Calcutta High Court
Great Lakes Carbon Corporation (No. 1) vs Commissioner Of Income-Tax on 19 December, 1989
Equivalent citations: [1993]202ITR64(CAL)
Author: Suhas Chandra Sen
Bench: Suhas Chandra Sen
JUDGMENT Suhas Chandra Sen, J.
1. The Tribunal has referred the following question of law under Section 256(1) of the Income-tax Act, 1961 " Whether, on the facts and in the circumstances of the case, the sum of Rs. 10 lakhs or any part thereof is taxable in the hands of the assessee or arisen in India ?"
2. The assessment year involved is 1966-67, for which the relevant accounting period is the calendar year 1965. The assessee is a non-resident company which entered into three separate agreements dated March 12, 1964, for erecting a plant for the production of graphite and rendering services in connection therewith, Graphite India Ltd. (hereinafter described as "the Indian company ") was to pay to Messrs. Great Lakes Carbon Corporation Rs. 14,00,000 under the agreement. The facts found by the Tribunal as stated in the statement of case are as under :
The assessee is a non-resident company. Its accounting year for the assessment year 1966-67 was the calendar year 1965. Proceedings under Section 147 were initiated in the above case by the Income-tax Officer by recording, inter alia, the following reasons :
"This is a case of a non-resident which entered into three agreements dated March 12, 1964, viz., (i) Engineering and Construction Agreement, (ii) Operation Agreement and (iii) Export Sales Agreement with Messrs. Graphite India Ltd. for erecting a plant for the production of graphite and rendering services in connection therewith. According to paragraph 4 of the Engineering and Construction Agreement, in consideration of services rendered up to the date of setting up the plant, the Indian company was to pay to Messrs. Great Lakes Carbon Corporation Rs. 10,00,000 upon receipt of the appropriate authorities as set out in Clause 9 of the agreement dated May 7, 1962.
The agreement dated June 7, 1962, was not produced. Though the plant got set up only in 1967, yet the payment was made in 1965 (May 28, 1965), when the consideration was utilised for issuing equity capital of the Indian company. Twenty-five per cent. of the equity capital of the Indian company is held by Messrs. Great Lakes Carbon Corporation and, as per paragraph 7 of the Engineering and Construction Agreement, the plant was to be handed over to Messrs. Graphite India Ltd. after the production starts. This meant that Messrs. Great Lakes Carbon Corporation were actively associated in the setting up of the plant in India and as such the remuneration received by them is for the services rendered in India. Moreover, the payment has been received in India in the shape of equity capital of the Indian company. Though, under the agreement, some services are rendered abroad, the payment in respect of the same having been received in full in India, it becomes taxable under Section 5(2)(a). I have, therefore, reason to believe that this income of Rs. 10,00,000 has escaped assessment for failure on the part of the assessee to file the return of income in time and for which no notice under Section 139(2) of the Income-tax Act, 1961, was issued."
3. The assessee-company filed its return of income pursuant to the notice under Section 148 on January 17, 1979, disclosing an income of Rs. 96,000 by way of dividend. It claimed that the sum of Rs. 10,00,000 was not taxable in India because no part of it has accrued or has arisen in India. The Income-tax Officer held that there was close financial and managerial association between Messrs. Great Lakes Carbon Corporation (hereinafter described as " the American company " ) with the Indian company and the total receipt was treated as business income of the American company.
4. On appeal, the Commissioner of Income-tax (Appeals) upheld the order of the Income-tax Officer and the assessee preferred a further appeal to the Tribunal. The contention of the assessee before the Tribunal was that the ratio of the decision of the Supreme Court in the case of Carborandum Co. v. CIT applied to the facts of this case and, on the basis of the principles laid down in that judgment, the income of the assessee could not be treated as taxable in India.
5. The Tribunal, however, held that the employees who were deputed by the assessee to the Indian company for working in India had not severed their relation with the American company and that, apart from making payments to the said employees directly, the Indian company was also making some payments towards the emoluments to the assessee-company. The Tribunal observed :
" . . . a perusal of all the documents would lead one to the ultimate conclusion that these employees had not severed their connection with the assessee-company altogether and, therefore, it cannot be said that all the jobs done by the assessee-company in consideration of this amount were outside India. After all, at least a factory had to be constructed in India and the engineering part thereof had to be supervised in India. It is true that for the salaries paid to the supervising officers the Indian company had paid extra consideration for their work done in India over and above the said sum of Rs. 10 lakhs, but part of the said sum was also the consideration for the asscssee's having made available the services of the highly qualified and experienced personnel to the Indian company. In this view of the matter, we feel that some part of Rs. 10 lakhs, however slight it may he, would have to be said to have accrued and arisen in India. For determining this part, the matter has to go back to the Income-tax Officer as already pointed out by us."
6. It has been strongly contended by Mr. Pal, appearing for the assessee. that the Tribunal has taken a wrong view of the agreement and has not understood the import thereof. The Tribunal should have held that the persons who were treated as employees of the American company were really employees of the Indian company. While in India, they were under the supervision and control of the Indian management of the Indian company. They were working as employees of the Indian company. The American company, either directly or indirectly through its employees, had not rendered any service in India.
7. On this aspect of the matter, there are a large number of decisions. But every decision turns on the facts of its own case, The agreements under consideration in all these decisions are not identical. The question whether the American company had rendered any service to the Indian company through its employees will have to be resolved on the basis of the terms and conditions of the agreement and the various correspondence that has passed in this regard between the American company and the Indian company and also between the Reserve Bank of India and the various parties.
8. Taking an overall view of the matter, it appears that the Tribunal's decision in this matter is correct. The agreement dated March 12, 1964, a copy of which has been included in the paper book, goes to show that Graphite India Ltd., the Indian company, desired to have a plant erected in India for production of graphite. Graphite India Ltd. required engineering services "in the design and construction of the said plant and recognised that Great Lakes, the American company, had personnel in its employ .... qualified to design and supervise such design and construction."
9. The Indian company hired and retained the American company "to design, engineer and supervise construction" of a plant for this purpose. The plant was to be erected in India near Durgapur. The Great Lakes were to render, inter alia, the following services : . . .
" I. Engineering : . . .
(e) Supervision of preparation of detailed engineering drawing in India. . . .
(g) Engineering supervision of construction.
(h) Supervision of the project by the chief engineer or a qualified nominee of the electrode division of 'Great Lakes'.
(i) Such engineering services during the entire course of construction as may be necessary in the sole discretion of Great Lakes."
" II. Selection and Training of personnel . . . ."
10. Great Lakes had also to impart training to various employees and also to provide technical know-how and various other things in the United States. Great Lakes, under the agreement, had to provide the following operating staff :
" III. Operating staff :
A. A resident manager from the personnel of Great Lakes, B. A technical manager from the personnel of Great Lakes, C. A production manager from the personnel of Great Lakes.
IV. Technical knowledge and information (sometimes referred to as ' know-how ' and ' show-how ')."
11. The relevant clauses for payment were as under :
" In consideration of the engineering services special technical, accounting and financial information and other items to be provided by Great Lakes as set out in paragraphs I, II, III and IV of Clause 3 hereof up to the date the said plant of Graphite India Ltd. commences operation, Graphite India Ltd. shall pay to Great Lakes one million rupees upon receipt of the appropriate authorities as set out in Clause 9 of the agreement dated June 7, 1962, and described as the 'Main Agreement' between Bangur Brothers Ltd., of the one part and Great Lakes Carbon Corporation of the other part.
All payments due or payable to Great Lakes under this agreement shall be made in cash in U. S. dollars at the exchange rate prevailing in Calcutta on the date of payment or at the election of Great Lakes (such being their intention ) may be paid to Graphite India Ltd. in respect of any moneys uncalled and/or unpaid on the 2,50,000 equity shares of Graphite India Ltd. proposed to be allotted to Great Lakes pursuant to paragraph 2(b) of the said main agreement between Bangur Brothers Ltd. and Great Lakes dated June 7, 1962."
12. It will clearly appear from the above provisions that Great Lakes had an obligation not only to supply know-how but actually to " design, engineer and supervise " the construction of the plant and render engineering services during the course of construction. The Great Lakes had also to provide a resident manager, a technical manager and a production manager from the personnel of Great Lakes. Mr. Pal has contended that these personnel of Great Lakes, when they came to India, became the employees of the Indian company. They had no connection with the American company and, therefore, their services in India could not be equated to services rendered by Great Lakes in India.
13. The actual wording of the agreement does not support the contention of Mr. Pal. Apart from the clause set out hereinabove, there are other items in the agreement which go to show that the employees of Great Lakes, when they were deputed to India, continued to be the employees of the American company. The agreement itself provided in Clause 8(f) that the best efforts would be obtained from prospective employees and Great Lakes personnel assigned to the project. In the letter dated August 25,1962, written by the Ministry of Commerce and Industry to Graphite India Ltd., it has been recorded that the agreement envisaged that " Indian personnel in number to be specified and approved by the Government will be trained by Messrs. Great Lakes in their factories. Messrs. Great Lakes will also depute technicians to the Indian company in numbers and for periods and on terms to be specified later and approved by the Government".
14. Moreover, a copy of the foreign service agreement with one Mr. Joseph Mackey has been included in the paper book from which the terms and conditions underwhich the employees of Great Lakes worked in India can be found out. From these documents, it appears that Graphite India Ltd. is an Indian company in which Great Lakes Carbon Corporation held a minority interest. Great Lakes Carbon Corporation was one of the major shareholders and was represented on the board of directors of Graphite India Ltd. It has been recorded in their letter addressed to Mr. Mackey that " The Graphic Products Division of Great Lakes Carbon Corporation " also has the responsibility of providing " know-how" and seeing to it that Graphite India's plant produces commercial carbon and graphite and products of proper quality. Great Lakes Carbon Corporation is the exclusive sales representative for the sale of all products produced by Graphite India destined for export by India.
15. Mr. Mackey was further informed in that letter that he was going to India " in the capacity of technical engineering manager. In this capacity, you will be an employee of Great Lakes Technical Services Incorporated, a wholly owned subsidiary of Great Lakes Carbon Corporation, and you will be accumulating continuous service credit. Your salary will be paid by Great Lakes Technical Services Incorporated, who in turn will be reimbursed by Graphite India Ltd. As long as you are performing the functions aforesaid for Graphite India, you will comply with the instruction and directions of the Board of Graphite India with regard to the duties to be performed for them "
16. It has further been stated that Mr. Mackey will be given basic compensation for his assignment in India and the rate of compensation was stated to be in accordance with the company policy. The salary will be subject to review in accordance with the salary increase programme of the company which was the same as in the parent company.
17. It should be noted in this connection that "the parent company" in the agreement means Great Lakes Carbon Corporation of the United States and Great Lakes Technical Services Incorporated has been described as the company which is a wholly owned subsidiary of Great Lakes Carbon Corporation.
18. An expatriation allowance will also be paid for " your overseas assignment". It was arranged that, if the employee desired, a portion up to 70 per cent. of the monthly compensation was to be deposited in the United States. Arrangement had to be done with the parent company prior to the employee's departure to India for this purpose. The employee will be paid post allowance. The basis of the amount of the allowance was off set was to be the current U. S. State Department Schedule a copy of which was attached (sic). The amount was liable to be changed from time to time on a new schedule prepared by the parent company. The employee was required to inform the company from time to time of any. change in his marital or dependency status.
19. The company agreed to compensate the employee for the expenses incurred in storing excess furniture and personal belongings while in India. The payments were to be limited to a period not exceeding 60 days after the employee's departure from India. The children's education would be paid for by the parent company. The vacation was to be in accordance with the vacation policy of the company which was the same as that of the parent company.
20. It was specifically stated that " as a regular employee of Great Lakes Technical Services Incorporated, you may continue your participation in the employee's retirement plan of the parent company. Applicable deductions will be made on your basic compensation. No deduction will be made from nor benefits paid on account of the expatriation premium or any other extra compensation ".
21. It was further clarified that, " In the event of a claim, we have been advised by our insurance carriers that the best procedure would be for you to pay the bill and submit your claim for reimbursement through the parent company's personnel Department. Reimbursement to you will be in United States currency. Arrangements for deductions on that part of the premium paid by you must be made, prior to your embarkation, through the Graphite Products Division of the parent company. Premiums and benefits will be based on your basic compensation only and not on the expatriation premium or any other extra compensation ".
22. " As a regular employee of the Great Lakes Technical Services Incorporated, you will continue to be covered by the Federal Insurance Contribution Act (Social Security). Deductions will be made from your compensation in accordance with the provisions of the Act."
23. " If you sustain injury including death therefrom while employed, you will be paid an amount equal to the compensation and other benefits under the New York Compensation Laws."
24. The employees were also informed that, prior to departure from the United States and, periodically thereafter as required by the company, the employees and each member of the employee's family had to undergo a physical examination, " the results of which shall be made available to, and be satisfactory, to the company. The examination shall be conducted by a doctor designated by the company and shall be at the company's expense ".
25. All these details do not leave any room for doubt that the employees who have been sent to India are to be employees of the company. All the benefits and amenities available to the employees of the United States were to be made available to the employees and they were being repeatedly informed that all these benefits will be available to the employee because he was " a regular employee of Great Lakes Technical Services Incorporated " even while he was serving in India.
26. Therefore, there is considerable material in support of the Tribunal's conclusion that the employees of the Great Lakes Carbon Corporation, while in India, continue to be employees of Great Lakes.
27. Mr. Pal has contended that the employees were under the supervision and control of the Indian company while in India and their salaries and other emoluments were to be paid by the Indian company. That may be so, but it was Great Lakes who was responsible for supervision and construction of the plant in India and to achieve this object, they sent their employees to India. While in India, they continued to be employees of Great Lakes. While carrying on the construction work, they may have to carry out certain directions of the Indian company. But it is difficult to accept that in the matter of erection of a plant, where the technical know-how and supervision of Great Lakes was necessary, the actual construction took place under the supervision and control of the Indian management. Under the contract. Great Lakes was given the responsibility to " design, engineer and supervise construction " of the plant. The employees of Great Lakes were sent to Durgapur under the terms of the contract and were discharging the. contractual obligation of Great Lakes to " design, engineer and supervise " construction of the plant. The employees continued to be the employees of Great Lakes even while in service in India. They were actually assigned to do the job in India just as they might have been assigned to any other project in the United States by Great Lakes.
28. The Indian company had to pay for the technical know-how and other goods and services provided by Great Lakes. Ultimately, what was spent by Great Lakes on the salary of their employees in India may have been reimbursed by the Indian company. That, however, does not make any difference. The cost, charges and expenses of Great Lakes in designing, engineering and supervising the construction of the plant including the salary of the employees of Great Lakes, while working in India, may have been ultimately reimbursed by the Indian company. But that will not make any difference to the principle. Merely because the Indian company ultimately paid for the designing, engineering and supervising charges will not transform the activities of Great Lakes into activities of the Indian company.
29. The employees of Great Lakes came to India to discharge the obligation of Great Lakes under the contract. The employees continued to be in the employment of Great Lakes while in India, Their salaries were paid by Great Lakes. They were to be paid monthly compensation for being employed in India. A portion of the monthly compensation was to be deposited in the United States. The employees would continue to participate in the employees' retirement plan of the parent company. The employees would continue to be covered by the Federal Insurance Contribution Act (Social Security of the United States) as regular employees of Great Lakes Technical Services Incorporated for any injury or death while in work. The employees would get compensation under the New York Compensation Laws. The employees had to undergo physical check-ups from time to time and such check-ups had to be to the satisfaction of Great Lakes.
30. Having regard to all these facts, in our view, the conclusion drawn by the Tribunal cannot be interfered with,
31. It is also to be seen that the Tribunal has not given any opinion on the amount or quantum of the income that had accrued in India. The Tribunal had remanded the case for this purpose.
32. Therefore, the question that has been referred is answered in the affirmative and in favour of the Revenue.
33. There will be no order as to costs.
Bhagabati Prasad Banerjee, J.
34. I agree.