Calcutta High Court
Commissioner Of Income-Tax vs West Bengal State Electricity Board ... on 5 August, 1986
Equivalent citations: [1987]166ITR507(CAL)
JUDGMENT Dipak Kumar Sen, J.
1. K. Okumo, the assessee, a Japanese national who was an engineer in the employment of Fuji Electric Co. Ltd. of Japan, came to India initially on February 13, 1971, to supervise an electricity project at Jaldhaka in West Bengal set up by the West Bengal State Electricity Board, hereafter referred to as the Board. He left India on September 13, 1971. The assessee again came to India on May 30, 1972, for work in the same project and finally left India on November 4, 1972. The Government of India approved the services of the assessee for the purpose of exemption from income-tax under Section 10(6)(vii) of the Income-tax Act, 1961.
2. In the assessment year 1973-74, the accounting period ending on March 31, 1973, the assessee was assessed to income-tax. The Income-tax Officer found that under the order of the Government of India dated April 19, 1973, whereby the services of the assessee from June 30, 1972 to October 29, 1972, were approved under Section 10(6)(vii) would not entitle the assessee to claim exemption of his income from being taxed inasmuch as the assessee had come to India in an earlier year, namely, 1971, and was a resident in India in one of the four financial years immediately preceding the financial year involved. As such, it was held that the assessee did not qualify for exemption from income-tax in the assessment year involved. The salary of the assessee was, accordingly, assessed to income-tax and inasmuch as the Board had agreed to bear the tax payable by the assessee, the amount of tax to be paid by the Board was treated as perquisite in the hands of the assessee and was grossed up. The total income was determined at Rs. 11,33,500.
3. Being aggrieved, the assessee through the Board preferred an appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner held that inasmuch the assessee had been a resident in India in one of the four financial years immediately preceding the financial year in question, he was not entitled to claim exemption from income-tax.
4. It was contended before the Appellate Assistant Commissioner further that the Income-tax Officer was not justified in grossing up the assessee's income by treating the tax to be borne by the Board under the agreement entered into by and between the Board and Fuji Electric Co. Ltd., as a perquisite in the hands of the assessee as the same had been borne by the Board who was not the employer of the assessee and as such the tax on the salary of the assessee paid by the Board was not a perquisite within the meaning of Section 17(2)(iv) of the Income-tax Act, 1961. The agreement between Fuji Electric Co. Ltd. and the Board was placed before the Appellate Assistant Commissioner and it was contended that the assessee was in fact an employee of Fuji Electric Co. Ltd. and had been deputed by the Japanese company to work as a technician with the Board, There was no contract of employment between the assessee and the Board.
5. The Appellate Assistant Commissioner rejected the contentions of the assessee. He held that though the assessee was deputed by Fuji Electric Co. Ltd. of Japan to work for a specific period, the actual work was done by the assessee under the Board. The Board itself had made necessary arrangements for tax exemption of the assessee under Section 10 of the Income-tax Act, 1961. He also noted that the Board had granted a salary certificate to the assessee in respect of remuneration paid to him. He held that remuneration had been received by the assessee as salary for services rendered in his employment under the Board and that the tax paid by the Board on such remuneration was a perquisite in the hands of the assessee under Section 17 of the Income-tax Act, 1961. The assessment was confirmed.
6. The assessee went up in further appeal before the Income-tax Appellate Tribunal. It was contended before the Tribunal on behalf of the assessee that the assessee at all material times was an employee under Fuji Electric Co. Ltd. of Japan and there was no privity of contract between the Board and the assessee. The agreement between the Board and the Japanese company as recorded in a confirmation letter dated June 9, 1972, was placed before the Tribunal and it was contended that it was clear from the said agreement that the assessee never served the Board as an employee and under the agreement, all payments by the Board had been made not to the assessee but to the Japanese company for and on account of the latter. It was contended that the assessee not being an employee of the Board, the Income-tax Officer and the Appellate Assistant Commissioner were wrong in grossing up the salary of the assessee on tax basis and were also wrong in treating the amount of tax as a perquisite under Section 17 of the Income-tax Act, 1961.
7. Contentions to the contrary were made on behalf of the Revenue. A letter dated April 19, 1973, from the Government of India to the Board was placed before the Tribunal to show that the services of the assessee as a technician to the Board had been approved and on that basis, tax exemption had been granted to the assessee. An earlier decision of the Tribunal in the case of N. Sciandra where the facts were more or less similar to those in the instant case was cited.
8. The Tribunal considered the agreement between the Board and Fuji Electric Co. Ltd. of Japan as recorded in the letter of confirmation dated June 9, 1972, and found that the technicians who were deputed by the Japanese company referred to in the agreement as the seller, were referred to in the agreements as the seller's engineers. The agreement further recorded that the buyer, namely, the Board, had to pay supervision charges for the engineers at specific rates. It was stipulated in the agreement that the Japanese company would submit their bills monthly to the Board which would pay to the Japanese company after two weeks of the receipt of the bills the amount charged partly in dollars to the Japanese company and partly in rupees in the bank account of the engineers concerned. It was further recorded in the agreement that the taxes and duties which might be imposed in the performance of the contract and also in respect of the amounts received by the engineer would be borne by the Board which would give full co-operation for exemption of such taxes and duties.
9. On the basis of the aforesaid, the Tribunal found that there was no agreement directly or indirectly between the Board and the assessee. The Tribunal held that the assessee remained an employee of the Japanese company. Payment of only a part of the charges for the assessee would be paid in rupees to the assessee by the Board. The same was not tantamount to the salary earned by the assessee for services rendered to the Board. The Tribunal found that under the agreement between the Board and the Japanese company, no right had accrued to the assessee to sue the Board for enforcement of the terms and conditions of the agreement and the same might be enforced only by the Japanese company.
10. On the basis of the aforesaid, the Tribunal held that the assessee remained an employee of the Japanese company in the assessment year and could have been assessed to income-tax under Section 9 of the Income-tax Act, 1961, in respect of the income earned by him in India, The Tribunal set aside the order of assessment with the direction to the Income-tax Officer to initiate fresh assessment after obtaining a salary certificate from M/s. Fuji Electric Company Ltd.
11. The Tribunal further held that the Revenue was wrong in grossing up the salary on tax on tax basis. The Board was never the employer of the assessee and the tax payable by the Board in respect of salary earned by the assessee in accordance with the terms and conditions of the confirmation letter dated June 9, 1972, could not be computed by grossing up the salary as was done. But the Tribunal, however, held that the tax which was to be paid by the Board resulted in a benefit to the assessee and this had an element of income. Such income would not be a salary income nor was it a perquisite and it should be treated as income from other sources.
12. On an application of the Revenue under Section 256(1) of the Income-tax Act, 1961, the following question has been referred, as a question of law arising out of the order of the Tribunal, for the opinion of this court:
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee remained an employee of M/s. Fuji Electric Co. Ltd. and did not become an employee of West Bengal State Electricity Board during the previous year relevant to the assessment year 1973-74?"
13. At the hearing before us, the learned advocate for the Revenue contended that the assessee should be held to be an employee of the Board.
14. He reiterated the contentions of the Revenue before the Appellate Assistant Commissioner and relied on the findings of the Appellate Assistant Commissioner. Learned advocate for the Revenue submitted further that if the assessee was not a employee of the Board, he could not have applied to the Government of India for tax exemption under Section 10 of the Income-tax Act, 1961. Such application was made on the basis that he was an employee under a local authority, namely, the West Bengal State Electricity Board and further that he was being paid remuneration as an employee by way of salary. Approval of the Government of India under Section 10 indicated that the assessee was an employee of the Board. He submitted further that the Board had accepted the assessee as its employee and had furnished a salary certificate. The assessee had filed his income-tax return personally. In support of his contentions, learned advocate for the Revenue cited the following decisions :
(a) Tokyo Shibaura Electric Co. Ltd. v. CIT [1964] 52 ITR 283 (Mys). In this case, a non-resident company had granted a licence to the resident company for manufacture of certain articles and had also agreed to render certain services to the resident company. In consideration of the same, the resident company agreed to pay to the non-resident royalty at the rate of 3% of the net sale proceeds of articles manufactured and sold by the company. It was agreed that all payments to be made would be without deduction of taxes and other charges assessed in India which should be assumed by the resident company.
On these facts, it was held by the Mysore High Court on a reference that the real income by way of royalty received by the non-resident company under the agreement would be the amount, which if the tax thereon had been deducted, left a royalty at 3 per cent. of the proceeds. Such income was not net royalty plus the tax.
(b) Satyanarayan Rungta v. CIT . In this case, it was held by a Division Bench of this court that where an employee received salary from his employer tax free, the income-tax authorities would be justified in grossing up the salary. It was held further that no credit for tax could be given to the assessee for the difference between salary income taken for the purposes of assessment and net tax free salary received by the assessee from his employer.
(c) Frank Beaton v. CIT [1985] 156 ITR 16 (Delhi). In this case, the assessee, a non-resident, was the area manager in Delhi of an Australian Airways company wholly owned by the Government of Australia. The terms of the employment of the assessee were, inter alia, that payment of any local Indian income-tax on the salary and allowances would be the responsibility of the company. In assessing the salary of the assessee to income-tax, the Income-tax Officer computed the salary and perquisites after grossing up. Tax on the said grossed up salary was demanded and paid. Revision petitions filed before the Commissioner were dismissed and the computation of the Income-tax Officer was upheld. On a writ petition filed before the Delhi High Court, it was held that the computation of the Income-tax Officer was wrong. On an interpretation of the agreement it was held that it had to be determined what was the taxable salary of the assessee if the same was not tax free. On this amount so determined, tax had to be calculated and only this amount of tax the company, as the employer, had to pay. Any additional tax levied as a result of the addition of the tax payable by the company had to be paid by the assessee as there was no agreement that the company would pay a tax on tax. It was directed that after adjusting the tax payable on the full amount of the salary of the assessee, the additional amounts paid by the company should be refundable.
15. Learned advocate for the assessee contended on the other hand that the question referred was not concerned with either the grossing up of the salary or the payment or the computation of income-tax. He submitted that the. only question to be determined was whether the assessee was an employee of the Board or an employee of the Japanese company.
16. Learned advocate for the assessee produced before us a copy of the letter of confirmation recording the agreement between the Board and the Japanese company. We allowed the same to be relied on as the same had been referred to in the order of the Tribunal. The said document had also been mentioned in the index of the paper book but had not been printed. It appears from the said confirmation letter that the Japanese company agreed to provide the services of competent engineers to the Board to give necessary instruction for erection of machinery and equipment. The Board had to pay supervision charges to the Japanese company for such services at a fixed rate, a part of which was to be paid in dollars in Tokyo, Japan, and the balance had to be paid in rupees in the bank accounts of the engineers concerned at Calcutta. The payments by the Board would be made on the bills to be submitted by the Japanese company every month. Tax and duties imposed in respect of the amounts received by the engineers would be borne by the Board.
17. Construing the said confirmation letter, learned advocate for the assessee contended that no relationship of employer and employee had been established between the assessee and the Board. The Tribunal was correct in holding that the assessee was not an employee of the Board but of the Japanese company.
18. In support of his contentions, learned advocate for the assessee cited a decision of this court. In N. Sciandra v. C1T [1979] 118 ITR 675, where on almost similar facts, it was held that a foreign technician deputed by a nonresident in a project of the Fertiliser Corporation of India, was not an employee of the latter. The facts in that case were, inter alia, that the Indian Corporation would pay stipulated amounts to the non-resident in respect of the services to be rendered by the personnel deputed by the nonresident. The Indian Corporation in that case had also issued a certificate showing that certain payments had been made to the foreign personnel. It was not mentioned in the certificate that the foreign personnel had been engaged by the Corporation or that remuneration had been paid by the Corporation. No deduction on account of tax from the salary payable to the foreign personnel was made by the Corporation. It was held that a relationship of employer and employee had not been established between the Corporation and the assessee.
19. In the instant case it is not the case of the Revenue that the agreement between the Board and the Japanese company is something different from what has been recorded in the confirmation letter. The terms and conditions recorded in the said confirmation letter, considered earlier, indicate prima facie that the assessee was not an employee of the Board but was an employee of the Japanese company. The Board no doubt issued a certificate to the assessee, but the same certifies only the amount paid in rupees to the assessee. The certificate does not mention that the same has been paid by way of salary to the assessee or that the assessee was an employee of the Board.
20. The application of the assessee for tax exemption under Section 10 of the Income-tax Act, 1961, was not produced in any of the proceedings earlier, nor is it a part of the record before us. It is not possible to infer that merely because the assessee had made such an application, the assessee must have declared himself to be an employee of the Board or that a contractual relationship of employer and employee arose on the said affidavit. We are unable to accept the contention of the Revenue that there was a relationship of employer and employee between the assessee and the Board and that the Board had accepted the assessee as its employee.
21. In this reference, we are not concerned with the taxability of the amount earned by the assessee while working in India, nor are we concerned with the method of grossing up of the assessee's income on the basis that tax had been paid by somebody else.
22. On the facts and circumstances, we find no reason to disagree with the conclusion of the Tribunal that the assessee was not an employee of the Board. There was sufficient evidence before the Tribunal to come to the same conclusion. Evidence to the contrary which have been relied on by the Revenue are not conclusive and, in any event, sitting in reference jurisdiction, we cannot reappreciate the entirety of the evidence as in an appeal.
23. For the reasons as above, we answer the question referred in the affirmative and in favour of the assessee.
24. There will be no order as to costs.
Mrs. Monjula Bose, J.
25. I agree.