9911796707
TMI Blog1981 (6) TMI 42X X X X Extracts X X X X X X X X Extracts X X X X ..... The obligations of Linde for the above purpose were incorporated in a consortium agreement entered into between Linde, GSFC and SP on 18-10-1976 which in Annexure A thereof detailed the obligations and responsibilities of Linde. The consortium agreement was to supplement five different agreements entered into by the assessee with Linde prior to April 1976 and another agreement called the Ammonia Services Agreement, dated 10-5-1976. There were also four agreements for the urea plant dated 13-10-1976, subsequently modified on 19-10-1976, between the assessee and S.P. All these agreements were approved of by the Central Government. The details of the services to be rendered by the consortium leader, Linde, are contained in article 2 of the consortium service agreement. The following clauses of the consortium agreement and the consortium service agreement are relevant: "1.2. GSFC has selected LINDE AG for the award of the contract for the establishment of Ammonia Plant on the terms and conditions contained in the contracts concluded between GSFC and LINDE AG. 1.3. GSFC has selected SNAMPROGETTI for the award of the contract for establishment of Urea Plant on the terms and condition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nation. Such procedure shall be mutually settled between the Parties. The technical part of contracts for offsites, affecting the Consortium Leader's responsibilities, shall be subject to the Consortium Leader's approval prior to execution. 5.4. The Consortium Leader shall decide when and where meetings between the Consortium Leader and the Partners shall take place. He shall also decide about the number and qualifications of the personnel the Consortium Leader uses to observe his obligations under this Consortium Agreement. It is estimated that at least 150 men/months will be required for assignment outside the Consortium Leader's home office. For the Consortium Leader's home office activities, at least 10,000 hours are estimated to be required. 8. 1. IMPORTED AND INDIGENOUS EQUIPMENT WITHIN THE COMBINED AMMONIA AND UREA PLANT BATTERY LIMITS The Consortium Leader shall be responsible for the safe, guaranteed performance of the Ammonia and Urea Plants within the combined Ammonia and Urea Plant Battery Limits as per Annexure III, operation jointly and delivering the product to specifications as detailed in the respective Ammonia and Urea Contracts. 8.1.3. The Consortium Le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Ammonia Plant and the Urea Plant. 3.2. Owner shall pay to Consortium Leader for each calendar day of absence of his Expatriates from his place of residence. --- for a directing engineer or directing chemist DM 632 --- for an engineer, erection inspector or chemist DM 579 --- for a master erector or technician DM 424 These daily rates cover the time actually worked. Overtime and hours worked on Sundays and holidays will not be separately invoiced, provided that total working time of 50 hours a week is not exceeded. The services rendered by the Expatriates will be invoiced to Owner monthly. Payment of the respective invoices, net, without deduction, will have to be made, within four weeks from the date of invoice, by transfer of the amounts involved to the account of the Linde Aktiengesellschaft, Hollriegeskreuth with the Deutsche Bank Ag. Munchen, or any other bank indicated by Consortium Leader." 2. Generally, it is stated that the business carried on by Linde consisted of providing consultancy services in chemical engineering for which the payments under the above clauses were to be made from time to time. 3. By its letters dated 2-11-1978, 7-12-1978 and 28-2-19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ducted at source amounting to Rs. 63,73,032 was tax illegally recovered from the assessee and should be refunded to him. It was also prayed that the company be permitted to make further remittances to Linde without any deduction of tax. The Gujarat High Court passed orders on the petition on 18-10-1979. Regarding the claim for refund of the amount of Rs. 63,73,032 the Court directed that if the petitioner preferred an appeal or appeals under section 248 of the Act, ITO would not object to that appeal or appeals on the ground of limitation and he will have no objection if the delay in filing each appeal or appeals were condoned. As regards the request for permission to make further remittances without deduction of tax the High Court held as follows: "If the petitioner makes a representation to the Commissioner, Baroda, for not to enforce the payment under Exh. 'G' as well as in respect of the amount of the last item in Exh. 'F', viz., gross amount (in DM) 3,09,412.08 and income-tax at 40 per cent (in DM) 1,23,764.83, till the disposal of the above-mentioned appeal by the AAC or the Tribunal and/or by the High Court, if a reference is made to the High Court till the disposal of suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the income received by the non-resident. Whether the receipts in his hands would be covered by any provisions such as article III of the Agreement for avoidance of double taxation between India and Federal Republic of Germany, would come for consideration only when the question of assessment of the non-resident himself was considered. According to the Commissioner, the authority to decide whether the benefit of this agreement was available to the non-resident was the ITO who would make an assessment on the non-resident. Provisions of article III of the agreement, therefore, could not, in the view of the Commissioner, be invoked by the assessee ; whether it constituted commercial or industrial profits or would otherwise be exempt could also, therefore, not be agitated by the assessee in connection with his claim for non-deduction of taxes at source or the refund of the taxes already deducted. What was payable by the assessee to the non-resident was prima facie, a payment of an income nature being fees for service rendered. Unless what was payable was not income in the hands of the non-resident such as for instance, a capital receipt, etc., exempt from tax, in the view of the Comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s pointed out that what Linde does is not personal services of any type but commercial and industrial activities, directed towards the organisation and working of a huge fertilizer factory involving an investment of more than Rs. 400 crores. This is clear from the terms of the agreement detailing the responsibilities of the consortium leader, the non-resident, and the partners, viz., the assessee and S.P. The annexures to the agreement which details the activities to be performed by the assessee also indicate that what he does is an integrated business activity consisting of several facets resulting in an ultimate profit or loss. The entire approach is an integrated one for the manufacture of fertilizers and requires proper technical co-ordination between the various parties both local and foreign. The task of the consortium leader was to see that not only were the various engineering activities carried on by the several parties, according to the specifications in their respective contracts but also to incorporate modifications, wherever necessary, to match with the technical standards or specifications and to ensure that individual plant, battery limit and process parameters match ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eral Republic of Germany, the learned counsel has referred to the provisions of articles III, XII and XVI and the scope of the expression 'sum chargeable under this Act' obtained in section 195(2). The question is as to who should decide chargeability to tax of the non-resident. Article XVIII had also to be considered. Reference war, made to the decision of Supreme Court in Aggarwal Chamber of Commerce Ltd. v. Ganpat Rai Hira Lal [1958] 33 ITR 245. 13. The payment is made under clause 9.3 of the agreement. The rate of tax should, therefore, be as provided in section 195. Under the provisions of sections 198 and 199 of the Act the remittance to a non-resident and the tax payable to the Central Government on the same on behalf of the non-resident also constitutes a payment to the non-resident. This being so, according to the learned counsel, grossing up of the amount was mandatory, and the tax to be deducted should be also on the grossed amount and not on the actual amount remitted. 14. On the question of taxability itself, it is pointed out that the mere application of the double taxation avoidance agreement would not lead to non-chargeability. In the first place, these payments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rgeable for the purpose of deduction of tax. It is not in dispute in the present case that the assessee is not an agent either by appointment by the non-resident or even a statutory agent appointed under the Act. The liability to deduct tax, therefore, subsists if the sum payable to the non-resident is chargeable under the provisions of the Act. What requires notice, however, is that neither under the provisions of section 195(1) or (2) has the ITO a jurisdiction to make a demand on the assessee or any person responsible for making a payment to the recipient. Under section 195(2) the assessee could make an application to the ITO to determine the proportion of the sum chargeable to income-tax. Under section 195(1) he himself could deduct tax on the entire payment. The basis of the deduction is the chargeability of the same under the Act but under neither of the above sub-sections of section 195 has the assessee any remedy if the ITO does not pass an order determining a proportion. Section 246 of the Act which provides an appeal to the AAC or to the Commissioner (Appeals) does not provide for an appeal against an order under section 195(2). Of course, there is no order to be passed u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the Commissioner (Appeals). The appeals filed by the assessee before the Commissioner (Appeals), therefore, are competent. Since on a plain reading of section 248, there is no time-limit for filing such an appeal, that part of the Commissioner (Appeals)'s order dealing with delay in filing an appeal and condonation of the delay---all of which has proceeded on the basis that the appeal is against the letters or demands of the ITO---would be of no consequence in law. The Commissioner (Appeals), however, has condoned the alleged delay thereby exercising a power in favour of the assessee though he is not competent to exercise the same and even though it is not necessary to exercise the same. It is not, therefore, necessary for us to direct any particular modification of his order on this point. 17. Under section 195 any person responsible for making a payment to the non-resident under circumstances stated therein is bound to deduct income-tax if the sum paid, not being dividends, is chargeable under the provisions of this Act. The point made out by the learned Advocate General in this regard that the assessee has, therefore, to determine the chargeability to tax of the non-resident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd to double taxation avoidance have to be considered in determining the obligation of the assessee to deduct income-tax from payments made to the non-resident. 19. Even though an appeal under section 246 does not lie to the Commissioner (Appeals) from any order of the ITO under section 195---in fact there is no provision to pass an order by the ITO---an appeal under section 248 lies to the Commissioner. Such an appeal can be filed by a person who has deducted and paid tax in respect of any sum chargeable under the Act in accordance with the provisions of section 195 and section 200. The primary condition for the maintainability of such an appeal under section 248 being deduction and payment of tax and where this has been done, the appeal to the Commissioner (Appeals) and thereafter a further appeal to the Tribunal is maintainable. Three appeals have been filed before the Commissioner (Appeals). He has treated them as filed under section 248 even though that part of his order treating these appeals as against the ITO's order would be erroneous. Appeals under section 248 by a person who had deducted and paid tax from payments made to non-resident being competent, the appeals filed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to tax on the same. The non-resident is performing certain services pursuant to the consortium agreement and the consortium service agreement in respect of the fertilizer project run by the assessee. The liability of the non-resident to be taxed on the receipts from the assessee has to be decided under the provisions of the Act read with the agreement for double tax avoidance with the Federal Republic of Germany. As claimed by the learned counsel for the department such a liability has to be spelt out by a reading of the agreement as an integrated one. Even so, in our opinion, the liability would arise only under the provisions of article III which is as under: "Article 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 of the said enterprise situated in the first-mentioned territory. If profits are so derived, tax may be levied in the first-mentioned territory on the profits attributable to the said permanent establishment. (2) There shall be attri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a, constitute an industrial activity. Industrial activity clearly anticipates manufacture or at least a distant connection with the same on one's own. Any ancillary activity, much less of an advisory or assistance nature, cannot constitute industrial activity. Profits earned from such assistance cannot, therefore, be regarded as industrial profits. Nor can the activity carried on by the non-resident in India come under the scope of the expression 'commercial profits'. Commerce envisages trading activity, i.e., purchase and sale of a commodity. Admittedly, the non-resident has not entered into any business activity with the assessee or with anyone else. He is concerned with the agreements, consortium or service (sic), under which he is in receipt of amounts from the assessee. The setting up of a business dealing in commodities and earning a profit resulting from the difference in prices is the essence of commercial activity, which is conspicuous by its absence here. Prima facie, therefore, the receipts of the non-resident through the assessee are not the industrial or commercial profits of an enterprise. 22. On the contrary, what the non-resident does is an activity by way of supe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1372 and 1687 the following definitions of 'management' and 'personel services' appear: "Management: Act or art of managing, more or less skilled handling of something (as a weapon, a tool, a machine)---The conducting or supervising of something (as a business)---the executive function of planning, organising, coordinating, directing, controlling, supervising any industrial or business project or activity with responsibility for results---judicious use of means to accomplish an end. Personal Services : Economic service involving either intellectual or manual personal labour of the server rather than a saleable product of his skill (physicians, architects, garbage collectors/equally self personal service)." In the light of the above definitions and in the concept of co-ordination and management with the ultimate aim of guaranteed performance in a factory or a project, we cannot but hold that the receipts of the non-resident would certainly come under management charges or remuneration for labour or personal services which are excluded by the provisions of clause (2) of article III. With the information, therefore, available to us and from the exposition of the activities of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if that becomes payable. The question of deduction of tax on the amounts the assessee has to pay, by way of tax on behalf of the non-resident, would arise only when an assessment being made on the non-resident and a demand having been raised either on the non-resident or someone on his behalf---the assessee in this case. It is only at this juncture when under the agreement with the non-resident the assessee is obliged to pay the tax to the ITO due from the non-resident and he pays the same, he could be regarded as making indirectly or constructively a payment to the non-resident of the latter's tax dues thus incurring the obligation to deduct tax at source. The tax, therefore, the assessee has to deduct as indicated in the ITO's letter and the actual amounts that he appears to have paid after deduction seem to be far in excess of the amount he is obliged to pay even at the rate of 40 per cent and not 20 per cent as claimed by him. The tax to be deducted should be computed on the actual amount, without inclusion of the income-tax liability which the assessee remits to the non-resident. We direct that the excess tax deducted at source and paid, be refunded to the assessee as this has ..... X X X X Extracts X X X X X X X X Extracts X X X X
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