Commissioner of Income Tax vs Barium Chemicals Ltd.

Jeevan Reddy J.

The Income Tax Appellate Tribunal, Hyderabad has referred the following question u/s 256(1) of the Income Tax Act, 1961 :

"Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was justified in holding that the question of assessing the tax perquisite in the hands of the Indian company in its capacity as the agent of the non-resident company would not arise ?"

The facts relevant to the question are that the assessee-company, Barium Chemicals Limited, Ramavaram, entered into an agreement with a foreign company, viz., Chemical and Technical Service Limited, on July 9, 1967, whereunder, the assessee-company undertook to remit certain amounts to the foreign company from time to time. During the previous year relevant to the assessment year 1968-69, the assessee-company remitted certain amounts to the foreign company. No tax was deducted at source by the assessee-company as required u/s 195 of the Income Tax Act. For that reason, the Income Tax Officer added the tax component and worked out the total taxable income at a particular figure. On appeal, the Appellate Assistant Commissioner determined the income accruing to the non-resident company at pounds 2,000 and held "in the instant case, it is quite clear from the agreement that the appellant company had to bear the tax, if any, that may arise in respect of the payments made and to that extent, the benefit that arises to the non-resident firm, is a perquisite includible. As I have now fixed the total income accuring at pound 2,000 the Income Tax officer is directed to value the perquisite on the basis (taking it as tax on tax and including this amount) and computing the business income and allow relief accordingly."

Against the order of the Appellate Assistant Commissioner quantifying the income, no appeal was preferred by the Department. Only the assessee-company filed an appeal. The Income Tax Appellate Tribunal held that under clause ''H'' of the contract between the parties, the assessee-company had not undertaken the liability to pay tax and, therefore, it is not possible to come to the conclusion, in the present case, that the payments made to the foreign company were free from Income Tax. It observed further that the statutory liability accruing to the non-resident company continued to exist and that, therefore, the question of assessing the tax perquisite as directed by the Appellate Assistant Commissioner in the hands of the assessee (Indian company) in its capacity as the agent of the non-resident company would not arise.

Clause ''H'' (1) of the contract between the parties reads thus :

"Phase I :

Irrevocable confirmed letter of credit on Barclays Banks Limited (Foreign Exchange Branch), London, for pounds 15,950.00 OD payable as follows :

With order... ... pounds 3,000.00 OD.

Three monthly payments of pounds 3,000.00. OD payable four months after signing of the contract without any deductions for taxes or otherwise."

A reading of the above clause shows that the assessee undertook to remit to the foreign company certain amounts "without any deductions for taxes or otherwise". This contract is clearly in the teeth of section 195 of the Income Tax Act, which obligates every person paying any sum, chargeable under the provisions of the Act to a non-resident (foreign company) to deduct the tax on such amount at the prevailing rates.

Now, the question is at what figure should the income earned by the foreign company in this country be determined. According to the assessee''s counsel, the total income earned by the foreign company in India is only pounds 2,000. It is true, he says, that the agent of the foreign company (assessee) has failed to deduct the tax when paying the said amount, but, that only means that the assessee will now be liable to pay the tax due on pounds 2,000 and that amount alone, it could be made liable for. The assessee-company, he says, is prepared to pay the tax assessed.

On the other hand, the contention of the Department is that pounds 2,000 could be remitted only after deducting the tax from the total income. Therefore, to arrive at the total income earned by the foreign company in India, the tax component should be added to the actual amount remitted to the foreign company. In other words, the income earned by the foreign company in India would be pounds 2,000 plus the tax which ought to have been deducted before the actual amount was remitted.

In other words, the question at issue is whether we should gross up the amount by adding the tax component or should we take the actual amount remitted as the total income and collect the tax from the agent on that amount.

A similar question arose before the Mysore High Court in Tokyo Shibaura Electric Co. Ltd. (By Agents Radio and Electricals Mfg. Co. Ltd., Mysore) Vs. Commissioner of Income Tax, Mysore, . There, the relevant clause between the Indian agent and the foreign company read as follows (p.285) :

"D. All payments to be made hereunder shall be made in the City of Tokyo, Japan, in any currency acceptable to the Japanese Government without deductions for taxes or other charges assessed in India, which shall be assumed by REMCO. (REMCO is the Indian company)."

The Mysore High Court held that under the aforesaid clause, the assessee has undertaken the liability to pay the tax due on the income earned by the foreign company in Indian and the tax component should be added and the total income should be arrived at by grossing it up.

Recently, a Bench of this court also had to deal with a similar clause in Commissioner of Income Tax, Andhra Pradesh Vs. Superintending Engineer, Upper Sileru, . There, there was an agreement between the Andhra Pradesh State Electricity Board and a foreign company and according to clause 13 of the agreement, the liability of the non-resident company to pay the Income Tax on the profit earned by such non-resident company had to be discharged by the Electricity Board. Construing the said clause, this court held thus (p.771) :

"Based on this covenant, the Income Tax Officer would be justified in adding to the net payment made only the amount of tax payable by the non-resident and the tax deductible at source determined with reference to the gross figure arrived at as above."

It is true that under clause H of the present contract, there are no express words to the effect that the assessee has undertaken the liability to deduct the tax on the income earned by the foreign company in India. But, in our opinion, the said words must be deemed to be implicit in clause H. The reason for our opinion is this :

Section 195 casts a statutory obligation upon every person in this country to deduct tax at the prevailing rates from out of any sum which is remitted to a non-resident/foreign company. It is not open to the parties to contract out of this statutory obligation. When the assessee in this case agreed to remit a particular amount without any deduction for taxes or otherwise, it would be reasonable to construe that the assessee has undertaken to pay taxes thereon by itself. It is not possible to agree that the assessee was not aware of the legal position and that in ignorance of it, it agreed to remit the entire income earned by the foreign company to it. A more reasonable way of understanding the clause would be to hold that the assessee-company undertook to discharge the tax obligation attaching to the income earned by the foreign company by itself. The mere absence of the words "which shall be assumed by REMCO" occurring in the contract considered in Tokyo Shibaura Electric Co. Ltd. (By Agents Radio and Electricals Mfg. Co. Ltd., Mysore) Vs. Commissioner of Income Tax, Mysore, , or the absence of the words like those occurring in clause 13 of the contract considered in Commissioner of Income Tax, Andhra Pradesh Vs. Superintending Engineer, Upper Sileru, , should not matter. When the assessee agreed to remit a particular amount without deducting taxes, it must be understood that it agreed to bear and pay the tax component. In such a case, the proper course is to gross up the figure.

We, therefore, answer the question referred to us in the negative. We hold that the Income Tax Appellate Tribunal was not justified in its conclusion and that the Appellate Assistant Commissioner of Income Tax was right in directing the Income Tax Officer to value the perquisite by adding the tax component to the actual amount remitted.

Another question has been agitated before us relating to the method of grossing up. This aspect has not been expressly referred to us. But, with a view to put an end to further controversy and also because there is already a decision of this court on this question, we are of the opinion that the authorities shall adopt the method of grossing up adopted and accepted by this court in Commissioner of Income Tax, Andhra Pradesh Vs. Superintending Engineer, Upper Sileru, .

The question referred is answered accordingly, i.e., in favour of the revenue and against the assessee. No costs.