Income Tax Appellate Tribunal - Hyderabad
Bhadrachalam Paper Boards Ltd. vs Income-Tax Officer on 4 April, 1986
Equivalent citations: [1986]16ITD680(HYD)
ORDER
T. Venkatappa, Judicial Member
1. The assessee-company was erecting its paper board factory at Bhadrachalam. It had entered into an agreement with Eastern Paper Mills Ltd., Calcutta, for the purchase of a Combination M.G. Multiply Board and M.F. Paper Machine. On the advice of Eastern Paper Mills Ltd., the assessee had placed an order for M.G. Cylinder with Eberhard Hoesch & Sohne GMBH & Co. of West Germany. Accordingly, the said machine was imported and it arrived at the Madras Port which was later transported by rail to Bhadrachalam. While the machine was being transported it got damaged. Then the assessee contacted the West German company who sent one Mr. R.G. Clark of England to Bhadrachalam and set right the machine. Mr. Clark arrived in India on 24-4-1979 and after setting right the defect in the machine he left India on 31-5-1979. Thus, his stay in India was for 38 days. The assessee was required to pay £7,790 to Mr. Clark as per the invoice dated 30-5-1979 sent by him. The assessee applied to the ITO and got a tax clearance certificate for remitting the amount to Mr. Clark. The assessee undertook to be treated as an agent of non-resident Mr. Clark under Section 163 of the Income-tax Act, 1961 ('the Act'). After obtaining the permission of the Reserve Bank, the assessee remitted £6,719 to Mr. Clark and the balance could not be remitted as there was some objection from the Reserve Bank. The ITO required the assessee to submit a return of income of the non-resident as the assessee was treated as a statutory agent. The assessee filed a return claiming that the payment made to Mr. Clark was exempt under Section 10(6)(vi) of the Act. The ITO did not accept the assessee's plea that Mr. Clark received the amount as employee of a foreign enterprise for services rendered by him in India. Mr. Clark is a consulting engineer who stays in England. He does not become the employee of any foreign enterprise and he did not receive the amount as an employee of that foreign enterprise. Thus, the remuneration received by Mr. Clark from the assessee is not covered by the exemption under Section 10(6)(vi). In the absence of full details with regard to the cost of the components used by Mr. Clark the ITO allowed an estimated amount of Rs. 10,000 towards the same. He further found that the sum of £7,790 payable to Mr. Clark is free of taxes which means that the taxes are borne by the assessee-company. Hence, the amount payable to the nonresident is, therefore, to be grossed up in arriving at the total income of the assessee. Value of £7,790 was taken in Indian currency at Rs. 1,39,052. Expenses of Rs. 999 were added to it which comes to Rs. 1,40,051 out of which Rs. 10,000 were deducted. Thus, the ITO arrived at Rs. 1,30,051 which is to be remitted to the non-resident and on the said amount by grossing up method by levying tax on tax he worked out the income at Rs. 3,75,320 and determined the tax payable at Rs. 2,45,270.
2. On appeal, the Commissioner (Appeals) held that Mr. Clark was not an employee of the West German company. Before him the assessee had filed a certificate dated 13-4-1984 of the West German company to show that Mr. Clark was its employee. The Commissioner (Appeals) refused to admit this evidence as it was not produced before the ITO. He held that even if the certificate is considered it does not postulate the existence of an employer-employee relationship as there is no control and supervision of the work by the employer and since Mr. Clark was not the employee of the foreign enterprise the exemption under Section 10(6)(vi) would not apply to the remuneration received by him. With regard to the quantum of remuneration receivable he upheld the ITO's working at Rs.l,30,051. With regard to the grossing up, he held that, in principle, the grossing up method is to be approved. But there is no indication from the income-tax records as to how the ITO has grossed up the income at Rs. 3,75,320. He directed the ITO to examine the point in the light of the decision of the Andhra Pradesh High Court in CIT v. Superintending Engineer, Upper Sileru [1985] 152 ITR 753. Against the same, the assessee has preferred this appeal.
3. The learned counsel for the assessee strongly urged that Mr. Clark was sent by the West German company to set right the machinery imported from them. Mr. Clark was an employee of the West German company. This is clear from the certificate issued by them. The Commissioner (Appeals) was unjustified in not admitting the said certificate which goes to the root of the matter. Since there was some delay in obtaining the said certificate from the West German company it could not be filed before the ITO. Thus, there was sufficient reason for producing it before the Commissioner (Appeals) which he should have admitted. He submitted that the said certificate should be accepted and Mr. Clark should be considered as an employee. He strongly urged that since Mr. Clark was an employee of the West German company the amount received by him is exempt under Section 10(6)(vi). He relied on the decision in Aditya V. Birla v. CBDT [1986] 157 ITR 470 (Bom.). Alternatively, he urged that the grossing up could be done only at one stage. Since the ITO has grossed up by levying tax on tax it is opposed to the ratio laid down in the decision in Superintending Engineer, Upper Sileru's case (supra).
4. The learned departmental representative strongly urged that Mr. Clark was not an employee of the West German company and so Section 10(6)(vi) was not applied. He had come on his own as a consulting engineer and for the services rendered by him, he was paid by the assessee-company. Alternatively, he urged that the assessee cannot say that he has no connection with the West German company. Section 9(1)(vii) of the Act would apply. He further urged that the assessee by agreeing to bear the tax payable by the non-resident, the Government would be getting lesser tax and to such a situation the decision of the Supreme Court in the case of McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148 would be applicable. In reply the learned counsel for the assessee submitted that the assessee has entered into an agreement with the Eastern Paper Mills Ltd., Calcutta, which is an Indian company who in turn got in touch with the West German company. Hence, the question of applying Section 9(l)(vz7) does not arise.
5. We have considered the rival submissions. The assessee had produced the certificate dated 13-4-1984 of the West German company before the Commissioner (Appeals) who declined to admit the same as it was not produced before the ITO. Since there was some delay in obtaining the said certificate from the West German company the assessee could not produce the same before the ITO. Since the same was obtained, it was placed before the Commissioner (Appeals). Thus, there was sufficient reason for not producing the same before the ITO. Hence, the Commissioner (Appeals) ought to have admitted the same. In our view this action of the Commissioner (Appeals) in not admitting the said certificate is not justified. This certificate is a very important piece of evidence in deciding the issue whether Mr. Clark is an employee of the West German company. Hence, the Commissioner (Appeals) ought to have admitted the certificate and considered the same. Hence, we are unable to sustain his finding in not admitting the certificate. We admit the same and proceed to decide the issue. The said certificate dated 13-4-1984 of the West German company reads as under :
This is to certify that Mr. R.G. Clark of Heston House, Lafford Lane, up Holland, Lancashire, England was employed by our company to carry out repairs at Bhadrachalam, Andhra Pradesh, India, to the M.G. Cylinder supplied by us to Bhadrachalam Paper Boards Ltd. Accordingly, Mr. R.G. Clark visited Bhadrachalam and stayed there from 23-4-1979 to 24-5-1979 and carried out the repairs to M.G. Cylinder. For the services rendered by him, Bhadrachalam Paper Boards Ltd. has paid Mr. R.G. Clark a sum of pnd. stg. 7,790.
The above certificate clearly states that Mr. Clark was employed by the West German company to carry out the repairs to the M.G. Cylinder supplied by them to the assessee and, accordingly, Mr. Clark visited Bhadrachalam and carried out the repairs for which the assessee paid the amount to Mr. Clark. Thus, in our view, Mr. Clark was an employee of the West German company. For deciding employer-employee relationship, the test of control is not a decisive one. In Cassidy v. Ministry of Health [1951] 1 All ER 574 at p. 579, Lord Justice Sommerwell pointed out that the test of control of the manner of work is not universally correct, that there are many contracts of service where the master cannot control the manner in which work is to be done as in the case of a captain of a ship. In Silver Jubilee Tailoring House v. Chief Inspector of Shops and Establishments AIR 1974 SC 37, the Supreme Court at p. 42 held that in many skilled employments, to apply the test of control over the manner of work for deciding the question whether the relationship of master and servant exists would be unrealistic. This is a case where the workers were tailors who were paid on piece rate basis depending on the skill of the worker and the nature of the work. If the worker does not go to the shop he did not take permission from his employer. All work in the shop but some are allowed to work in their homes. On those facts, the Supreme Court held that the employer-employee relationship existed between the parties. In Dharangadhra Chemical Works Ltd. v. State of Saurashtra AIR 1957 SC 264, the Supreme Court held that a person can be a workman even though he is paid not per day but by the job. In this case certain English cases were noticed where it was held that the test of control was not one of universal application and there were many contracts in which the master could not control the manner in which the work was done. The facts in the above Supreme Court decision are as follows : The appellants therein are lessees of salt works. The entire area is parcelled out into plots called pattas and each agaria is allotted a patta who commenced their work by levelling the lands and sinking wells in them. The agarias cannot either remove the salt manufactured by them or sell it. The appellant pays them for the salt manufactured on piece work basis. The agarias are free to engage extra labour with whom the assessee has nothing to do. No working hours are prescribed for these agarias and no muster rolls are maintained. There are no rules as regards leave or holidays and they are free to go out of the works as they liked provided they make satisfactory arrangement for the manufacture of salt. On those facts, the Supreme Court held that the agarias are professional labourers who work in the production of salt and would, therefore, be workmen. The fact that they are free to engage others to assist them and pay for them would not affect their status as workmen. The ratio laid down in the above cases would squarely apply to the facts of the instant case. In Aditya V. Birla's case (supra) the Bombay High Court held that a party that retains a consultant can properly be described as his employer and the words 'any remuneration' are wide enough to cover the fees payable to a consultant. The above ratio applies as it is the West German company which has retained Mr. Clark as its employee since he is a technical consultant.
6. Mr. Clark was an employee of the West German company. He may be a consultant in England. But he has rendered services to the assessee-company in repairing the machinery as an employee of the West German company which is very clear from the certificate dated 13-4-1984. Whether the West German company had control over Mr. Clark in the supervision of the work is not a decisive factor in deciding the employer-employee relationship. In our view Mr. Clark was an employee of the West German company and for the services rendered by Mr. Clark as an employee, the assessee has paid the amount to him. The remuneration received by Mr. Clark as employee of the foreign enterprise for the services rendered by him during his stay in India is exempt under Section 10(6)(vi). The said Section reads as under :
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-
(1) to (5) ** ** ** (6) in the case of an individual who is not citizen of India, -
(i) to (v) ** ** **
(vi) the remuneration received by him as an employee of a foreign enterprise for services rendered by him during his stay in India, provided the following conditions are fulfilled-
(a) the foreign enterprise is not engaged in any trade or bussiness in India ;
(b) his stay in India does not exceed in the aggregate a period of ninety days in such previous year ; and
(c) such remuneration is not liable to be deducted from the income of the employer chargeable under this Act;
Items (a), (b) and (c) of Section 10(6)(vi) are fulfilled as the foreign enterprise is not engaged in any trade or business in India. The assessee had entered into an agreement with Eastern Paper Mills Ltd., which is an Indian company. Hence, the foreign enterprise is not engaged in any trade or business in India. Item (b) thereto is also satisfied as the stay of Mr. Clark in India was only for 38 days. Item (c) is also satisfied as the remuneration received by Mr. Clark is not liable to be deducted from the income of West German company. Thus, all the conditions specified in Section 10(6)(vi) are satisfied and so exemption claimed is allowable under that provision. Section 9(1)(vii) relied on by the departmental representative has no application to the facts of the present case. Thus, the assessee's claim for exemption under Section 10(6)(vi) is allowed.
7. There is force in the alternative contention of the learned counsel for the assessee relating to the grossing up. As seen from the working sheet of the ITO for the grossing up, it is clear that in respect of the amount determined by her for remittance of Rs. 1,30,051 she went on adding tax on tax and determined the grossed up income at Rs. 3,25,320 on which she levied tax of Rs. 2,45,270. This method of grossing up tax on tax cannot be upheld in view of the decision of the Andhra Pradesh High Court in Superintending Engineer, Upper Sileru's case (supra). It was observed as under:
... There is no guidance in the orders of the ITO as to how the figure was arrived at. It is not known whether the ITO adopted the system of grossing up by working out tax on tax until he arrived at a '0' figure. If that was the basis followed, we do not think it is proper.... (p. 771) Thus, in our view the method of grossing up adopted by the ITO by working out tax on tax and arriving at the figure of Rs. 3,75,320 on which tax of Rs. 2,45,270 was levied cannot be sustained. The grossing up has to be done as laid down in the above decision of the Andhra Pradesh High Court. The decision of the Supreme Court in the case of McDowell & Co. Ltd. (supra) has absolutely no application to the facts of the instant case.
8. In the result, the appeal is allowed.