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TMI Blog1987 (11) TMI 125X X X X Extracts X X X X X X X X Extracts X X X X ..... ear. Performance guarantee tests were carried out in April and May 1978 and there was no problem during the warranty period in the working of these machineries. However, after the expiry of the warranty period, certain problems were cropped up. The N.M.D.C. wrote to DEMAG regarding these problems and DEMAG by their letter dated 23rd April, 1979 agreed to rectify the plants and machineries on certain conditions. They would send one section Engineer and he should be given free accommodation and allowance of Rs. 300 per day of his stay in India. Certain machineries were also sent for which rent of DM 60 per day will be charged. Air ticket to and fro must be furnished to the Engineer. The company should be paid at the rate of DM 565 per calendar day for the period when their erection Engineer would be in India. After getting the approval of the Government of India for the visit of the erection Engineer, an agreement was entered into N. M. D. C. with DEMAG on 2nd December, 1980. The conditions laid down in the offer by the DEMAG were practically accepted. one further condition to which N. M. D. C. agreed was that the income-tax liability if any would be borne by N. M. D. C. 3. Accordin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsp; -------- Total 1,70,933 -------- This was confirmed by the Commissioner (Appeals). 6. The N. M. D. C. is on further appeal before us. Mr. Murthy appearing for the Company submitted that the plant and machinery purchased from M/s. DEMAG were defective and DEMAG had set an Engineer to rectify that defect. Therefore the services rendered were merely to do certain repairs of the ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the claim that the other receipts like Dearness allowance paid to the Engineer, air fare, etc. should not be included, Dr. Prasad submitted that these are reimbursement of expenditure of DEMAG. Under s. 44D no expenditure would be allowed in the cases of non-resident from technical fees and therefore the assessee cannot claim any deduction. With regard to the grossing up for the purpose of taxation, he submitted that as per contract, the receipts were taxfree and so it has to be grossed up. 9. We have considered the submissions. The case of the department is that the fees paid to DEMAG is covered by section 9(1)(vii). Explanation 2 of that section reads as follows : "Explanation 2 : For the purposes of this clause 'fees for technical services' means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction,.assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head 'Salaries'. It will be clear from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficient working of the products sold". Thus, in that case, the finding was that the services were for effective fulfillment of the contract and it was merely incidental. In the case before us, the facts are entirely different. The warranty period for the machinery had already expired. The DEMAG had agreed to get it rectified and that was in a separate contract. It had nothing to do with the original contract for which the machineries were supplied. Besides, in the case of Hindustan Shipyard Ltd. no separate fees was paid for the services of the Engineer. In this case, separate fee is being paid. Therefore, the two cases are not parallel at all. 12. It is needless to say that the reliance placed by Sri Murthy on section 10(6) is totally misplaced because that section deals with individuals. Here, we are dealing with a Company. 13. This will take us to consider the second issue that is what is the quantum of the technical fees. The department's case is that all expenditure incurred by N. M. D. C. would amount to the technical fees. We are unable to accept this submission. An expenditure of Rs. 17,845 had been incurred by way of Air Fare for the Engineer. This payment is made in In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bited any deduction from the total receipts. It is true that section 44D prohibits certain types of deductions. The purpose of prohibition contained in section 44D is to ensure that whatever fees is received as technical fees by the non-resident should be brought to tax. That is effected already and the assessee is not being allowed any deduction. However, what the department now contends is to increase the scope of technical fees by bringing into the net of taxation certain reimbursement of expenditure and treating the whole receipts as "technical fees", the reimbursement of expenditure cannot be treated as technical fees as already stated by us. Technical fees is clearly that fee agreed to between the parties by a contract for providing technical services. It will not include the expenditure which the non-resident company would incur and which will be reibursed by the Indian Company. We therefore hold that only Rs. 1,32,072 can be brought to tax. 16. The last question is whether the Income-tax Officer is justified in calculating tax on tax. The income computed by the Income-tax Officer is Rs. 1,70,933. The tax payable on technical fees as fixed by section 115A is 40 per cent for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection, we may refer to the decision of the Mysore High court in the case of Tokyo Shibaura Electric Co. Ltd. v. CIT [1964] 52 ITR 283. That was also a case of a non-resident company entering into an agreement for payment of fees without deducting of taxes or other charges assessed in India. The High Court held agreeing with the Tribunal that the real income by way of royalty received by the non-resident under the agreement was such amount as would, if that the tax thereon has been deducted, have left the royalty figure as fixed in the contract. Thus, even before the introduction of the specific statutory provision in section 28(iv) the position in law was the same. The statutory provision made it very explicit. 20. In the case of American Consulting Corporation relied on by the assessee, the facts were as follows : M/s. Hindustan Steel Ltd. had entered into an agreement with the non-resident company for certain services to be rendered by the non-resident. The objects of the contract regarding consideration was clearly to place the non-resident in a position where it would not be required to pay any tax out of the net profit derived by it from the venture of supplying Hindustan St ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en the total receipt for the assessee would be not Rs. 1,400 as fixed up earlier but Rs. 1,560. Thus, the premise with which the calculation was started that is the technical fees plus tax payable thereon was Rs. 1,400 itself is proved wrong. thus, arithmatically it can be proved that the method suggested by the assessee is not correct. Grossing up is only other alternative method and such method has been upheld by the Mysore High Court in the case already cited above. 23. We may mention that grossing up does not depend upon the method of accounting followed by the assessee. For one things as far as the DEMAG is concerned, the receipt is from N. M. D. C. and that would be entered in the books as the net amount receivable. Under the circumstances of the case, there cannot be any entry regarding the liability to pay Indian Income-tax in their books of account. That is because as per the contract the assessee is not liable to Indian Income-tax Act. So, the books of account do not have to record that liability. Now merely because a liability is not recorded it does not cease to be an amount payable. Therefore, the entry in the books of account as far as this aspect is concerned, is no ..... X X X X Extracts X X X X X X X X Extracts X X X X
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