1986 (4) TMI 123 - AT - Income Tax

Summary

Issues Involved:

1. Whether Mr. Clark was an employee of the West German company.
2. Applicability of exemption under section 10(6)(vi) of the Income-tax Act, 1961.
3. Method of grossing up income for tax purposes.

Issue-wise Detailed Analysis:

1. Whether Mr. Clark was an employee of the West German company:

The assessee-company argued that Mr. Clark was an employee of the West German company, as evidenced by a certificate dated 13-4-1984 from the West German company. The Commissioner (Appeals) initially refused to admit this certificate because it was not produced before the ITO. However, the Tribunal found that there was sufficient reason for the delay in obtaining the certificate and that it should have been admitted as it was a crucial piece of evidence. The Tribunal admitted the certificate and concluded that Mr. Clark was indeed an employee of the West German company, citing various legal precedents that indicated the test of control over the manner of work is not universally applicable in determining an employer-employee relationship.

2. Applicability of exemption under section 10(6)(vi) of the Income-tax Act, 1961:

The Tribunal analyzed section 10(6)(vi) and found that all conditions specified therein were satisfied:
- The foreign enterprise (West German company) was not engaged in any trade or business in India.
- Mr. Clark's stay in India did not exceed 90 days; he stayed for only 38 days.
- The remuneration received by Mr. Clark was not liable to be deducted from the income of the West German company.

Given these conditions, the Tribunal held that the remuneration received by Mr. Clark was exempt under section 10(6)(vi).

3. Method of grossing up income for tax purposes:

The ITO had grossed up the income by adding tax on tax, arriving at a grossed-up income of Rs. 3,75,320 and levying a tax of Rs. 2,45,270. The Tribunal found this method to be improper, referencing the Andhra Pradesh High Court's decision in CIT v. Superintending Engineer, Upper Sileru, which stated that such a method of grossing up by working out tax on tax until a '0' figure is reached is not proper. The Tribunal concluded that the grossing up should be done in accordance with the guidelines laid down by the Andhra Pradesh High Court and that the method used by the ITO could not be sustained.

Conclusion:

The Tribunal allowed the appeal, determining that:
- Mr. Clark was an employee of the West German company.
- The remuneration received by Mr. Clark was exempt under section 10(6)(vi).
- The method of grossing up income adopted by the ITO was incorrect and needed to be revised as per the Andhra Pradesh High Court's guidelines.