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TMI Blog1989 (5) TMI 103X X X X Extracts X X X X X X X X Extracts X X X X ..... e rate of tax to be deducted at 40%, the ITO after grossing up the amount of tax with the net amount payable, arrived at the tax figure of Rs. 19,750, which amount he directed the assessee to deposit. 2.1 The assessee aggrieved by this directive order of the ITO passed u/s 195(2) preferred appeals to the CIT(A). The CIT(A) considered the case of CIT v. American Consulting Corpn. [1980] 123 ITR 513 (Ori.). He was of the view that the Mysore High Court ruling in the case of Tokyo Shibaura Electric Co. Ltd. v. CIT [1964] 52 ITR 283 was the direct authority on the subject as in that case of payment of royalty, it was held that the real income by way of royalty was such amount as would, if the tax thereon had been deducted, have left the sum in the hands of the assessee and not the royalty payable plus the tax thereon. He also placed reliance on Sandwell Co. v. ITO [1983] 6 ITD 183 (Cal.). 2.2 Before us the learned counsel Shri M.S. Syali placing reliance on the Andhra Pradesh High Court ruling in the case of CIT v. Super intending Engineer [1985] 152 ITR 753, submitted that his plea is only that the grossing up has to be limited to the tax on the technical services and not the ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies, 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. Sec. 115A would also be necessary to be brought out here : (1) Subject to the provisions of sub-section (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 an Indian concern in pursuance of an agreement made by the foreign company with the Indian concern after the 31st day of March, 1976, and approved by the Central Government, income-tax payable shall be the aggregate of-- (iii) the amount of income-tax calculated on the income by way of fees for technical services, if any, included in the total income, at the rate of forty per cent. [Emphasis supplied] 4. The reading of the above sections make it clear that the non-resident company shall be liable f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount (net of taxes) that is payable to the non-resident company. 5. Sec. 195 had been introduced only to facilitate the collection of income-taxes due on such technical services rendered by the non-resident company to an Indian company, through the Indian Company. This is clear from the wordings contained therein "Any person responsible for paying to a non-resident ..... 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". The purpose of facility is abundantly clear since it would be impossible to keep track of the foreign companies but would be easier to keep track of these non-resident companies through the Indian companies, which is why they had cast the obligation of deducting the tax while remitting the amount to the non-resident companies. The rate of tax in force as prescribed under the Finance Act was also 40%. In other words the tax that would become payable u/s 115A should be the tax that needed to be deducted u/s 195. This is further made clear by the words contained in sec. 195 that the provisions would not apply to a situation where the Indian company is the agent of su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation on any person responsible for paying to a non-resident, any interest (not being "interest on securities") or any other sum (not being dividends) chargeable under the provisions of the Income-tax Act, to deduct the income-tax at the "rates in force", unless he is himself liable to pay income-tax thereon as an agent. Payments to a non-resident by way of royalty for the use of, or the right to use, any copyright (e.g., of literary, artistic or scientific work including cinematograph films or films or tapes for radio or television broadcasting), any patent or trade-mark etc., and payments for technical services rendered in India are some of the typical examples of sums chargeable under the provisions of the Income-tax Act to which the aforesaid requirement of tax deduction at source will apply. The term "rates in force" means the rates of income-tax specified in this behalf in the Finance Act of the relevant year. Where the person responsible for paying any such sum to a non-resident considers the whole amount thereof would not be income chargeable under the Income-tax Act in the case of the recipient non-resident, he may make an application u/s 195(2) to the income-tax officer f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. The Orissa High Court was considering whether the tax liability could be called a perquisite u/s 28(1)(iv) which came on the statute book by the Fin. Act, 1964, for in that case the period pertaining was prior to the amendment i.e., of 1963 and accordingly it was held that it was not a perquisite. In that case their Lordships observed "The value of benefit or perquisite which arose to the corporation by way of its tax liability having been met by the company, the same has to be limited to the amount of actual tax due and in the circumstances grossing up was not permissible under the provisions of the Act". They also observed "The tax that would be leviable on the profits in the hands of the corporation was to be paid by the company". The Calcutta High Court was considering the period up to 1972 and in regard to the question of tax deduction u/s 195(2) with reference to the portion chargeable to tax in India. They also accepted on principle that the tax that would be payable by the non-resident company would be the tax that needed to be deducted u/s 195. They were confronted with the Mysore High Court ruling in the case of Tokyo Shibaura Electric Co. Ltd. but they chose to follow ..... X X X X Extracts X X X X X X X X Extracts X X X X
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