Karnataka High Court
Hyderabad Industries Ltd. vs Income-Tax Officer And Another on 4 January, 1991
Equivalent citations: [1991]188ITR749(KAR), [1991]188ITR749(KARN)
JUDGMENT K. Shivashankar Bhat, J.
1. The effect of section 10(6A) of the Income-tax Act, 1961, on the working of section 195 is to be considered in these writ petitions.
2. The petitioner had the benefit of the services of a non-resident company under an approved agreement; the petitioner had to pay certain sums to the non-resident company for the services rendered, on its behalf, by its engineer. The petitioner had to pay U. S. dollars 14,950 to the non-resident company; on this, the income-tax payable has to be paid by the petitioner under section 195 of the Act. The petitioner requested the first respondent to determine the tax to be paid on remittance of the amount and to issue a non-objection certificate. The net amount payable in terms of Indian currency was stated as Rs. 1,64,738 and the gross amount as Rs. 2,74,563; on this the tax of Rs. 1,09,825 was demanded as per no objection certificate dated May 18, 1984. After paying the tax and remitting the amount, the petitioner sought refund of Rs. 45,930, pointing out that as per section 10(6A) of the Act (which was inserted with effect from April 1, 1984), the grossing up could not be done. The tax payable on Rs. 1,64,738 was only Rs. 65,895. As per section 195, earlier, this tax, in turn, will be grossed up to the remittance for further calculation and tax was to be computed on this grossed up sum; the idea being that the tax paid by the petitioner is actually on behalf of the non-resident and, therefore, the said amount also should be part of the amount on which the non-resident has to pay the income-tax. Under section 195, the process of grossing up would continue until the total amount due to the non-resident by the resident (like the petitioner) gets exhausted. The net payment to the non-resident company after tax deduction is treated as Rs. 1,64,738 (the agreed sum); if so, the gross sum will be equivalent to that sum from which the tax at 40% has to be deducted to reach the net figure of Rs. 1,64,738. In other words, the net figure is 60% of the gross sum; in this manner, the gross sum payable is notionally arrived at at Rs. 2,74,563.
3. In view of section 10(6A), the petitioner sought rectification of the assessment order under section 154 and requested refund of the balance amount. This request was rejected; hence, the petitioner approached the were clear and the object was to prevent levy of tax on tax; the date of remittance was May 10, 1984, on which date section 10(6A) had come into force. However, the Commissioner also rejected the petitioner's petition under section 264.
4. The second respondent held that the proceedings under section 195 pertained to deduction of tax at source, while section 10(6A) was confined to the assessment of the foreign company; these are two distinct and separate issues.
5. Hence, two writ petitions, as to remittances under two sets of no objection certificates are involved.
6. Section 10(6A) reads thus :
"Section 10. - In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included :-
(6A) where in the case of a foreign company deriving income by way of royalty or fees for technical services received from Government or an Indian concern in pursuance of an agreement made by the foreign company with Government or the Indian concern after the 31st day of March, 1976, and approved by the Central Government, the tax on such income is payable, under the terms of such agreement, by Government of the Indian concern to the Central Government, the tax so paid.
Explanation : - For the purposes of this clause :-
(a) 'fee' for technical services shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9 :
(b) 'foreign company' shall have the same meaning as in section 80B.
(c) 'royalty' shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9."
Section 10 is in Chapter III bearing the nomenclature "Incomes which do not form part of total income". Omitting unnecessary words and confining the language to the instant case, section 10(6A) says that, in the case of a foreign company deriving income.... for technical services received from... an Indian concern... the tax on such income is payable... by the Indian concern to the Central Government, the tax so paid shall not be included in computing the total income of such a person, that is, the foreign company. Standing by itself, therefore, the tax paid on behalf of the foreign company for the remittances in question shall not be treated as part of the income derived by the foreign company. But the contention of the Revenue here is that section 10(6A) has nothing to do with the deduction of tax at source and it is attracted only for purposes of computing the total income of a foreign company. In other words, the contention seems to be that in case the foreign company has to face assessment proceedings, only then will section 10(6A) be attracted.
Subject to certain exceptions which are not relevant here as per section 195, any person responsible for paying to a non-resident, etc., any sum chargeable under the Act, shall "at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force"
7. Therefore, the payment to the non-resident is actually the income of the foreign company; section 195 recognises the payment as such income. In fact, levy of tax thereon, whether at source or subsequently, can only be on the basis that it is the income of the foreign company.
8. Section 19(6A) no where confines its operation to an assessment proceeding; there is no exclusion of its operation from their proceedings under the Act. The language of section 10 is quite simple and clear. It governs the computation of the total income of the person covered by it; a benefit which is not includible in the total income of a person necessarily implies that the said benefit is not the "income" of the person.
9. The construction sought t be placed by the respondents is based on a distinction which has no substance in it. It is not understandable as to why a benefit which will not e included in the total income of a person, should be considered as "income" for the purpose of deduction of tax at source at all. The purpose of deduction of tax at source is not to collect a sum which is not a tax levied under the Act; it is to facilitate the collection of the tax lawfully leviable under the Act. The interpretation put on those provisions by the respondents would result in collection of certain amounts by the State which is not a tax qualitatively. Such an interpretation of the taxing statute is impermissible.
10. That the Central Board of Revenue has formed the same opinion as above is clear from para 12.1 of its Circular No. 372, dated December 8, 1983 (see [1984] 146 ITR (St.) 9, 19), which read thus :
"12.1 A new clause (6A) has been inserted in section 10 of the Income-tax Act to provide that where income is derived by a foreign company by way of royalty or fees for technical services received from Government or an Indian concern in pursuance of an agreement made by the foreign company with Government or the Indian concern after 31st March, 1976, and tax on such income is payable, under the terms of such agreement, by Government or the Indian concern to the Central Government, the tax so paid will not be included in computing the total income of the foreign company. In other words, there will not be any 'grossing up' in respect of such tax. Where the relevant agreement is made by the foreign company with any State Government or Indian concern, the exemption under this provision will be available only if the agreement is approved by the Central Government. The expressions 'royalty' and 'fees for technical services' will have the meaning assigned to them respectively under Explanation 2 to section 9(1)(vi) and section 9(1)(vii) of the Income-tax Act and the expression 'foreign company' will have the meaning assigned to it in section 80B of the said Act."
11. No other contention was raised by the parties before me.
12. In view of the above, the petitioner is entitled to succeed. The impugned orders dated December 30, 1987 (annexures-E and K), are set aside. The respondents are directed to make consequential orders and refund the amounts due to the petition in accordance with law and in the light of the observations made above. Rule made absolute. No costs.