are between principal and principal. The real relation between the parties will have to be looked into from any agreement existing between them, but where: (a) the purchases made by the resident are outright on his own account, (b) the transactions between the resident and non-resident are made at arm's length at prices which would be normally chargeable to other customers, (c) the non-resident exercises no control over the business of the resident and sales are made by the latter on his own account, or (d) the payment to the non-resident is made on delivery of documents and is not dependent in any way on the sales to be effected by resident, it can be inferred that the transactions are as between the principal and principal.

The only other question that may arise in such a case is whether there is any liability of the non-resident Uunder Section 4(1 )(a) of the Income-tax Act on the basis of receipt of sale proceeds, including profit, in India. Here again, the main question is whether the agent took all the risks attendant on the import and no part of the risk in trading was taken up by the principal. If, for instance, the non-resident made over the shipping documents to a bank in his own country which discounted the documents and sent them for collection to bankers in India who presented the sight or usance draft to the resident importer and delivered the documents to him against payment or acceptance by the latter, no attempt should be made to assess the non-resident on receipt basis. In such a transaction, the non-resident, in effect, receives the value of the documents in his own country.

(d) In the light of the above case laws and circular, we have to determine whether there was business connection in India insofar as the supply of 6.6 KV MCC is concerned. From the facts, it is seen that it is a transaction between the resident and the non-resident at arm's length. This does not lead to a business connection. The Indian company's officials might have taken part in clinching the deal but that does not mean that there is a business connection established through the participation of the Indian company. The Indian company at best is entitled to some remuneration, but the fact that remuneration is given to the Indian company for services rendered is not enough to bring the transaction within Section 9(1 )(i')- For example, let us say that when a foreign principal arrives in India, a travel agent offers to take him to the concerned places and is remunerated for this service. This will not amount to business connection. Similarly, if the non-resident asks certain people to follow up the deal in the taxable territories that w ould not amount to a business connection. Even if the Indian company had been paid for services rendered by it to get contracts, it would not amount to a business connection. There must be an agent of the non-resident principal in India who could act on behalf of the principal. In this case, the tender is floated by KIOCL. The foreign company bids for the same. The contract is signed by KIOCL and the non-resident. The local company has no authority to bind the foreign principal by any of its action. It can negotiate and convey the views of one party to another but cannot sign the deal on behalf of the nonresident. It is only in case where the non-resident has an accredited agent in the taxable territory who can accept deals on behalf of the nonresident a business connection could be said to have been established. The above proposition is fully supported by the decisions cited above and particularly the Supreme Court decision in R.D. Aggarwal & Co.'s case (supra). Moreover, the case clearly falls within the circular issued by the Board. Under these circumstances, we hold that the Commissioner (Appeals) was justified in deleting the addition made in this behalf.

8. In the result Income-tax Appeal No. 414 (Bang.) of 1984 is partly allowed and Income-tax Appeal No. 415 (Bang.) of 1984 is allowed.

9. The cross-objections filed by the assessee being merely in support of the order of the Commissioner (Appeals) are dismissed as not maintainable.

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