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TMI Blog1963 (7) TMI 81X X X X Extracts X X X X X X X X Extracts X X X X ..... eferred to as the "principal company") and the Radio Electricals Manufacturing Co. Ltd. (hereinafter referred to as the "agent company") under which the latter undertook in India the manufacture of house service meters with the aid of the licences and technical information, data and experience of the principal company aforesaid on certain terms and conditions embodied therein. The following clauses therein relate to the remuneration payable to the "principal company": "Article VII.--A. In addition to the reimbursements and payments elsewhere provided for in this agreement, REMCO agrees to pay to TOSHIBA as consideration for the licences and for the information, data and experience to be furnished hereunder, an amount in any currency acceptable to the Japanese Government equivalent to three per cent. of the net sales billed in rupees by REMCO directly or on its behalf of all watthour meters, as defined herein, manufactured by REMCO with an annual minimum royalty of 9,000 U.S. dollars payable in two equal half yearly instalments of 4,500 U.S. dollars, each not later than sixty (60) days from the end of March and September of each calendar year... ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovided as to where and how the payment has to be made. The only condition imposed in this respect is that the quantum of royalty ascertained in the manner provided for in the agreement should be paid without any deduction for taxes which are to be borne by the resident agent, i.e., Remco. If taxes payable in India are to be borne by the resident agent, it is a payment by the resident on behalf of the nonresident in respect of income accrued to the latter in the taxable territories. The fact that the liability to pay taxes was shifted to the resident agent with the consent of the latter does not in any way alter the fact that the payment on account of taxes is a payment on behalf of the non-resident. To the extent the taxes are borne by the resident agent it is income which accrued to the non-resident. I am, therefore, of the opinion that the fact that the taxes on the amount payable according to the agreement are borne by the resident agent is of little significance and that the amount of tax payable by the resident agent for each year on the amount of royalty ascertained and paid according to the agreement represents income of the non-resident company and that the royalty ascerta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aranteed to the principal company. But all liability in respect of that amount by way of tax has been undertaken to be paid on his behalf by the other party to the agreement. It is not as if, as was contended for the assessee before us, that on the analogy of section 18, the payer was entitled to deduct only the single point tax from the payment due to a non-resident as income. Here is a case of an agreement which distinguishes the liability cast on the payer under section 18. Under the agreement here the payer has himself to bear the taxes. He is not entitled to recover the same by deduction or otherwise from the recipient as would be the case if the liability fell under section 18. Therefore, in our opinion, if the amount ultimately to reach the principal company was the amount calculated in the manner laid down in paragraph A of the agreement, then the amount of income of the principal company would be that figure which after payment of due taxes would leave the said net amount in the hands of the principal company and not less. In our opinion, the view taken by the Income-tax Officer on the interpretation of the agreement is correct; it is not the single point tax that alone is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n behalf of the assessee that the assessee is only liable to pay income-tax on the royalty received by it under clause A. The Appellate Assistant Commissioner has rightly remarked that "the fact that the liability to pay taxes was shifted to the resident agent with the consent of the latter does not in any way alter the fact that the payment on account of taxes is a payment on behalf of the non-resident. To the extent the taxes are borne by the resident agent it is income which accrued to the non-resident." This conclusion was not seriously attacked before us nor could it have been properly assailed. Therefore, we have to reject the contention advanced by Sri T.V. Viswanatha Iyer, the learned counsel for assessee, that the tax should have been levied only on the income realised by the assessee as per clause A of the agreement. But the above conclusion does not dispose of the reference. The more important contention is the alternative contention advanced on behalf of the assessee, namely, that on a proper interpretation of clauses A and D of the agreement, it will be found that the taxable income of the assessee is the royalty obtained by it under clause A plus the income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pay the employee a salary of £ 20 nett per month "without any deductions and taxes, which will be borne by the association". The employers deducted tax from the salary under section 1 of the Income Tax (Employments) Act, 1943, and the employee brought an action to recover the amounts deducted on the ground that the deductions were in breach of his service agreement. It was held by the Court of Appeal, reversing the decision of Finnemore J. in the court below, that on construction, the agreement was one to pay net remuneration at the stated figure together with such sum as was necessary to leave that figure available to the employee after the association had borne the taxes referable to him, and that, accordingly, the agreement was valid. Though it was not necessary to decide the point the court also expressed the view that the agreement was not void by reason of its infringing the general rule 28(2) since it was doubtful whether salary or other remuneration for services assessable under Schedule E were "annual payments" within the meaning of the rule. The computation of the gross amount of the remuneration varies according to the agreement or arrangement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liable to be ultimately borne by her in respect thereof, and that, as she was not liable to income tax (her income being under the exemption limit of £ 125), her annuity for the purposes of the repayment claim was £ 100 and no more. On appeal the General Commissioners held by a majority that she was entitled to repayment on the basis that her income was £ 100 grossed at the standard rate. The House of Lords held that the decision of the majority of the General Commissioners was correct." This decision undoubtedly helps the revenue. The only distinguishing feature, which, in our opinion, is not material--is that in the will left by the aunt of the assessee it was specifically mentioned that the assessee was entitled to annuity at the rate of £ 100 free of tax. The House of Lords held that the correct method of computing her annuity was by grossing the same to that sum which would leave her a tax-free annuity of £ 100. The decision of the King's Bench in Jaworski v. Institution of Polish Engineers in Great Britain Ltd. [1951] 1 K.B. 768; [1950] 2 All E.R. 1191 (C.A.). is more in point. In January, 1943, the plaintiff, a Polish subject, ente ..... X X X X Extracts X X X X X X X X Extracts X X X X
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