1993 (11) TMI 31 - HC - Income Tax

Business Connection, Foreign Company, In The Nature, Income Deemed To Accrue Or Arise In India, Income Tax Act, Indian Company, Revenue Receipt, Setting Up

Issues Involved:
1. Taxability of the "absence fee" of Rs. 47,428 in the hands of the non-resident assessee-company.
2. Whether the tax paid by the Indian company on behalf of the assessee could be grossed up and included in the income of the assessee.

Detailed Analysis:

1. Taxability of the "absence fee" of Rs. 47,428 in the hands of the non-resident assessee-company
The primary issue was whether the "absence fee" paid by the Indian company to the non-resident assessee-company was taxable as income in India. The assessee, a non-resident company, entered into an agreement with an Indian company to send technicians to India to assist in manufacturing licensed products. The Indian company paid Rs. 47,428 as "absence fee" to compensate for the salary paid to these technicians in Japan during their absence.

The Inspecting Assistant Commissioner (Assessment) initially held that the "absence fee" represented income arising from a business connection in India under section 9(1)(i) of the Income-tax Act, 1961. However, the Commissioner of Income-tax (Appeals) overturned this decision, deeming the amount as income of the employees under section 9(1)(ii), not the assessee-company. This view was upheld by the Income-tax Appellate Tribunal.

Upon review, the court examined the provisions of section 9(1)(i) and (ii) of the Income-tax Act, which create a legal fiction deeming certain incomes to accrue or arise in India if they result from a business connection in India. The court noted that the "absence fee" was not a direct salary payment to the technicians but a compensation to the assessee-company for business services rendered in India. Thus, the "absence fee" was deemed to be income arising from a business connection in India and taxable in the hands of the assessee-company.

The court distinguished this case from precedents like Carborandum Co. v. CIT [1977] 108 ITR 335 (SC) and Bharat Heavy Plate and Vessels Ltd. v. Addl. CIT [1979] 119 ITR 986 (AP), where the services were rendered entirely outside India or the personnel were not considered employees of the Indian company. Here, the technicians remained employees of the non-resident company, and the "absence fee" was a business expense related to services rendered in India.

2. Grossing up and inclusion of tax paid by the Indian company in the income of the assessee
The second issue was whether the tax paid by the Indian company on behalf of the assessee could be grossed up and included in the assessee's income. The agreement stipulated that any tax payable on the "absence fee" would be borne by the Indian company. The Inspecting Assistant Commissioner (Assessment) included this tax liability in the gross income of the assessee-company.

The court held that the tax paid by the Indian company should indeed be added to the "absence fee" and included in the total income of the assessee-company. The rationale was that the "absence fee" was a business income arising from a business connection in India, and the tax paid by the Indian company on behalf of the assessee was part of this income. The court rejected the argument that the assessee-company acted as a trustee for its employees in receiving the "absence fee."

Conclusion
The court concluded that the Income-tax Appellate Tribunal erred in holding that the "absence fee" of Rs. 47,428 was not taxable in the hands of the assessee-company and that the tax paid by the Indian company could not be grossed up and included in the income of the assessee. The reference was answered in favor of the Revenue and against the assessee, with no order as to costs.

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