Income Tax Appellate Tribunal - Mumbai
Dana Corpn. vs Income-Tax Officer on 8 April, 1988
Equivalent citations: [1989]28ITD185(MUM)
ORDER
R.L. Sangani, Judicial Member
1. This appeal by the assessee relates to the assessment year 1980-81.
2. The assessee is a non-resident company incorporated in United States of America. The assessee showed income of Rs. 12,76,940 in the return filed for the assessment year 1980-81, the details of which are as follows :
(i) Dividend from M/s. Mahindra Spioer Ltd.
and Perfect Circle Victor Ltd. Rs. 11,40,000
(ii) Royalty received from Mahindra
Spicer Ltd. Rs. 1,36,935
3. In the course of assessment, the Income-tax Officer invited the attention of the assessee to Section 5(2) of the Income-tax Act, 1961 and called upon the assessee to furnish full details of income received on accrual basis during the accounting year and state its objections to such income being assessed on accrual basis. The assessee then furnished details of royalty receivable for the relevant accounting year from Perfect Circle Victor Ltd. in terms of agreement dated 24-1-1975. Under the agreement dated 24-1-1975, the assessee was entitled to receive the royalty at the rate of 4 per cent of the net sale price of the products sold in India and at the rate of 5 per cent on net sale price of products exported to other countries. Under the said agreement, royalty was required to be calculated and paid every quarter. According to the assessee, royalty entitlement based on sales for the relevant previous year was Rs. 10,19,655. However, the assessee objected to including this amount in the total income. It pleaded that it had adopted the practice of returning the royalty income in the year in which the amount was received in USA and not in the year in which the right to receive amount accrued in India. It submitted that the same method should be adopted for this year also.
4. The Income-tax Officer rejected the plea of the assessee to the effect that the said royalty income should be assessed only in the year in which the same was received by the assessee-company in USA and that it should not be assessed in the year in which the income accrued. It was admitted before the Income-tax Officer that no application for permission to remit the amount to USA had been made till the date of the hearing of the assessment proceeding. He accordingly included the said income of Rs. 10,19,655 in the total income.
5. The assessee went in appeal before the Commissioner of Incomer tax (Appeals). The Commissioner of Income-tax (Appeals) noticed that the assessee had not filed copies of Profit and Loss Account and Balance Sheet or any other statement of accounts. From this he inferred that the assessee had not maintained any books of account in respect of the abovementioned item of income. He called upon the learned representative of the assessee to explain how, in the absence of books of account, it could be stated that the assessee had adopted cash system of accounting in respect of the royalty income. The. learned representative of the assessee stated before him that in the global Profit and Loss Account and Balance Sheet the assessee was accounting for the royalty income on receipt basis. The learned Commissioner of Income-tax (Appeals) noted that the assessee did not file copy of global Profit and Loss Account or Balance Sheet or any other evidence in support of that contention. He observed that in any case the method of accounting employed by the assessee-company in USA in respect of global operations is not relevant and that for the purposes of Section 145 of the Act what was to be seen was whether any method of accounting had been regularly employed for the purpose of accounting the income assessable in India, According to him, the method of accounting presupposed maintenance of regular books of account in respect of income from various sources, which were assessable under the Income-tax Act. As the assessee had not maintained any books of account at all in respect of its income from royalty, with which we are concerned, it could not be said that the assessee had adopted cash system of accounting in respect of income from said source. For these reasons he rejected the submission of the assessee that the said royalty income should be assessed on receipt basis in view of cash system of accounting followed by the assessee.
6. The learned Commissioner of Income-tax (Appeals) then referred to Section 5(2) of the Income-tax Act, 1961 and observed that under said section the total income of a non-resident included all income from whatever source derived, which was received or deemed to be received in India by him or on his behalf or which accrued or arose or was deemed to accrue or arise to him in India, In the present case, according to him, under the agreement dated 24-1-1975 the assessee became entitled to receive royalty in the relevant accounting year. Consequently, the said income had accrued to the assessee during the relevant accounting year and as such the said income formed part of the total income under Section 5(2) of the Act. He relied on the decision of the Madras High Court in CIT v. Standard Triumph Motor Co. Ltd. [1979] 119 ITR 573. The assessee is how in further appeal before us.
7. The first question to be determined is whether the income had accrued to the assessee in the relevant accounting year. As already stated, under the agreement dated 24-1-1975 between the assessee and M/s. Perfect Circle Victor Ltd., the assessee was entitled to receive royalty at the rate of 4 per cent of the net sales of products sold in India and at the rate of 5 per cent on products exported to other countries. Under the said agreement, royalty was required to be calculated and paid every quarter. As per figures furnished by "the assessee's representative before the Income-tax Officer, the royalty entitlement based on sales for the relevant previous year came to Rs. 10,19,655. On these facts, there is no scope for any doubt on the question that said income had accrued to the assessee in the relevant accounting year. Section 5(2) of the Income-tax Act, 1961 is as follows :-
(2) Subject to provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived, which-
(a) is received or is deemed to be received in India in such year by or on behalf of such person ; or (6) accrues or arises or is deemed to accrue or arise to him in India during such year.
8. under Section 5(2)(b) of the Act, an income which accrues or is deemed to accrue in India during the -relevant previous year would be includible in the total income of the non-resident.
9. We are supported in this view of the matter by the decision of Madras High Court in Standard Triumph Motor Co. Ltd.'s case (supra). In that case the facts were identical. In that case, under a collaboration agreement between non-resident company (assessee) and an Indian company the assessee was entitled to payment of royalty on the sale proceeds of all motor cars and component parts sold by the Indian company. In the return for one of the assessment years, the assessee claimed that it was maintaining its accounts on cash basis and not on mercantile basis and in the absence of actual payment of royalty by the Indian company, the assessee was not assessable on any income by way of royalty. This plea was accepted by the Tribunal. However, the High Court held that even if the assessee was keeping its accounts on the cash basis in regard to its income, the assessee was liable to tax under Section 5(2)(b) of the Act and as such the Tribunal was in error.
10. In the present case also the plea of the assessee is that the assessee was maintaining its accounts on cash basis and not on mercantile basis and as such the amount in question was liable to be brought to tax only in the year in which the amount was remitted from India to USA and was received by the assessee and that since the amount had not been received by the assessee in the relevant previous year, the same was not liable to be included in the income of the assessee. Even if the assessee was maintaining its accounts on cash basis, the plea that the amount was not liable to be included in the total income was bound to fail in view of the principle laid down by the decision of Madras High Court referred to above.
11. It was submitted by Shri B.K. Khare, the learned representative of the assessee, that the Madras High Court in said decision has not followed the decision of Supreme Court in Keshav Mills Ltd. v. CIT [1953] 23 ITR 230,, and as such we should not follow the decision of Madras High Court. He relied on the following observation at page 579 of the said decision of Madras High Court:-
We need not consider how far the observation of the Supreme Court is binding on us, for we proceed to deal with the matter on our own.
On the basis of this observation, the above submission was made by the learned representative of the assessee. We do not agree with the said submission. In fact, the attention to the Supreme Court decision in the case of Keshav Mills Ltd. (supra) had been drawn in the Madras High Court decision by the department and not by the assessee. The contention of the department was that particular observation of the Supreme Court in the case of Keshav Mills Ltd. (supra) was in favour of the department. The contention of the assessee before the Madras High Court was that said observation was obiter dicta and should not be relied upon for the purpose of deciding the case. After considering these rival submissions, the Madras High Court made the abovementioned observation to which our attention has been drawn by Shri B.K. Khare for the assessee. The Madras High Court has observed that it was not necessary for them to consider the contention of the department to the effect that the observation of the Supreme Court, which was in favour of the department, was binding on the Madras High Court. The Madras High Court proceeded to consider the question on their own. Thus, the Madras High Court in said decision has not in any way disregarded the decision of Supreme Court in the case of Keshav Mills Ltd. (supra).
12. In the case of Keshav Mills Ltd. (supra) the income had accrued outside India to an assessee who was non-resident and who was following mercantile system of accounting, but the said income was received in India. In that case even the assessee did not dispute that if the income was received in India in a particular year that income was liable to tax in that year even though the assessee was maintaining accounts outside India on mercantile basis and the income had accrued outside India what was seriously contended by the assessee in that case was that the income should be deemed to have been "received" outside India at the time when it accrued outside India and there cannot be receipt of same income over again in India. The Supreme Court held that income could not be, deemed to have been received at the time when it accrued. Within the meaning of the relevant provisions it was received in India when the purchasers made payments to the agent of the assessee in India and that event of receipt in India made the income liable to taxation. Thus the said Supreme Court decision is an authority for the proposition that method of accounting followed by non-resident assessee outside India in respect of his entire global income, was immaterial and that if and when a taxing event takes place in India, charge to tax is attracted. If this ratio is applied to the facts of this case it would follow that the fact that assessee showed in his account books maintained on mercantile basis outside India, royalty income received from India on receipt basis and not on mercantile basis, was wholly immaterial and that when taxing event takes place, that is when income accrues in India, charge to tax is attracted under Section 5(2)(b) of the Act. The Supreme Court expressed this view in following words :
Mr. Kolah pressed into service the argument based on Section 13 of the Act that the mercantile system of accounting regularly adopted by the assessee was obligatory on the income-tax authorities for computation of his income. While agreeing generally with that submission in case of residents, we doubt whether that position would be available to a non-resident, who maintains his books of account outside British India according to the mercantile system. The section would only be relevant where the total profits of the assessee have to be computed, in which event he would be entitled to claim that they should be computed according to the system of accounts maintained by him. But the section would hardly be relevant where stray items of income are caught in taxable territories as received in taxable territories by a nonresident.
Thus the decision of Supreme Court assists the department in the present case and not the assessee.
13. Shri Khare drew our attention to last sentence in the above quotation and argued that the said principle was applied by Supreme Court because of the fact that Supreme Court treated the transactions in India as "stray items of income...caught in taxable territories" and that transactions with which we are concerned are not "stray items" and as such said principle should not be applied. It was pointed out that royalty income was being received by the assessee for last several years and as such this item was not "stray item".
14. We are unable to accept the above submission. By using the expression "stray items of income" in said sentence in the decision of Supreme Court, what their Lordships have conveyed is that the non-resident was doing business outside India on a large scale and out of large number of transactions in the course of said business, when some transactions are "caught" in India then those transactions were "stray items of income". Thus comparison is between the entire business of non-resident and the transactions in India. The non-resident was maintaining accounts on mercantile basis in that case in respect of its entire transactions which were large in number and out of them few were "caught" in India and the Supreme Court observed that Section 13 of the Income-tax Act, 1922 (corresponding to Section 145 of Income-tax Act, 1961) would hardly be relevant. In our case also method of accounting followed in the account books maintained outside India in respect of entire global business transactions would be hardly relevant for determining chargeability in respect of income accrued in India. Taxing event of accrual would attract chargeability in respect of such income under Section 5(2)(b) of the Act.
15. In this connection we may refer to submissions made by Shri Vohra, the learned representative of the department. His submission is that there is no evidence to show that assessee was maintaining accounts on receipt basis in respect of this item of income. He has drawn attention to the fact that no account books or balance sheet has been produced. Regarding this submission, Shri B.K. Khare, the learned representative of the assessee, filed before us photo copy of what is termed as "Comments on Financial Statements". Reliance is placed on the following portion in the said comments :
Dividends, royalties and fees from these affiliates are recorded in Dana's consolidated statements when received.
It is submitted that from this it should be inferred that the assessee followed cash system of accounting as far as income from royalties was concerned.
16. We do not agree with the above submission. If the assessee claimed that it maintained accounts on cash basis in respect of particular source of income and that the income should be assessed on cash basis under Section 145(1) of the Act, the assessee has to show that the accounts for the relevant previous year were in fact maintained on cash basis. This has not admittedly been shown to us. The above extract only indicates that in the consolidated statements prepared by the assessee in respect of its global income, royalties were recorded when received. What is recorded in consolidated statements is not relevant. What is relevant is maintenance of accounts on cash basis in respect of this source of income. Besides, in the above extract dividends have also been referred to. It is an admitted position that the assessee was not returning dividend income as and when received and that dividend income was being returned as and when the dividends were declared as required by Section 8 of the Act. Consequently, mere fact that dividends were mentioned in the consolidated statements when received would not mean that dividends would become assessable not in the year in which they are declared but in the year when they are received. When this is true about dividends, the same would be true about royalties. Royalties would become assessable when they accrued or arose as laid down in Section 5(2)(b) of the Act. Mere fact that royalty was shown in the consolidated statement when received would not mean that royalties would be assessable only in the year when they are received.
17. It is to be noted that the consolidated statements referred to above were prepared by the company as on 31st August. The previous year, which the assessee has declared, is the financial year. This is because no specific accounts are maintained in India in respect of the income derived in India. For this reason also the income would be liable to be brought to tax on accrual basis.
18. The next submission of Shri Khare, the learned representative of the assessee, was that there would be no accrual unless permission of Reserve Bank had been received because without that permission the assessee, who is non-resident, would have no right to receive the same. This submission cannot be accepted. A similar submission was considered by the Tribunal in the case of ITO v. Pfizer Corpn. [1985] 12 ITD 351 (Born.) in respect of dividend income. The submission before the Tribunal was that in view of Sections 9 and 19 of Foreign Exchange Regulation Act, dividend did not accrue till the Reserve Bank of India permitted remittance and as such no right was created in favour of the non-resident till such permission was given. This submission was rejected by the Tribunal. The Tribunal considered the relevant provisions of the said Act and it was held that those provisions prescribed procedure for remittance and did not suspend accrual of income. It was held that final dividend accrued on date of declaration in the Annual General Meeting and not on the date when Reserve Bank of India gave permission. The same principle would apply to the royalty, which has accrued to the assessee under the agreement in question. The said income had accrued to the assessee in the relevant year and that the accrual was not postponed because of any of the provisions of Foreign Exchange Regulation Act.
19. Another submission that was made in the said decision before the Tribunal was that since the assessee had adopted cash method of accounting, the dividend income could not. be assessed on. the. basis of declaration but should be, assessed on the basis of receipt. The Tribunal rejected the said submission relying on the decision of the, Madras High Court in .Standard Triumph Motor Co, Ltd.'s case (supra) on which we have relied in the present case. This decision of the Tribunal thus supports the view which we have taken.
20. We may also mention that the submission that income accruing to non-resident should be taxed on receipt basis and not on accrual basis was considered by the Special Bench of the Tribunal in the case of Siemens Aktiengesellschaft v. ITO [1987] 22 ITR 87 (Bom.) at page 122 and the Tribunal relying on the above-mentioned decision of the Madras High Court held that income was taxable on accrual basis and not on receipt basis. The decision in CIT v. American Consulting Corpn. [1980] 123 ITR 513 (Ori.), on which Shri Khare has relied, has been taken note of by the Special Bench of the Tribunal. Thus the decision of the Special Bench of the Tribunal also supports the view which we have taken.
21. Our attention was invited by the learned representative of the assessee to Section 115A of the Act where it is provided that income by way of royalty or fees for technical services received by an assessee, being a foreign company, would be chargeable to tax at particular rate mentioned therein. It was submitted that this section indicates that it is the receipt of income by a nonresident company, which is chargeable and not accrual of the income. We are unable to accept this submission. Section 115A prescribes rate at which particular category of income would be chargeable. That section is not concerned with the year in which the particular income would be chargeable. Section 5(2)(b) is the proper section for determining the year in which the particular income is taxable. Section 9 expressly states that income by way of royalty payable by a person who is a resident shall be deemed to accrue or arise in India. In the present case, as already stated, the royalty became payable to the assessee in the relevant year under the agreement in question and as such that income accrued or deemed to have accrued or arose in India in view of provisions of Section 5(2)(6) and Section 9 of the Act.
22. Our attention was also drawn to Section 205 of the Act. That section lays down that where tax is deductible, at the source under Sections 192 to 194, Section 194A, Section 194B, Section 194BB, Section 194C, Section 194D and Section 195, the assessee shall not be called upon to pay the tax himself to the extent to which tax has been deducted from that income. It was submitted that the tax was liable to be deducted at the time of remittance of royalty by the Indian party and as such the assessee himself had no liability for payment of tax. This submission cannot be accepted. It is only in respect of the tax which has been deducted that there would be no liability for the assessee to pay the tax. When no deduction as contemplated by Section 205 has taken place because of the fact that the income has not been remitted, this provision would not be of any assistance.
23. We may emphasise here that it was an admitted position that no application has ever been made to Reserve Bank of India for , permission to remit the amount in question to the assessee in USA. Already more than seven years have passed since the income accrued to the assessee and yet no application for permission to remit the amount has been made. The assessee holds large number of shares in the company in question. Consequently, the assessee has financial interest in the affairs of the company in question. It can be safely presumed that it was with the consent of the assessee-company that no application to remit the amount has been made. We were informed by the learned representative of the assessee that in the year 1987 the assessee has chosen to accept shares of the concerned company in lieu of the amount, which was receivable by the assessee in respect of royalty income. Thus the event of remittance has been postponed because of financial considerations and not because of any difficulty in remittance of the amount. By choosing to receive the amount after a lapse of seven years, the assessee cannot postpone the taxing event by seven years. We may also further emphasise that as far as the Indian company is concerned, the amount in question representing royalty payable to the assessee has been claimed as deduction in computation of its profits and has been allowed. This indicates that the Indian company treated the royalty income as payable to the assessee-company in the relevant accounting year. This further supports the view which we have taken to the effect that the income had accrued to the assessee in the relevant accounting year and the assessee was not entitled to postpone the taxability by choosing not to receive the amount for several years.
24. It was submitted that the assessee had offered the royalty income for taxation on receipt basis for last several years and the department had accepted the same for the earlier years and as such the department would not be entitled to make deviation and make assessment on accrual basis. We, are unable to accept this submission. If in the past the assessee had offered the income for taxation on receipt basis and the department accepted the same, that by itself does not disentitle the department to make assessment on accrual basis when, according to legal provisions applicable, the amount was liable to be taxed on accrual basis and when no double assessment was involved. Besides, as we have already pointed out, the assessee, who had financial interest in the company in question, had chosen not to receive the amount for several years and has thus postponed the receipt for financial considerations. In the circumstances, we find no error in assessing the income in question on accrual basis when the legal provisions clearly indicate that" the income in question was assessable on accrual basis and when the decision of the Madras High Court has confirmed this legal position. There was no decision which has taken a contrary view as far as this point was concerned. It is now well settled by the decision of Bombay High Court in the case of CIT v. Smt. Godavaridevi Saraf [1978] 113 ITR 589 that Tribunal was bound to follow decision of a High Court when there are no contrary decisions. We do not accept the submission of the learned representative of the assessee that the decision of the Madras High Court does not lay down the correct legal position. We respectfully follow the said decision and reject the submissions made on behalf of the assessee.
25. Shri Khare had also submitted before us, on the basis of observations at page 170 of the Law & Practice of Income-tax by Kanga & Palkhivala, that there was distinction between 'accrue' and 'arise' and that it should be held that when the permission of Reserve Bank was obtained for remittance, there was arisal of income although accrual had taken place earlier and that the income should be taxed in the year in which it arose.
26. It is well established that as far as 'accrue' and 'arise' are concerned, the locale for both the events would always be the same but the time may be different ; income may accrue in one year and arise in another. However that distinction is not relevant here. As regards income arising in different year, what the learned authors have emphasised is that this would happen solely because of particular method of accounting regularly employed by the assessee under Section 145 of the Act.
27. In our case, we have already stated, no account books have been maintained under Section 145 of the Act for the income accruing or arising in India and no copies of any account book have been filed. We have already dealt with this aspect earlier. We are unable to accept the submission that the grant of permission by Reserve Bank for remittance to USA would be the only taxing event in the present case. As already stated no permission of Reserve Bank for remittance has ever been sought as far as this income is concerned. Accrual is one of the taxing events attracting tax and when that event has taken place, tax would be attracted. In the case of Keshav Mills Ltd. (supra), receipt in India was the taxing event that attracted tax. In the present case as well as in the case of Standard Triumph Motor Co. Ltd. (supra), accrual is the taxing event attracting the tax. We accordingly confirm the addition of amount in question in the total income.
28 to 35. [These paras are not reproduced here as they involve minor issues.]