9911796707
TMI Blog1985 (1) TMI 127X X X X Extracts X X X X X X X X Extracts X X X X ..... ment order dated11-3-1983relating to the assessment year 1979-80 stands reproduced here under in verbatim: "The assessee a non-resident company incorporated inUKentered into a contract with the Government of India, Ministry of Defense for manufacture of Jaguar aircraft by Hindustan Aeronautics Ltd.,Bangalore. In this connection, the assessee and Government of India entered into various agreements like direct supply agreement, licence agreement, purchase agreement and the technical assistance agreement, etc. As per the direct supply agreement, the supplies were to be accepted by the Government of India at the supplier's works inUK. The payments of the supplies are to be made to the assessee in theUK. During, the previous year no supplies were received and no payments have been made. The assessee entered into an agreement with the Government of India for transfer of licence rights as per clause 2 of the licence agreement as under: 'In consideration of licence fee and royalties referred to herein and in accordance with the terms and conditions of this agreement the licensor hereby grants to the license: 2.1.1 the exclusive rights to manufacture, assemble and test the licensed pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12-4-1979wherein a total consideration of FF 133 million was agreed upon. This was preceded by a payment of 14000000 FF under the provision of the intention to proceed in October 1978. The balance of 119000000 FF was to be received in installments. It has been clarified by the assessee that prior to the date on which each instalment became due, the assessee had no right to receive the amount. This arrangement takes away the character of lump sum consideration of the total amount agreed to be paid under the licence agreement. As against assessee's claim that the licence fee installments have become due as and when received, in fact, the entire licence fee amount became due on the date of agreement and as such this is liable to be taxed for the year 1980-81. However, since the payments received at the time of agreement for intention to proceed in 1978 being a part consideration of the total licence fee to be received, have been shown as income for the assessment year 1979-80, this is being assessed to tax for this year on a protective basis without prejudice to the department's right to include this amount in the total sum agreed upon assessable in the assessment year 1980-81. The ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... letter of the Government of India dated 29th March, 1979, above. Whereas, no amount was withheld at the time of payment in October 1978, 15 per cent of 14 million FF was deducted at the time of payment of second installment in April 1979 in respect of the payment made in October 1978 also. It is contended by the appellant's counsel that the effective receipts in the hands of the appellant counsel be taken to be 11.9 million FF only as 2.1 million FF which was withheld by the Government was not an effective receipt but it was receivble on happening of certain event at a later date and was, therefore, a contingent receipt. This amount according to sub-clause (f) of the clauses cited above would be payable by the Government of India to the appellant if for any reason whatsoever the company is unable to obtain the benefit of double taxation relief in UK. According to Mr. Subramaniam, chartered accountant, representing the assessee, a non-resident can be taxed only in respect of any income which is received or deemed to be received inIndiain such year or which accrues or arises or is deemed to be accrued or raised inIndiaduring such year. According to this argument only 85 per cent of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efund 15 per cent withheld by it to the assessee. If the double taxation relief procured by the assessee from the UK Government happens to be in excess of the amount withheld by the Indian Government, i.e., 15 per cent they will remit the sum to the Government of India. If the benefit secured is less than 15 per cent the Government will reimburse them to the extent of shortfall. So, in any case, the appellant is assured of getting 10 per cent of amount payable under the contract either from the Government of India or from UK Government. The entire amount is receivable under the contract from the Government of India and can, therefore, be deemed to be income accruing or arising to the assessee under section 9(1)(vi) of the Act, the same is, therefore, taxable in its hands under section 5(2). There is nothing contingent about the payment of 15 per cent as pleaded by the assessee as the payment of full 100 per cent is assured to it under the terms of the agreement. The ITO was, therefore, fully justified in treating gross amount of 14 million FF as the income accruing or arising to the assessee inIndiaand bringing the same to tax after the necessary grossing up in the assessment year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich the payment of fee or royalty is dependent on the commercial results reflected as a percentage of sales or profit. In the present case, however, the payment to.be made to the company is fixed and only the disbursement of the payment has been distributed over a period of time by dividing the sum into a number of instalments. This, however, does not change the character of the payment which will continue to be that of a lump sum consideration payable over a period of time. The appellant is, therefore, justified in claiming that the rate of tax should have been taken at 20 per cent. The ITO is directed to gross up the amount 14 million FF at the rate of 20 per cent and recompute the rupee equivalent of the gross amount which should be taken as income of the appellant company." 5. Since the other reasoning of the learned Commissioner [Appeals] is not necessary, it has not been reproduced and we like to clarity that the revenue is not in appeal, but the assessee is and for the assessment year 1979-80 following specific grounds have been raised before us: "1. Your appellant submit that the learned Commissioner [Appeals] X, has erred in upholding in assessing FF 14 million as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red. Most of the objections raised have already been considered by me while deciding the issue in assessment year 1979-80. Only one new objection has been raised by the assessee, namely that since they have adopted cash method of accounting, the amount withheld by the Government cannot be brought to tax unless it is received by them. This objection raised by the appellant is not correct and is not supported by assessment records. The assessee himself has been declaring its income on the basis of each installment of 14 million FFs. becoming the minus 15 per cent withheld in respect thereto. Thus in assessment year 1979-80 although the assessee received a gross amount of first installment amounting to 14 million FFS., Without any withholding of 15 per cent yet it declared a net amount of 11.9 million FFS only one basis that only this sum was due to it. The department is also taxing the basis of the installments becoming due in each assessment year. In this connection I may point out that the Madras High court has held in the case of CIT v. Standard Triumph [Madras] Co Ltd. [1979] 119 ITR 573 that in the case of a non-resident, royalty income has to be assessed on accrual basis and no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he actual receipt or else the income as has been taken by the lower authorities; and (ii) whether grossing up is warranted on facts and in law and if so, the quantum thereof. 11. We have heard at length Shri G. C. Sharma, the learned senior advocated and Shri S.D. Kapila, the learned senior departmental representative at length since the appeals were heard extensively on 19-12-1984 and again on 2-1-1985. We have also pursued carefully the assessee's paper book which is a common one in relation to both the years under appeal and contains 38 pages including copy of letter dated29-3-1979addressed by the Government of India to the assessee appellant. We have also perused clause 14 'General obligations' said to be appearing in the main agreement entered in to by the Government of India and the assessee-applicant vis-a-vis 'direct supply agreement' between the Government of India the assessee since that clause only deals with taxation matter. The agreement has been claimed by the Government of India, Ministry of Defence in the Department of Defence production, in a letter addressed to the ITO, as a 'classified' and voluminous document and the Government of India has categorically sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hold an amount not exceeding 15 per cent of each instalment of the licence fee as it becomes due under the licence agreement. (b) When the tad liability for a licence fee installment has been assessed, the government ofIndiawill promptly pay to B. Ae. any amount by which the tax liability for each of the payment is less than 15 per cent. (c) The Government ofIndiawill promptly forward to the B. Ae. a certificate and a copy of the assessment order showing the actual amounts of tax which have been levied and paid in respect of each of the licence fee instalments. (d) If the Government of India fails to forward such certificate and assessment order as required under preceding sub-paragraph within 5 [five] years of the date of payment, the Government of India shall then forthwith pay to B. Ae. an amount not exceeding 15 per cent of the particular licence fee instalment concerned or the amount which was withheld by the Government of India from the payment whichever is the lesser. (e) B. Ae. will endeavor to seek relief regarding double taxation in theUKfor the amount of tax paid by the Government of India. (f) If, for any reason whatsoever B. Ae. is unable to obtain the benefi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia; or. (c) a person who is a non-resident, where the royalty is payable in respect of any right, property or information used or services utilised for the purpose of 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. 15. The first point made out by Shri Sharma, the learned senior counsel, is that the assessee has accounted for the receipts on receipt basis i.e. that the assessee has declared the income on cash basis, hence the actual amount received is to be the income and for this proposition, be has pressed into service section 145(1) of the Act. He has further contended that the method of accounting employed by the assessee being on 'cash basis' there is no justification for taking of the income as has been taken by the lower authorities. The learned departmental representative in his reply to this point has contended that since the assessee is a non-resident, in view of decision of the Tribunal, Delhi Bench 'B' in the case of Prentice-Hall of India (P.) Ltd. v. ITO [IT Appeal Nos. 1888 [Delhi] of 1979, 882 and 1149 [Delhi] of 1980], the cash basis system is not available to the assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itories as received in taxable territories by a non-resident." Now on the facts of the assessee's case, it is not the assessee's case that the assessee is maintaining any account books qua this source of income much less, that it can be said to be employing 'cash system' as a regular method of accounting. With these reasoning on the facts and in the circumstances of the case the stand of the assessee stands negatived. The next point made by the leaned counsel for the assessee is that within the meaning of section 9(1)(vi) the word 'payable' should be interpreted as payable by the Government of India to the assessee in the accounting period relevant to the assessment year under appeal and in the context of agreement entered into between them and further to be read along with Government of India's letter dated 29-3-1979 to the assessee. Shri Sharma has, as such, emphasised that the withholding of an amount not exceeding 15 per cent of each instalment of the licence fee as it became due under the agreement should be interpreted as not payable in the accounting period relevant to the assessment year under appeal since the said payment is a contingent one and is payable after a period ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income accruing or arising to the assessee in the accounting period relevant to the assessment year under appeal, much less, it can be said that this is payable by the Government of India to the assessee in the accounting period when each of he installment becomes accruing or arising to the assessee in the accounting period relevant to the assessment year under appeal, much less, it can be said that this is payable by the Government of India to the assessee in the accounting period when each of the installment becomes contingent, it cannot be a subject matter of assessment for the said accounting period since contingent payment cannot be enforced as a liability by the claimant from the payer. In the case of E. D. Sassoon and Co. Ltd. v. CIT [1954] 26 ITR 27 [SC] and again referred to be their lordship have observed that accrue, means to increase, to augment to be added as increase, to arise or per in as a natural growth or result. In order that income, profits or gains may accrue to a person it is necessary that he must have acquired a right to receive the same or a right to the income, profits or gains has become vested in him though its valuation may be postponed and though its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icence fees specified in the licence agreement for the amount which will be received by the assessee after all tax liabilities in India have been taken into account and withholding of 15 per cent is in that direction hence on the facts and in the circumstances of the case the grossing up has to be there. Section 115A is the relevant section dealing with this issue and the relevant provision for our purposes, reads as under: "(1) Subject to the provisions of sub sections [1A] and [2], where the total income of an assessee, being a foreign company, includes any income by way of- (a) and (aa) ** ** ** (b) royalty or fees for technical services received from Government or an Indian concern in pursuance of an agreement made by the foreign company with Government or the Indian concern after the 31st day of March 1976, and where such agreement is with an Indian concern, such agreement is approved by the Central Government; the income-tax payable shall be the aggregate of--" It is pertinent to note here that under Explanation [c] to subsection [1] of section 115A royalty is defined to 'have the same meaning as in Explanation 2 to clause [vi] of sub section [1] of section 9.' 20. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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