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TMI Blog1983 (6) TMI 31X X X X Extracts X X X X X X X X Extracts X X X X ..... sport, Govt. of India. The Visakhapatnam Port exports a large amount of iron ore. In order to speed up the export operations, the Port Trust felt it necessary to install a plant known as " Bucket Wheel Reclaimer ". The purpose of this was to remove iron ore mechanically from the wharfs and put it on a conveyor belt which takes the ore directly into the ship. Global tenders were called for by the Port Trust in June, 1967. A German company known as M/s. Maschinenfabrik Buckau R. Wolf (hereinafter called the " German company ") tendered contract for supply of the Bucket Wheel Reclaimer on June 26, 1967. After several negotiations the contract was finalised on 12th September, 1968. The terms of the lengthy contract dated September 12, 1968, may be briefly noticed. The German company, (i) undertook to supply and deliver to the Port Trust one Bucket Wheel Reclaimer as per drawing, and (ii) to delegate one engineer-erector for supervising the total erection and one special fitter for installation of, electrical equipment. It is not in dispute that the engineer-erector delegated was Mr. Bremer and that no special fitter was delegated. The period of contract was 13 1/2 months and shipment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -------------------------- 342 2,201,829 1,700,276 + DM 9,41,000 The terms of payment in cl. 12 were in several parts : (i) DM 1,700,276 = (DM 1,399,860 + DM 210,416) DM 1,610,276 + DM 90 000 was payable in Germany. 5% of the above amount was payable at the conclusion of the contract, 10% by opening letters of credit in four weeks and 85% (DM 1,445,240) in 20 equal semi-annual instalments each of DM 72,262, of which the first instalment was payable as soon as the Port Trust certified that the unit was ready. For the credit remaining after payment of each of these instalments, interest was to be paid by the Port Trust at 6% p.a. The deferred payment was to be guaranteed by the State Bank of India.. The interest portion for the deferred payment was DM 451,637. Of course, the figures were to be redetermined according to the formula agreed in the price variation clause which depended on such variable factors like " the mixed m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nown as the Buckau-Wolf India Engineering Works Ltd., Pimpri, near Poona (hereinafter called the Poona company), came into the picture. It is common ground that the Poona company is not a subsidiary of the German company nor is it, in any manner whatsoever, controlled by the German company. This Poona company was employed to fabricate single thick steel sheet. Such of the items (items 13 to 17 of the contract) which the German company manufactured in Germany and despatched to Bombay Port were to be firmly imbedded on the steel plate (Boom) by the Poona company and delivered at Visakhapatnam where the items which would be directly sent by the German company to the Visakhapatnam Port were to be put on the said plate under the supervision of the German engineer, Mr. Bremer. The assembling at the Visakhapatnam Port was to be done at the expense of the Port Trust. This is also clear from the fact that cl. 10 of the contract provided that the Port Trust had to provide suitable skilled and unskilled labour, scaffolds, etc., water and electricity and pay for these items of expenditure. The Port Trust has filed a lot of documentary evidence to prove that the Port Trust itself, as a fact, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have deducted tax at source in accordance with the provisions of s. 195 of the I.T. Act, 1961 (hereinafter referred to as " the Act "). The assessee raised various objections but they were overruled by the ITO who passed an order under s. 195(2) of the Act directing the assessee to pay the tax as well as the interest under s. 201(1A) in a sum of Rs. 2,83,44,178. The assessee carried the matter in appeal before the AAC. The assessment years involved were 1968-69 to 1974-75. In the appeal it was argued that s. 195(2) of the Act did not apply as the property in the money and goods passed in Germany. It was alternatively contended that the entire amount should not be taxed inasmuch as the machinery portion was supplied in Germany for which the payment was also made in Germany. The AAC substantially accepted the contentions of the assessee but held that so far as the interest paid along with the twenty semi-annual instalments was concerned, it was liable to be taxed in accordance with the provisions of s. 195 of the Act. Accordingly, be directed that the interest should be grossed-up, i e., the interest portion of the payment was held to fall within the mischief of s. 195 of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... source by itself and it forms part of the industrial and commercial profits which are covered by the Agreement; (vii) There is no indebtedness independent of the terms of the contract and interest is not on any debt but it is on account of the terms of the contract itself. Before this court, the learned counsel for the Department, Sri M. Suryanarayana Murthy, contended that the Tribunal had no jurisdiction to apply the Agreement in view of art. XVIII contained therein. He also submitted that s. 9(1)(i) of the I.T. Act was attracted as the German company and the Poona company had " business connection " and that the Indo-German Agreement did not override s. 9. He further submitted that art. II(1)(i)(aa), (bb) and (dd)(1) applied to the facts of the case and thereby the German company had a " Permanent establishment " in India, and the income was taxable by applying the latter part of art. III. We shall deal with the various aspects of this question little later. He also argued that the interest payable in DM on the 20 instalments to the German company is an independent source of income taxable under art. VIII. On the other hand, the learned counsel for the assessee (Port Trust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommittee of the organisation for European Economic Co-operation (O.E.E.C.), published a draft on 6th July, 1963 (vide Halsburys Laws of England, 4th Edn., Vol 23, para. 1040). In the meantime in September, 1961, the organisation for Economic Co-operation and Development (O.E.C.D.), was established to succeed the O.E.E.C. and the draft dated 6th July, 1963, submitted to the O.E.E.C. was confirmed by the O.E.C.D. These are called the O.E.C.D. models (vide Simon's Taxes, 3rd Edn., Butterworths, p. 351, para. F(4.401). They have been further modified in 1974 and 1977 by either the O.E.C.D. or in individual cases by the contracting countries. The O.E.C.D. provided its own commentaries on the technical expressions and the clauses in the model conventions. Lord Radcliffe in Ostime v. Australian Mutual Provident Society [1960] AC 459, 480; 39 ITR 210, 219 (HL), has described the language employed in these Agreements as the " international tax language ". For a complete but brief history of the tax treaties from 1870 in various countries and the League of Nations and U.N.see Dr. M. B. Rao's Books on Double Tax Treaties between Developing and Developed Countries (Milend Publications, New Del ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l tax has been imposed." Even where the taxpayer initially invokes the mutual agreement procedure, in case the said authorities fail to agree or their agreement is not satisfactory to the taxpayer, all countries (except Sweden) are agreed that there will be no objection to the taxpayer then moving the courts, within the prescribed time, if any (British Tax Review). In Canada (No. 76-15) and the United States (Rev. Proc. 70-18) the Government tax publications suggest that taxpayers should protect their rights of appeal before the courts while applying for the mutual agreement procedure (British Tax Review (1979), p. 333). We respectfully agree with the rulings mentioned above. We are also of the opinion that art. XVIII underlines a procedure which is in addition to and not in substitution of the remedies before the domestic courts or tribunals. Hence the assessee was entitled to rely on the agreement before the Income-tax Appellate Tribunal. The first point is, therefore, held in favour of the assessee. The second point turns upon the effect of art. XVI of the Agreement on s. 9(1) of the Act. Article XVI of the Agreement reads as follows: "The laws in force in either of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. v. CIT [1953] 23 ITR 152, relied upon for the Department is, in our opinion, not relevant in the context of the Double Taxation Avoidance Agreements which override the liability of a non-resident principal or an Indian agent who may be otherwise liable to tax under ss. 4 and 5 read with s. 9. Similarly, we hold that the ruling in P. C. Ray & Co. (India) P. Ltd. v. A. C. Mukherjee, ITO [1959] 36 ITR 365 (Cal), of the Calcutta High Court is also not relevant. Coming to the part played by Mr. Bremer, we are of the view that even there, no " business connection " is established. It may be noted that Chinnappa Reddi J. (as he then was), sitting with Punnayya J. in CIT v. Hindustan Shipyard Ltd. [1977] 109 ITR 158 .(AP) held that an agreement providing for guarantees, deputing of technical and other personnel by a Polish company to the Hindustan Shipyard for supervision of the erector and for sending a supervising engineer, did not establish a " business connection " with the shipyard. It was held that they were dealing with each other on a principal to principal basis. So is the relationship between the German company and the Poona company as shown by us under the third point. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct or the like ; ...... (dd) a person acting in one of the territories for or on behalf of an enterprise of the other territory shall be deemed to be a permanent establishment in the first mentioned territory, but only if 1. he has and habitually exercises in the first mentioned territory a general authority to negotiate and enter into contracts for or on behalf of the enterprise, unless the activities of the person are limited exclusively to the purchase of goods or merchandise for the enterprise, or 2. he habitually maintains, in the first mentioned territory a stock of goods or merchandise ....... 3. he habitually secures orders in the first mentioned territory,...." Was the German company having a " permanent establishment " in India ? The word " permanent establishment " is one of those technical expressions which is invariably used in all international Double Taxation Avoidance Agreements as these are based on standard O.E.C.D. models. In view of the standard O.E.C.D. models which are being used in various countries, a new area of genuine " international tax law " is now in the process of developing. Any person interpreting a tax treaty must now consider decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oreign Relations). It is common practice for an enterprise which carries on trade or business in one country to expand its operations, with out incorporation or further incorporation into another country, for it then has a branch there, or a permanent establishment which can be regarded as having sufficient presence in that country to make them taxable there in the same manner as the residents of that country. (Harvey Mc. Gregor, Old Exemptions-New Credits. The Rights of Permanent Establishment under the Double Taxation Agreements between U.K. and U.S.A.-1(British Tax Review [1977] Pt. 6, p. 327). In our opinion, the words " permanent establishment " postulate the existence of a substantial element of an enduring or permanent nature of a foreign enterprise in another country which can be attributed to a fixed place of business in that country. It should be of such a nature that it would amount to a virtual projection of the foreign enterprise of one country into the soil of another country. First we shall take up sub-cl. (aa). Applying the above tests to sub-cl. (aa) of art. II(1)(i), there is, in our view, nothing in the contract between the German company and the Port Trust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmission, therefore, clearly lacks factual foundation. Reliance is then placed on the eight bills issued by the German company which refer to the price being payable C.I.F. Bombay or Visakhapatnam " without assembly " or " without erection ". It is argued that these operations of assembly and installation must, therefore, be taken to have been conducted in India by the German company. In our opinion, the above words in these bills do not raise a presumption that these operations have been conducted by the German company. The question must depend solely on the evidence as to who has actually got the operations of assembly or installation or erection made or paid for it. The material on record in this reference is only one way, namely, that it was the Port Trust that got the Reclaimer assembled, installed and erected at Visakhapatnam and that, in fact, the Port Trust paid Rs. 3,97,034.66 to the workers. There is absolutely no material in favour of the Department on this question. There is no evidence that the German company even reimbursed the expenditure of the Port Trust in this regard. This contention is, therefore, liable to be rejected. According to the learned counsel for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Laws of England (Hailsham Edn., Vol. 1, p. 193, para. 345), as follows : "An agent is to be distinguished on the one hand from a servant and on the other from an independent contractor. A servant acts under the direct control and supervision of his master, and is bound to conform to all reasonable orders given to him in the course of his work ; an independent contractor, on the other hand, is entirely independent of any control or interference and merely undertakes to produce a specified result employing his own means to produce that result. An agent, though bound to exercise his authority in accordance with all lawful instructions which may be given to him from time to time by his principal, is not subject in his exercise to the direct control or supervision of the principal. " Further in Pritchett & Gold and Electrical Power Storage Co. Ltd. v. Currie [1916] 2 Ch D 515 (CA) and Mahomed Shafi v. Fazal Din AIR 1930 Lab, 1062, it was held that the relationship between a contractor and his sub-contractor is similar, to that between one principal and another. In the light of these principles of law applicable to the cases of servant, agent and sub-contractor, let us examine the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n tax authorities regarded these profits as earnings from independent work performed in Germany in the sense of s. 18 of the (German) Income Tax Law, and subjected to restricted tax liability in pursuance of s. 49(1) No. 3 and the relevant corporation tax provisions. But the court decided that the know-how fees were not to be regarded as earnings from independent work based on the personal activities of a taxpayer but as profits derived from an-industrial enterprise. The British company having no permanent establishment in Germany, these profits were not taxable. In our opinion, Mr. Bremer did not carry on any construction, installation or assembly project or the like on behalf of the German company in India. He was only delegated to India for supervision. As already pointed out, the work of construction, installation or assembly was actually done by the Port Trust and not by the German engineer. It is not, therefore, permissible to equate the situation with one where the German engineer has, instead of merely supervising the above operations, was himself in charge of those operations on behalf of the German company. The Income-tax Tribunal was, therefore, right in holding that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... VIII of the Agreement: " Art. III (1) Subject to the provisions of paragraph (3) (below) tax shall not be levied in one of the territories on the industrial or commercial profits of an enterprise of the other territory unless profits are derived in the first-mentioned territory through a permanent establishment ...... (3) For the purposes of this Agreement the term 'industrial or commercial profits ' shall not include income in the form of rents, royalties, interest, dividends, management charges, remuneration for labour or personal services or income from the operation of ships or aircraft but shall include rents or royalties in respect of cinematographic films. " The items enumerated in sub-cl. (3) are referred to in the later articles. Article V deals with the conditions for taxation of income from the operation of aircraft, article VI in respect of shipping operations, art. VII dividends, art. VIII interest, and so on. The first question that arises for consideration is with regard to the construction of sub-cl. (3) in relation to the first part of art. III(1) and in relation to the second part of art. III(1). The words " subject to the provisions of paragraph (3) " i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , debitum in praesenti, solvendum in futuro : Webb v, Stenton [1883] 11 QBD 518, 527 (CA).A liability depending upon a contingency is not a debt in praesenti or in futuro till the contingency happened. But if there is a debt the fact that the amount is to be as certained does not make it any the less a debt if the liability is certain and what remains is only the quantification of the amount. The expression " debt " may take colour from the provisions of the concerned Act. It may have different shades of meaning: Kesoram Industries and Cotton Mills Ltd v. CWT [1966] 59 ITR 767 (SC). If money is due to a person and is not paid for but has been withheld from him by the debtor after the time when payment is to have been made, in breach of his legal rights, it is a compensation whether it is liquidated under agreement or statute. The compensation is properly described as interest: (Westminster Bank Ltd. v. Riches [1947] 28 TC 159, 189 ; 15 ITR (Supp) 86 (HL). Therefore, when interest is paid not as part of the compensation but is given for the deprivation of the use of the money, it is an independent source of income and is taxable. Dr. Shamlal Narula v. CIT [1964] 53 ITR 151 (SC), and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation as a loan, the amount received by the seller cannot be regarded as interest on money lent. The word " source " means something from which income arises. The seller would have, in a contract for sale of goods, got any way interest on sale proceeds under s. 61 of the Sale of Goods Act even if the purchaser had not utilised the money: Lakhmichand Muchhal v. CIT [1961] 43 ITR 315 (MP). The interest in such a case is received as part of the purchase price itself, that is to say, as part of the consideration for sale of goods on deferred payment basis and not as a separate source: CIT v. Saurashtra Cement & Chemical Industries Ltd. [1975] 101 ITR 502 (Guj), the mere nomenclature employed by the parties notwithstanding. When the payment of interest is as part and parcel of the agreement to pay the unpaid purchase money on a deferred payment basis, there is no indebtedness (Chittela Venkata Subba Reddi v. Jayanthi Audinarayana A.S. No. 446 of 1964, dt. 2-8-68 (per Kondaiah J., as he then was), affirmed in L.P.A. No. 267 of 1968, dt. 14-3-69). Bearing these well-settled principles in mind, it has to be seen whether interest payable on the agreed instalments of unpaid purchase money ..... X X X X Extracts X X X X X X X X Extracts X X X X
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