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TMI Blog1995 (8) TMI 98X X X X Extracts X X X X X X X X Extracts X X X X ..... anical equipment and ETC for supervision of erection, etc., for electrical equipment. 3. Under another agreement dated 15-11-1983, for setting up one complete unit of 4-strand Wire Rod Mill (hereinafter referred to as WRM contract), between RINL and SMM Schloemann-Siemag Aktiengesellschaft (hereinafter referred to as SMS) with SMS as the Prime Contractor and three Indian contractors, viz., MECON, Bharat Heavy Electricals Ltd. (BHEL) and Engineering Projects (India) Ltd. (hereinafter referred to as EPIL), GFA was appointed as one of the foreign major sub-contractors for technical assistance through supervision of erection, etc., for the mechanical equipment and for technical assistance through supervision during manufacture of Indian equipment including overall co-ordination of activities. 4. Clause 1.5 of Schedule-1 of the LMMM agreement, dealing with supervision during manufacture of Indian equipment, reads as under:- " 1.5.1 The Contractor shall depute his and/or Confirming Party's/foreign Major Sub-Contractors' engineers/experts for carrying out inspection of the Equipment and Materials, supervision during its manufacture and test and test runs as well as at the time of sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tor shall give a rebate @ DM 785/FF 1800 per man-day in the case of foreign experts and Rs. 650 per man-day in the case of Indian experts for each man day of foreign/Indian experts are not utilised. " The contract further guarantees : " 1.10.3 The obligations of the experts so deputed by the Contractor, the Confirming Party and Major Sub-contractors for supervision of erection, commissioning and performance guarantee tests shall be in accordance with Article 19 of the Purchaser's General Conditions of Contract. " " 1.10.5 If some of the experts deputed for supervision of erection, commissioning and performance guarantee tests are required by the Purchaser beyond the Contract period, the Contractor shall provide such services in accordance with the terms and the rates to be agreed upon between the Purchaser and the Contractor. The Contractor together with the Confirming Party shall also ensure that the Major Sub-contractors provide such services whenever necessary in accordance with the terms and rates to be mutually agreed upon. " Schedule-.2 to the agreement provides for the contract price and clause 2.1.2 which deals with GFA's scope of services reads as under :- Cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MS-Schloemann Siemag/GFA-Anlagenbau : The total DM amount for German supplies and services of mechanical Equipment as defined in Schedule-2 will be payable to the nominated German Bank Account of SMS Schloemann-Siemag AG/GFA - Anlagenbau, 4000 Dusseldorf, Federal Republic of Germany as follows : 5.1.1 Engineering fees including fees for Tempcore and cost of importation of drawings, training services abroad (as per Schedule-2) : 5.1.1.1 10% (Ten per cent) of the value of the above services as direct down payment (free foreign exchange) by telegraphic transfer against submission of a Bank Guarantee for an equivalent amount as per proforma agreed upon with the Purchaser from State Bank of India. This payment shall be made only after Contractor furnishing in addition to the aforesaid, a 596 Bank Guarantee for the Security Deposit to the Purchaser as per Article-4 of the Purchaser's General Conditions of Contract at the latest, however, on or before September 30, 1982 provided the above Bank Guarantee for Security Deposit is received by the Purchaser by 20th September, 1982. 5.1.1.2 5% (Five per cent) of the value of the above services after submission of drawings for approval ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... September, 1982. . . . " The price for supervision of erection and commissioning and supervision during manufacture of Indian mechanical equipment by GFA is provided in clause 5.1.3. It reads as under : " 5.1.3.1 10% (Ten per cent) of the value of the above services as direct down payment (free foreign exchange) along with the payments as per 5.1.1.1 and 5.1.2.1 above and after complying with the requirements mentioned at 5.1.1.1 and 5.1.2.1 above. 5.1.3.2 5% (Five per cent) of the value of the above services as monthly payments according to services rendered in that particular month and issue of corresponding invoices collaterally with the payments as per 5.1.3.3 below as direct payment (free foreign exchange) against an irrevocable letter of Credit for equivalent amounts, allowing partial withdrawal, to be established in favour of GFA by State Bank of India, within 30 days after signing of the Contract. This payment shall be made against attendance certificate issued by the Purchaser. Should a confirmation of such Letter of Credit through Commerzbank AG be required by GFA then the bank charges for such confirmation will be borne by GFA. 5.1.3.3 85% (Eighty-five per cent) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lauses are 1.2.4 and 1.7 of Schedule-1, 2.2, providing for contract prices, of Schedule-2, 2.9.5 of Schedule-2, Schedule-5 providing for terms of payment and Schedule-6 providing for terms and conditions towards deputation of experts. They are worded almost in similar language except variation of amounts of consideration. Therefore, they are not being reproduced here. 6. The assessee originally claimed the receipt of fees as exempt on the ground that they were industrial and commercial profits and, therefore, part of business profits under Article III of the Agreement for Avoidance of Double Taxation between India and Federal Republic of Germany (AADT in brief). The Assessing Officer did not agree with the assessee and brought the amount claimed to be exempt in part III of the return to tax as "fees for technical services" under section 9(1)(vii) of the IT Act read with Explanation 2 thereunder. 7. On a scrutiny of the records, the Commissioner of Income-tax noticed that what was assessed in the assessment was only 90% of the fees received by the assessee which was evident from the copies of the invoices filed by the assessee in the course of assessment proceedings for the resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asst. years 1985-86, 1986-87 1987-88 as per the invoices raised in those years was not brought to tax, the assessments made for the said years have resulted in prejudice to the interests of revenue inasmuch as they are erroneous. In view of this discussion, I will set aside the three impugned assessments for being redone in accordance with law and with a direction to the ITO to take into consideration the 10% down payment also in the assessments. In other words, the entire value of the invoices should be assessed. " The assessee is aggrieved by this order of the CIT for asst. years 1985-86, 1986-87 and 1987-88 and is in appeal before us. 8. Fresh assessments were made by the Income-tax Officer in compliance with the directions of the CIT, bringing 100% billed amount to tax. The assessee carried the matter in appeal to the CIT (Appeals) who deleted the addition agreeing with the contention of the assessee that 10% down payment received by the assessee in asst. years 1983-84 and 1984-85 under the two agreements was the income of those years and was considered as such by the ITO in granting No Objection Certificate allowing RINL to make the full payment without deduction of tax. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f services or on presentation of the invoices. I would, therefore, direct that the amounts actually received by the appellant during the accounting period relevant for the AY 1988-89 be subjected to tax. 15. In this connection, it is relevant to reiterate that the 'down payments' were actually made by RINL after conclusion of the above-said two agreements although respective invoices were received much earlier. In the case of the WRM contract, the contract agreement was signed during the F.Y. 1983-84, it commenced during the F.Y. 1983-84 and the direct 'down payment' was made during the F.Y. 1983-84. Therefore, the direct 'down payment' in the case of W.R.M. contract was assessable for the AY 1984-85. 16. The LMMM contract agreement was signed on 9-2-1983, but its commencement was subject to fulfilment of the conditions laid down in Article 5.6 of the agreement. All the conditions were fulfilled with remittance of the direct 'down payment' on 21-12-1983. Thus, while the contract agreement was concluded during the F.Y. 1982-83, it actually commenced during the F.Y. 1983-84. But the right of the appellant to receive the direct 'down payment' arose with the conclusion of the Contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e was given to the effect that the entire amount was not taxable and it was allowed to be remitted without deduction of tax. Though the invoices raised in the subsequent years show the gross amount of the consideration for the services rendered and a deduction of 10% thereof was given therefrom, that was only for the purposes of determining the amount payable by RINL to the assessee. He, therefore, submitted that the CIT had no jurisdiction to invoke the provisions of sec. 263. 10. On merits, Sri Dastur submitted that the receipt of 10% was not in the nature of advance payment but down payment, that it was an income for asst. year 1983-84, that it was processed in those proceedings and that, therefore, the same cannot be brought to tax in the years under consideration merely because it was found to be not assessable in that year because of the provisions of the AADT. According to him, the CIT (Appeals) has taken a correct and appropriate decision in deleting the said amount of 10% from the income of the subsequent years. 11. The learned departmental representative, Sri Indra Kumar, on the other hand, submitted that the 10% down payment received by the assessee in asst. years 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mstances, which is an indicator that the parties have understood that the amount was income of that year. He further submitted that work had already started on 25-5-1982 and, therefore, it cannot be said that the income had accrued only in the year in which the bills have been raised by the assessee. Reference was also invited to the assessee's letter to the Assessing Officer dated 16-12-1991 wherein it was stated in para 3 as under :- " 3. On the above facts, it is submitted that it is not correct to consider the 10% down payment under the above agreements, which fell due for payment during the previous year relevant to the earlier assessment years, when the relative invoices were raised by the non-resident Company, as income accrued during the previous year relevant to this assessment year. It is submitted that the 10% down payment was not made by way of advance towards services to be rendered at a later date, but it is intended to be the consideration for the following activities and work done by the assessee-company during the relevant period : - Discussion with the Indian Company Mecon regarding organisation of erection, consultation regarding methods how to select compete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis that it is received or deemed to be received by him in India. Even otherwise, sec. 4 levies the charge on the person in an asst. year in respect of the income of the previous year and not of any other year. 15. On the contrary, if the amount of "down payment" received on signing of the agreement was not the income of that year but only a receipt as an advance payment for services to be rendered in future, it would not be the income of the year of receipt but would be income of these years under consideration when the services are actually rendered by the assessee and the receipt is adjusted in the invoices raised for the services on man-days basis. If that be so, the mere fact that the Revenue attempted but failed to bring the receipt to tax in the year of receipt or the attempt was aborted, would not make it a case of double taxation, and the department, on the principle of double taxation, cannot be estopped for bringing the same to tax in the year to which it pertains. There cannot be an estoppel against law. Let us, therefore, consider of which year the said 10% receipt is the income. 16. Sec. 4 is charging section. It provides charges of tax on a person for an asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Society Ltd. v. CIT [1977] 106 ITR 11 (SC) - a case of receipt for broadcasting Western music on All India Radio; (6) Explanation 2 to sec. 9(1)(vii) providing for deemed accrual of a consideration received for rendering technical services]. The other proposition is, when and where a right to receive comes into existence and vests in an assessee under the terms of an agreement. [see: (1) W.S. Try Ltd. v. Johnson [1946] 1 All. E.R. 522 CA, holding that unless and until there is created in favour of the assessee a debt due by somebody it cannot be said that he has acquired a right to receive the income or that income has accrued to him; (2) ED. Sassoon Co. Ltd.'s case - a case of commission held to have accrued on finalisation of accounts; (3) CIT v. Karamchand Premchand Ltd. [1985] 152 ITR 94 (Guj.) - a case of remuneration for services rendered in earlier years held to have accrued when resolution authorising the remuneration was passed in subsequent year; (4) CIT v. Goverdhan Ltd. [1968] 69 ITR 675 (SC) - a case of time of accrual of income to the partner held to be on finalisation of accounts of the firm; (5) CIT v. Memo Devi [1978] 113 ITR 335 (Delhi) - a case of compensatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the first receipt after accrual. Therefore, a receipt is not income unless it has accrued to the assessee, that is, when the assessee gets a right under the contract. 21. In the case of Indo Foreign Traders (P.) Ltd., under an agreement dated 28-6-1947, the assessee was appointed sales organisers for the whole of India for the products of a drug company. The agreement provided that the assessee was entitled to commission of 45% on the listed prices for original sales packing and 25% on all bulk packings. The agreement was terminated with effect from 1-7-1949 under which the drug company agreed to pay compensation to the assessee calculated at the rate of 5% of the gross turnover of the drug company for a period of 10 years with effect from 1-7-1949, the commission to be calculated and paid monthly. The said agreement further provided that if within the said period of 10 years the drug company ceased to manufacture pharmaceuticals or transferred the whole or any part of its business or goodwill to any other concern, the drug company would pay compensation to the assessee for the loss sustained by reason thereof. The drug company did not pay the compensation in terms of the agreem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rection, commissioning and conduct of performance guarantee tests, etc., and the charges are per man-day basis which as per clause 6.2 is to be reckoned from the date of the experts' departure from the place of their regular work till they return to the place of their regular work by the shortest and quickest route. The bills are raised on the basis of such man-days of actual working by the assessee's engineers. One such bill is reproduced below : " Rashtriya Ispat Nigam Ltd. Visakhapatnam Steel Project Visakhapatnam-530 026 India INVOICE No.111/1622 Customer's Order Date 21-02-1985 VSP.PUR.2. 75003 Our Order No. 624 50038 dated 09-02-1983 634 50061 Feinrin Amount DM ---------- Su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 982 to MECON stating, "You are requested to proceed with work immediately" and submissions in their letter dated 16-12-1991 to the Assessing Officer do not throw any light on the fact whether the assessees rendered any services to RINL in this regard. No bills for that period, or, as the case may be, for such services, in any case, were issued. Raising of invoices on man-days basis, on the contrary, gives an impression that they entitled the assessee to payment only from the date of sending their experts to India. 24. The assessee has challenged the jurisdiction of the CIT in asst. years 1985-86 to 1987-88 on the ground that a final decision was taken on the "down payment" as not taxable in asst. year 1983-84 up to the level of the Central Board of Direct Taxes, the highest executive authority under the Income-tax Act, and, therefore, the CIT was not authorised to reopen the issue in these years. We do not find any force in this claim of the assessee, firstly because we do not know what were the reasons given by the CBDT for exempting the same in that year, secondly because the receipt was a consideration for rendering technical services which was not taxable in India because of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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