1. At the instance of the Commissioner of Income-tax (Delhi-II), New Delhi, the following question has been referred to us under s. 256(1) of the I.T. Act, 1961 (for short 'the Act') by the Income-tax Appellate Tribunal, Delhi Bench 'C' :
'Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the order of the ITO under section 195(2) of the I.T. Act, 1961, was without jurisdiction and, thereforee, null and void ?'
2. The Jay Engineering Works Limited, the assessed, was incorporated as a public limited company. It entered into an agreement with M/s Arnaldo Vigerallin S.P.A., stated to be an Italian company, having its principal office of business in Italy. As will be seen from the statement of case, the agreement was entered into in connection with the assessed company's desire to manufacture Zig Zag Sewing Machines in India. It was agreed between the parties that the Italian company shall assist the assessed-company in their project on the terms and conditions contained in the said agreement. The Italian company were to supply the know-how which included all inventions, processes, patent, engineering and manufacturing skill and other technical information. The assessed-company was to pay a sum of U.S. Dollars 20,000 as a consideration for the sale and transfer of the technical know-how. The assessed-company was also to pay royalty to the Italian company at the rates mentioned in clause 4 of the agreement. In pursuance of the said agreement the assessed-company in order to make the payments to the Italian company applied to the ITO on February 3, 1967, for a tax clearance certificate contending that no tax was deductible from payment to the Italian company, which was a non-resident company. The ITO passed an order on February 28, 1967, under s. 195(2) of the Act determining the net Indian portion of the profits of the assessed-company at the rate of 33 1/2% of the payments other than royalty to the non-resident company. The assessed appealed to the AAC of Income-tax. It was contended that there was no business connection between it and the Italian company and, thereforee, the provision of s. 195 of the Act were wrongly applied by the ITO to the assessed's case. The AAC by his order dated March 3, 1970, rejected this contention. He agreed with the ITO that there was a business connection between the two companies and, thereforee, the Indian portion of profits was rightly determined under s. 195(2) of the Act by the ITO.
3. The assessed filed a further appeal to the Income-tax Appellate Tribunal. The main contention of the assessed-company was that the provisions of s. 195(1) of the Act were not applicable. On the basis of a decision of the Calcutta High Court reported as Czechoslovak Ocean Shipping International Joint Stock Company v. ITO : 81ITR162(Cal) , it was, however, argued before the Tribunal that there was no jurisdiction with the ITO to pass any order under s. 195(2) of the Act as the condition for making such an order were not fulfillled. It was submitted that no application was made by the assessed under s. 195 of the Act and the ITO could not assume jurisdiction to pass an order under s. 195(2) of the Act. It was also submitted that the assessed had merely applied for a tax clearance certificate as per its application dated February 3, 1967. The application was not made available to the Tribunal at the time of hearing of the appeal, but the Tribunal referred to the opening paragraph of the ITO's order under s. 195(2) of the Act which read as follows :
'The resident party filed an application on February 3, 1967, for tax clearance certificate contending that no tax is deductible from payments to the non-resident which is capital in nature'.
4. The Tribunal, thereforee, was of the view that the assessed had merely applied for a tax clearance certificate and had also contended that no tax was payable. Consequently, it was held that the requirements of an application under s. 195(2) of the Act were not satisfied, and the order of the ITO was without jurisdiction and was null and void.
5. There is no form prescribed for an application under s. 195(2) of the Act. It was contended by Shri K. K. Wadhera, on behalf of the Department, that the assessed could always submit to the ITO to treat the application for grant of a tax clearance certificate as an application under s. 195(2) of the Act inasmuch as there is no other provision in the Act under which the ITO could act. The order of the ITO specifically states that it was passed under s. 195(2) of the Act and the assessed company contested this order on merits only. Section 248 of the Act provides for an appeal against the order passed under s. 195 of the Act.
6. In support of his contention, Shri Wadhera relied upon a decision of the Allahabad High Court in Rattan Lal Ved Prakash v. CIT : 144ITR135(All) . The case pertained to s. 3(4) of the Act. Under this section, the assessed cannot change its previous year once having exercised the option, without the consent of the ITO and upon such conditions as the ITO may think fit to impose. In this case, the assessed did not file any application under s. 3(4) of the Act but filed a return for the changed period after having voluntarily effected a change in his previous year after a settlement with the CIT and the ITO acting on the return, passed an order of assessment. It was held that the consent of the ITO under s. 3(4) of the Act could be implied for the change in the previous year though no formal application was made by the assessed and there was no express order passed by the ITO permitting the assessed to change his previous year. It was held that the Act did not require an application in any particular form being submitted to the ITO under s. 3(4) of the Act. In similar circumstances, the Punjab and Haryana High Court in Karnal Kaithal Co-operative Transport Society Ltd. v. CIT held that the voluntary submission by the assessed of return for the previous year effecting a change amounted to an application for change of the previous year and acceptance of these returns by the ITO amounted to his consent for the change.
7. It was submitted before us that there was no provision under the Act under which the assessed could apply for a tax clearance certificate. Our attention was, however, drawn to certain directions issued by the Reserve Bank of India under s. 9 of the Foreign Exchange Regulation Act as contained in the book 'Foreign Exchange Control Regulations in India' Vol. I compiled by R. Kumar and I. D. Gupta. Paragraph 24A. 11(ii) at p. 189, reads as under :
'Remittance of technical know-how fees, royalties, etc., falling due under the collaboration agreement will be allowed by the Reserve Bank strictly in accordance with the terms and conditions approved by Government. Applications for the purpose should be made through an authorised dealer supported by a statement certified by the company's auditors showing the computation of the net remittable amount (citing references to Government approval and clause (a) of the collaboration agreement, wherever necessary), amount deducted on account of tax, etc., and other documents and particulars that may be specified by Reserve Bank. Payments towards consideration for use of foreign trade mark should not be included in such applications. Such remittances will be required to be made separately with prescribed documents (see paragraph 25A. 4(ii))'.
8. Shri G. C. Sharma, on behalf of the assessed, contended that an application was filed before the ITO in view of the aforesaid directions of the Reserve Bank and that no application under s. 195(2) of the Act was made. Under s. 195 of the Act, any person responsible for paying to a non-resident, not being a company, or to a company which is neither an Indian company nor a company which has made the prescribed arrangements for the declaration and payment of dividends within India, any interest, not being 'Interest on securities', or any other sum, not being dividends, chargeable under the provisions of this Act, shall, at the time of payment unless he is himself liable to pay any income-tax thereon as an agent, deduct income-tax thereon at the rates in force Omitting the provisos to this sub-s. (1), sub-s. (2) reads as under :
'Where the person responsible for paying any such sum chargeable under this Act (other than interest including interest on securities, dividend and salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the Income-tax Officer to determine, by general or special order, the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is so chargeable'.
9. Thus, relying on the decision of the Calcutta High Court mentioned above, Shri Sharma contends that an application under s. 195(2) of the Act pre-supposes that the person responsible for making payment to a non-resident is in no doubt that tax is payable in respect of some part of the amount to be remitted to a non-resident but is not sure what should be the portion so taxable, or the amount of tax to be deducted. He can make an application to the ITO for determining the amount, and that it is only when these conditions are satisfied that an application is made to the ITO and then the question of making an order under s. 195(2) would arise. It was submitted that where the ITO is only approached for a certificate that no tax is due and such a certificate was required by the Reserve Bank, it cannot be said that an application has been made under s. 195(2) of the Act, and any order under s. 195(2) in such a case would be in excess of the jurisdiction conferred on the ITO by the Act.
10. In the Calcutta High Court case in Czechoslovak Ocean Shipping International Joint Stock Co. v. CIT : 81ITR162(Cal) , the ITO was approached for a certificate that no tax was due in respect of freight charges for goods unloaded at an Indian port. This was when the agents for the non-resident shipping company wanted to remit the freight charges outside India where the head office of the non-resident company was situated as the Reserve Bank required the agents to produce the clearance certificate from the income-tax authorities. The agents were informed by the ITO that the freight earnings received in the taxable territories on behalf of the non-resident principal were assessable under s. 5 of the Act. Certain details were asked for from the agents by the ITO. After exchange of certain letters, the ITO informed the agents that they were liable to deduct tax under s. 195 of the Act from the freight earnings and required them to pay tax. It was against this order that the non-resident shipping company and the agents obtained the rule. On the question of the validity of the order purported to have been made under s. 195 of the Act, the court held as under (p. 168 of 81 ITR) :
'This section enjoins a person responsible for making any payment to a non-resident to deduct tax if such payment is taxable under the Act before making the payment. Whether such a person is not sure as to which part of the amount payable to the non-resident is chargeable to tax, he can apply to the Income-tax Officer to determine the proportion of the sum so chargeable and on such application the Income-tax Officer is to make an order determining the proportion and the tax to be deducted under sub-section (1). The application of sub-section (2) pre-supposes that the person responsible for making the payment to the non-resident is in the no doubt that tax is payable in respect of some part of the amount to be remitted but is not sure what should be the amount to be remitted but is not sure what should be the portion so taxable or the amount of tax to be deducted. If these conditions are satisfied and the person responsible for making the payment applies to the Income-tax Officer, then the question of income-tax Officer, making an order under section 195(2) arises. In this case can it be said that the Khemkas (agents) made an application to the respondent No. 1 under section 195(2) The admitted facts are that the Khemkas applied for sanction of the Reserve Bank to remit a certain amount to their non-resident principals and that the Reserve Bank wanted a clearance certificate from the Income-tax Department that no tax was payable respect of the amount sought to be remitted. By its letter dated the 1st April, 1965, the Khemkas wrote to the respondent-Income-tax Officer to confirm that no income-tax was payable on freights for import discharged in Calcutta as the freights are deemed to have been earned by the shipping company abroad in respect of both the vessels. This cannot be construed as an application to the respondent-Income-tax Officer what portion of the amount was chargeable to tax and the amount of the tax to be deducted under section 195(2).'
11. The court accepted the argument of the petitioners that the ITO was approached only for a certificate that no tax was due in respect of the freight charges as the certificate was required by the Reserve Bank before issuing the necessary sanction and that it was always the case of the agents that no tax was payable is respect of the freight as no part of it was earned in India. Reference was also made to the dictionary meaning of the word 'application' as 'including a request and making a request', and it was submitted that in that case there was no request by the agents to determine that amounts of the tax to be deducted and retained by them. The court held that there was no application under s. 195(2) of the Act.
12. As noticed above, there is provision under the Act under which an application for grant of a tax clearance certificate could be made. When the assessed-company approached the ITO, in the instant case, he treated the application for grant of a tax clearance certificate as one under s. 195(2) of the Act. Though the opening words of the application record the contention of the assessed-company that 'no tax is deductible from payments to the non-resident which is capital in nature', this application was always treated as one under s. 195(2) of the Act. The assessed-company supplied the relevant information asked for by the ITO and participated in the proceedings before him. In the grounds of appeal before the AAC as well as the Tribunal it was never the case of the assessed-company that the ITO lacked jurisdiction because no application under s. 195(2) of the Act was made before him. It appears that the judgment of the Calcutta High Court. The assessed-company also acted on the order of the ITO under s. 195(2) of the Act.
13. The ITO could not act under the Act to grant a tax clearance certificate to the assessed-company. He is an income-tax authority under s. 116 of the Act and his jurisdiction is prescribed by s. 134 of the Act. What would the assessed-company do if the ITO had declined to take any action on the application of the assessed-company for grant of a tax clearance certificate as claimed by it Certainly, a direction by the Reserve Bank of India for production of a tax clearance certificate by the ITO could not confer jurisdiction on the ITO and particularly when it has also not been shown if such a direction is of statutory character. The order of the ITO passed under s. 195(2) of the Act shows that he had examined the relevant contract and certain other documents and order was passed after hearing the assessed-company. Even if the application was for grant of a tax clearance certificate the assessed-company could submit before the ITO to treat it as application under s. 195(2) of the Act. It is admitted case that no particular form of such an application is prescribed. It cannot be said that the application must contain in it all the requirements of s. 195(2) of the Act to enable the ITO to exercise his jurisdiction. An assessed could approach the ITO by merely stating that as order under s. 195(2) of the Act may be made. Even mentioning of a wrong section is immaterial. Even in the grounds of appeal either before the AAC or the Income-tax Appellate Tribunal it was never the case of the assessed-company that the ITO had no jurisdiction to pass an order under s. 195(2) of the Act as is being now contended on the basis of the Calcutta case cited above. In that case, the rule was obtained immediately the ITO had passed an order under s. 195(2) of the Act. The conduct of the assessed-company in the present case points to the contrary.
14. In this view of the matter, we would, thereforee, hold that the ITO had jurisdiction to pass an order under s. 195(2) of the Act in the present case. The reference is, thereforee, answered in the negative, and in favor of the Department, leaving the parties to bear their own costs.
15. Since the Tribunal had disposed of the appeal on a preliminary point, the matter will have to go back to the Tribunal for decision on merits.