Income Tax Appellate Tribunal - Hyderabad
Dr. Reddy Laboratories Ltd. vs Income-Tax Officer on 15 December, 1995
Equivalent citations: [1996]58ITD104(HYD)
ORDER
M. Ramakrishna, Judicial Member
1. This appeal by the assessee is directed against the order of the CIT(A)-II, Hyderabad, dated 31-1-1995 for the assessment year 1994-95.
2. The effective grievance of the assessee in this appeal reads as follows-
The CIT(A)-II erred in confirming an order under Section 201 determining amounts payable by the assessee as under, viz-
Rs.
1. Short deduction under the head salaries 2,79,681
2. Non-deduction of tax on foreign commission 39,26,347
3. Short deduction on payment to foreign employees 1,86,954
4. Interest payable under Section 201(1A) 7,33,765".
3. While deducting the tax at source from the salaries paid by the assessee to its employees, it has not taken into account conveyance allowance, medical reimbursement and leave travel allowance paid by the assessee to its employees. As regards the conveyance allowance, it was the claim of the assessee that the amount incurred by the employees for coming to their office and going back would qualify for exemption under Section 10(14) of the Income-tax Act. The Assessing Officer, observing that as per the provisions of Section 10(14) of the Act, any allowance necessarily and exclusively incurred in the performance of duties of an office or employment or profit would only qualify for exemption, held that since the amount incurred by the employees was for the purpose of coming to their office from residences and for going back, the expenses so incurred could not be treated an expenditure incurred necessarily and exclusively for the purpose of business of the assessee. Further, since Standard Deduction is allowed under Section 16(i) of the Act to salaried tax payers, the expenditure of the nature noted above would come under the umbrella of Standard Deduction itself. He therefore, held that no separate deduction could be allowed for the expenses incurred. On appeal, the CIT(A) confirmed the view taken by the Assessing Officer on this aspect.
4. With regard to medical reimbursement, the Assessing Officer noticed that the assessee had paid certain amounts not exceeding a month's salary to almost all the employees under the head 'Reimbursement of Medical Expenses'. It was explained before the Assessing Officer that in tune with the policy of the assessee-company, supporting evidence was not being insisted upon from the employees, as it was considered by the assessee-company that it would involve a very painstaking process to verify the genuineness of all the supporting documents. This explanation of the assessee did not find favour with the Assessing Officer, who, observing that the proviso to Clause (v) of Section 17(2) of the Act states that any sum paid by the employees in respect of any expenditure actually incurred by him on his medical treatment or on treatment of any member of his family would not be treated as a perquisite to the extent of Rs. 10,000 and as such there Was a clear stipulation that one has to satisfy that the actual amount has been spent by the recipient, held that reimbursement of medical expenses in the instant case, in the absence of supporting evidence, would only be an allowance paid in fixed sums and was to be taxed as another category of perquisites. On appeal, the CIT(A), on this aspect also confirmed the view taken by the Assessing Officer.
5. Even with regard to Leave Travel Allowance, the Assessing Officer noticed that this allowance had been paid to the employees of the Company on the basis of self-declarations furnished by the employees to the effect that they had incurred such expenditure. It was explained by the assessee before the Assessing Officer that Leave Travel Allowance has been paid on the basis of the declarations furnished by the employees themselves and that the assessee-company refrained from a detailed scrutiny of all the bills and supporting vouchers/evidence in view of the magnitude of the task. This explanation of the assessee did not find favour with the Assessing Officer. He observed that Section 10(5) of the Act clearly stipulated that the portion of the amount that had been actually incurred by an employee would only qualify for exemption under the Act. He further observed that in order to ascertain the veracity of the claim, one has to verify the tickets/receipts in support of the expenditure incurred towards the journey. He accordingly held that the amounts disbursed by way of L.T.A. which had been excluded from the purview of taxable salary were to be subjected to tax and as such tax should have been deducted at source in respect thereof. On appeal, the CIT(A), considering the provisions of Section 10(5), wherein the emphasis was on the amount of expenditure actually incurred for the purposes of such travel, confirmed the view taken by the Assessing Officer.
6. Aggrieved by the orders of the lower authorities with regard to short deduction of tax under the head 'salaries', assessee came up in appeal on that aspect.
7. Reiterating the contentions urged before the lower authorities, the learned counsel for the assessee submitted that the conveyance allowance paid and incurred by employees for coming to office and going back to residences would qualify for exemption under Section 10(14) of the Act; that reimbursement of medical expenses qualify under the proviso to Section 17(2) of the Act; and that leave travel allowance paid did fall for exemption under Section 10(5) of the Act. With regard to reimbursement of medical expenses and Leave Travel Allowance, it is stated that merely because no evidence was led to show that actually - the expenditure had been incurred, the contention of the assessee should not have been rejected and considering the reasonableness of the amounts paid, exemptions were correctly allowed by the assessee, while computing the tax deductible at source in respect of its employees. He also submitted that the assessee has not called for evidence from its employees to show the assessee actually incurred these expenses and scrutinised the same, to avoid the laborious task involved in that process. Since the amounts have been paid by the assessee to its employees considering the reasonableness of the expenditure involved, those allowances are subject to exemption and the same cannot be denied merely because there was no evidence obtained by the assessee from its employees to show that they indeed incurred those expenses. In response to the direction of the Bench, the assessee by its letter dated 15th May, 1995, furnished inter alia copies of appointment letters of Assistants, Senior Executives, Managers and General Manager and also furnished the details of the company's policy for payment of Medical Allowance and L.T.A. Specimen copies of Declaration/Receipt obtained by the assessee from its employees with regard to medical expenses reimbursement and leave travel concession are also furnished with the said letter. He also filed two separate paper-books, one containing copies of various correspondence exchanged with the lower authorities, among others and the other containing case-law relied upon by the assessee, on various issues that arise for consideration in this appeal.
8. On the other hand, the leaned Departmental Representative, strongly supported the orders of the lower authorities and submitted that the conveyance allowance, reimbursement of medical expenses and leave travel allowance paid by the assessee to its employees, are in the sort of allowances having no bearing on the actual spending of the same by the employees and as such they do not qualify for exemption under the Act.
9. We have considered the rival submissions and perused the orders of the lower authorities and other papers filed before us. As regards the conveyance allowance, we find from the orders of the lower authorities and other material papers filed before us that assessee has been making payment of conveyance allowance to its employees in fixed sums, with no bearing on the actual expenditure incurred by them and the same has been paid basically to enable the employees to perform the journeys to come to the work-place and to go back to their residences. It has been the contention of the assessee right from the beginning that the conveyance allowance paid to employees for coming to office from residence and returning thereto does qualify for exemption under Section 10(74) of the Income-tax Act. Provisions of Section 10(14) read as follows-
(i) any such special allowance or benefit, not being in the nature of a perquisite within the meaning of Clause (2) of Section 17, specifically granted to meet expenses wholly, necessarily and exclusively incurred in the performance of the duties of an office or employment of profit, as the Central Government may, by notification in the Official Gazette, specify to the extent to which such expenses are actually incurred for that purpose;
(ii) any such allowance granted to the assessee either to meet his personal expenses at the place where the duties of his office or employment of profit are ordinarily performed by him or at the place where he ordinarily resides, or to compensate him for the increased cost of living, as the Central Government may, by notification in the Official Gazette, specify, to the extent specified in the notification;
It is not the case of the assessee that the conveyance allowance paid by it to its employees has been notified by the Central Government as exempt under the above section. At least no notification to that effect has been brought to our notice. Further, as per Clause (i) extracted above, it is only the special allowance granted to meet expenses 'wholly, necessarily and exclusively incurred in the performance of the duties of an office or employment of profit', that would qualify for exemption under Section 10(14). The conveyance allowance paid to defray expenses connected with journeys from residence to office and back, cannot be termed as an allowance paid for defraying expenses 'wholly, necessarily and exclusively' in the performance of the duties. Further, it is only to the extent such expenses are actually incurred, that exemption would be available under Section 10(14) in respect of even an allowance notified by the Central Government in that behalf. In the case on hand, the conveyance allowance paid by the assessee without any relevance or bearing on the actual expenditure incurred by the employees, cannot come within the purview of Section 10(14) and for that matter, since the Standard Deduction granted under Section 16(1) is meant to take care of the expenses of an employee, incidental to his employment, including the journeys from residence to office and back, the conveyance allowance is clearly taxable under the head 'salary' and as such the assessee could not have excluded the conveyance allowance paid, while computing the tax deductible at source, from the salaries paid by it to its employees.
10. With regard to Medical Allowance and Leave Travel Allowance, the policy of the assessee-company, as detailed in its letter dated 15-5-1995 reads as follows-
A. MEDICAL ALLOWANCE:
The company adopts the policy of paying. Medical Allowance for all employees and is restricted to Rs. 2,400 per annum prior to 1994-95 all the employees of the company were eligible to draw one months Gross salary towards Medical Allowance and is less than Rs. 10,000 (A set of Appointment letters are enclosed).
The LTA and Medical Allowance paid to the four levels are-
LTA (Rs. Ps.) Medical Allowance
(Rs. Ps.)
Level I - General Manager 9,000 9,000
Level II - Manager 4,596 2,400
Level ffl - Senior Executive 5,069 2,400
Level IV - Assistant ' 1,923 2,400
(Note : None of the employees receive medical reimbursement in excess of Rs. 10,000).
B. LEAVE TRAVEL CONCESSION All the employees of the company are eligible for one month Basic + Special Allowance + Personal pay towards LTA. While calculating the employees taxation the allowance is being considered as income of the employee in alternative years. As employee surrender the tickets at the time of exit from the station, the company is relying on a declaration from the employee that he had spent the amount towards LTA. (A copy of the declaration is herewith enclosed).
Thus, the amounts that have been paid by the assessee by way of medical reimbursement and Leave Travel Allowance are on the basis of self-declarations made by the employees concerned. Copies of such declarations are also furnished with the letter dated 15-5-1995 for our perusal. Whatever may be the reasons for which the assessee has not asked for further proof from its employees to the effect that in fact incurred the expenses to the extent to which and for the purpose for which the above allowances have been granted, it is a matter of fact that the employees have claimed the medical expenses reimbursement and Leave Travel Allowance as per their entitlement to the fullest extent on the basis of such self-declarations made by them and the same came to be paid by the assessee, without verifying the correctness of the contents of those self declarations. It is in this background that we have to consider the assessee's contention that the reimbursement of medical expenses made by it is exempt under proviso v to Section 17(2) and the Leave Travel Allowance paid by it is exempt under Section 10(5) of the Act.
11. Dealing with the reimbursement of medical expenses, the proviso to Section 17(2) in so far as it is relevant for our purpose, reads as follows -
Provided that nothing in this clause shall apply to-
(i)...(iv)...
(v) any sum paid by the employer in respect of any expenditure actually incurred by the employee on his medical treatment or treatment of any member of his family (other than the treatment referred to in Clauses (i) to (ii); so however, that sum does not exceed ten thousand rupees in the previous year...
As per the above proviso, it is only the expenditure that is actually incurred by the employee on medical treatment, that does not come within the purview of taxable perquisites under Section 17. In the instant case, reimbursement of medical expenses is in the sort of an allowance, which has been claimed by the employees by filing the self-declarations even which are bereft of material particulars and the same has been made by the assessee without verifying the correctness of those self-declarations, as per the entitlements of the respective employees. As such, the above proviso has no application to the case on hand and the assessee was not justified in excluding the medical reimbursement from the purview of salary, for the purposes of deduction of tax at source.
12. Similarly, provisions of Section 10(5) dealing with exemption of Leave Travel Allowance reads as follows-
(5) in the case of an individual, the value of any travel concession or assistance received by, or due to, him-
(a) from his employer for himself and his family, in connection with his proceeding on leave to any place in India;
(b) from his employer or former employer for himself and his family, in connection with his proceeding to any place in India after retirement from service or after the termination of his service.
subject to such conditions as may be prescribed (including conditions as to number of journeys and the amount which shall be exempt per head) having regard to the travel concession or assistance granted to the employees of the Central Government;
Provided that the amount exempt under this clause shall in no case exceed the amount of expenses actually incurred for the purpose of such travel....
The proviso to Section 10(5) makes it abundantly clear that the exemption under this clause shall in no case exceed the actually incurred expenses in connection with the travel. So, before granting the exemption in respect of any leave travel concession or assistance, one has to restrict the same to the actually incurred expenditure. To ascertain the actually incurred expenditure, bereft of materid particulars mere self-declarations would not be sufficient, as, such declarations are not amenable to verification in this view of the matter, fixed sums of Leave Travel Allowance paid by the assessee in the case on hand, is not entitled to exemption under Section 10(5) of the Income-tax Act and as such the assessee was not justified in excluding the same from computation of tax deducted at source from the salaries paid by it to its employees.
13. In this view of the matter, we uphold the order of the CIT(A) on the aspect of short deduction of tax at source under the head Salaries' in a sum of Rs. 2,79,681, rejecting the grounds of the assessee on this aspect.
14. Now we consider the assessee's grounds with regard to non-deduction of tax on foreign commission. The Assessing Officer noticed that the assessee company had paid foreign commissions to various persons and while making such payments, no tax was deducted at source. He noted that the assessee had paid foreign commission amounts by way of foreign currency drafts and the assessee had admitted that these drafts had been sent by post or through couriers from Hyderabad itself, where the registered office of the assessee is situated. Taking note of the following factors, the Assessing Officer concluded that the foreign commission payments were received by the payees in India only-
(i) The foreign currency drafts were obtained in India;
(ii) These drafts were sent either by post or through couriers. These drafts were posted in Hyderabad or handed over to the couriers in Hyderabad, i.e. within the territory of India;
(iii) There was an implied request on the part of the payee to send the amounts by post. Under such circumstances, the post office/courier could be considered as an agent of the payee.
He accordingly, placing reliance on the decisions of the Supreme Court in CIT v. Ogale Glass Works Ltd. [1954] 25 ITR 529 and in Shri Jagdish Mills Ltd v. CIT [1959] 37 ITR 114 and in CIT v. Kirloskar Bros. Ltd. [1954] 25 ITR 547, held that tax is exigible on the foreign commission payments and the assessee should have recovered the same while making thosepayments. Placing reliance on the observations of the Supreme Court at page 546 25 ITR in the case of Ogala Glass Works Ltd. (supra) and at 122 (37 ITR) in the case of Jagdish Mills Ltd. (supra); of the Gujarat High Court in Petlad Turkey RedDye Works Co. Ltd. v. CIT [1965] 55 ITR 532; and in Kathiawar Coal Distributing Co. v. CIT [1958] 34 ITR 182; of the Bombay High Court in Hira Mills Ltd. v. CIT [1965] 57 ITR 103; and of the Supreme Court in CIT v. Patney & Co. [1959] 36 ITR 488, it was contended before the CIT(A) on appeal that what is to be looked into is whether there is an express or implied request from the payee that the payment should be effected through a particular mode and whether the mode of payment actually resorted to is in conformity with the general business usage. Inviting attention to the various agreements, it was argued before the CIT(A) that in all these cases, there was no express or implied request from the agents to the effect that the post office or the courier should be construed as their agent for the purpose of commission payments. The CIT(A) observing that even though there is no request from any of the agents that payments should be sent through drafts purchased at Hyderabad, it has to be reasonably presumed that such is the intention between the assessee-company and its agents that commission payments would be effected through drafts purchased at Hyderabad and remitted either through the Postal Channel or through couriers; that nothing has come to his notice to suggest that such drafts were received conditionally by the agents or they were refused to be accepted by the agents; that the very factum that such payments through drafts were received and acted upon by the agents would only show that such payments were in conformity with the general business usage prevalent in international business transactions; held that though the facts of this case differ materially from those obtaining in the case of Ogale Glass Works Ltd. (supra), in the absence of an express request from the agents that foreign commission payments should be sent by cheques/drafts, the principles enunciated in Jagdish Mills Ltd.'s case (supra) would squarely apply to the facts of this case, as an implied request has to be inferred from the facts and circumstances of the case. Distinguishing the other decisions relied upon by the assessee, the CIT(A) upheld the view taken by the Assessing Officer that the foreign commission payments were received or deemed to have been received in India in terms of Section 5(2)(a) of the Act and as such payments were exigible to tax and consequently the assessee-company had the liability to deduct tax at source. Aggrieved by this decision of the CIT(A), assessee came up in appeal before us.
15. The learned counsel for the assessee reiterating the contentions urged before the lower authorities submitted that the Commission payments were made outside India, since no income was received or deemed to be received in India; that no income accrued or arose or was deemed to accrue or arise in India; and that no part of the commission paid could be said to be a "sum chargeable under the provisions of this Act". Inviting our attention to the copies of the agreements with the four recipients of the foreign commission from the assessee, viz. APC Pharmaceuticals, Astas Ltd., Mika Enterprises and MED Export copies of which are filed at pages 110 to 124 of the paper-book filed by the assessee, it was submitted that in the case of A.P.C. Pharmaceuticals and Chemicals Ltd., Hongkong, Clause (6) of the agreement stipulates that the agent shall be paid a commission of maximum 12.5% of C&F Value, which would be paid in U.S. Dollars at Hongkong by telegraphic transfer through banking channels. Similarly, it was pointed out that M/s. Astras Ltd., showed that the agent shall be entitled to a commission of 3% on C & F values for supplies made to M/s. Square Pharmaceuticals Ltd., Dhaka, whereas the agreement with M/s. Mika Enterprises, Dhaka stipulates that for the services rendered to the assessee company, the agent would be entitled to commission on all direct and indirect sales and that the commission would be settled on mutual agreement and whereas the consignment agreement with MED Export Service vide Clause 5.6 thereof shows that the commission due to the consignee for the products sold during the current period would be paid by the consignor to the consignee within 14 days from the date of receipt of the monthly payment from the consignee. Thus, in the agreements with M/s. Astras Ltd., M/s. Mika Enterprises and M/s. MED Exports the learned counsel for the assessee pointed out that there was no stipulation with legard to the mode of payment. As regards the agreement with M/s. A.P.C. Pharmaceuticals and Chemicals Ltd., Hongkong, though the agreement indicated the mode of payment that it shall be effected 'by telegraphic transfer through banking channels', it was argued, that it was definitely a payment outside India, since the payment according to the agreement was 'to be made in U.S. Dollars at Hongkong and admittedly not in India. In any event, inviting our attention to the statement on mode of payment of commission filed before us at the time of hearing and other details with regard to export commission paid alongwith names and address and photocopies of demand drafts furnished at pages 125 to 147 of the paper-book, the learned counsel for the assessee submitted that the stipulation in the agreement with M/s. A.P.C. Pharmaceuticals & Chemicals was also not complied with and the payments were made by the drafts issued by the Canara Bank and Bank of Baroda at Hyderabad, on The Bank of New York, New York and by the State Bank of India, Hyderabad, on State Bank of India, New York Branch, New York. He thus contended that there was no express or implied request from the agents to the effect that the post office or the courier, as the case may be construed as their agent for the purpose of making commission payments. Besides relying mainly on the decisions of the Madhya Pradesh High Court in CIT v. Kalyanmal Mills Tent Factory [1981] 132 ITR 115; of the Supreme Court in Patney & Co. 's case (supra) and of the Gujarat High Court in Dhrangadhra Trading Co. (P) Ltd. v. CIT [1966] 60 ITR 674, the learned counsel for the assessee has also cited and filed copies of the following decisions among the above, for our ready reference, in the paper-book filed before us-
(a) Ogale Works Ltd.'s case (supra)
(b) Jagdish Mills Ltd.'s case (supra)
(c) Petlad Turkey Red Dye Works Co. Ltd.'s case (supra)
(d) Kathiawar Coal Distributing Co. 's case (supra)
(e) CIT v. New Jehangir Vakil Milk Ltd [1960] 39 ITR 427 (Bom.)
(f) Hira Mills Ltd.'s case (supra)
(g) Indian Aluminium Co. Ltd. v. CIT [1983] 140 ITR 114 (Cal.)
(h) Dalmia Dadri Cement Ltd. v. CIT [1974] 94 ITR 303 (Bom.)
(i) ESI Corporation v. Md. Ismail Sahil AIR 1960 Mad. 64
(j) Thurappa Devenappa v. Umedmalji [1923] 25 Bom. LR 604 He thus, concluded that the post office or the courier cannot be construed as the agent of the recipient of the commission and the commission payments in accordance with the agreements in question should be construed as the payments made outside India and as such the assessee was justified in not deducting tax from those commission payments, since they are not exigible to tax in India.
16. The learned Departmental Representative, on the other hand, placing strong reliance on the decisions of Supreme Court in Ogale Glass Works Ltd.'s case (supra); Jagdish Milk Ltd.'s case (supra) and Kirloskar Bors. Ltd.'s case (supra) strongly supported the orders of the lower authorities.
17. We have considered the rival submissions and perused the orders of the lower authorities judicial pronouncements relied upon by both sides and other papers filed before us. It is an admitted fact that the payments in respect of all the agents have been made by obtaining drafts at Hyderabad on the branches of the banks at other countries and the same have been remitted from Hyderabad either through the postal channel or through couriers. It is the contention of the assessee that since the commission payments have been received by the agents at other countries and not in India, merely because the drafts were obtained at Hyderabad (India) or remitted from Hyderabad, the payments cannot be held to have been in India and as such no tax could be deductible at source in respect of those payments, more so, when those agents have not insisted on payments through drafts or through postal or any particular channel. On the other hand, the view taken by the lower authorities is that even though there was no request from any of the agents that payments should be sent through drafts purchased at Hyderabad, it has to be reasonably presumed that such is the intention between the assessee-company and its agents that commission payments would be effected through drafts purchased at Hyderabad and remitted either through postal channel or through couriers and since the drafts sent in that manner have been accepted by the agents, the payments were expected to be under the agreement and accepted by the payees as such, in conformity with the general business usage prevalent in international business transactions. Thus, the question that arises for our consideration is whether the impugned payments of commission to foreign agents can be said to have been made in India, so as to make the assessee liable to deduct the tax at source in respect of those commission payments.
18. In Ogale Glass Works Ltd.'s case (supra), the assessee, a non-resident company carrying on business of manufacturing certain articles in the State of Audh, secured some contracts for the supply of the articles to the Government of India. The contract provided that "unless otherwise agreed between the parties, payment for the delivery of the stores will be made on submission of bills in the prescribed form in accordance with instructions given in the acceptance of tender by cheque on a Government Treasury in India or on a branch of the Reserve Bank of India or the Imperial Bank of India transacting Government business". The assessee submitted the bill in the prescribed form and wrote on it as follows-
Kindly remit the amount by a cheque in our favour on any bank in Bombay.
The assessee received cheques drawn on the Bombay Branch of the Reserve Bank of India along with a memo containing an acknowledgement form which was thus expressed :
The undersigned has the honour to acknowledge cheque No. dated for Rs. in payment of the bills noted in the first column in the reverse.
The assessee endorsed the cheque in favour of the Audh Bank, Ogale wadi Branch, which in its turn endorsed them in favour of a Bombay Bank. The Bombay Bank cleared the cheque through the Clearing House in Bombay. The Audh Bank credited the assessee's account on the very day the cheques were received from the assessee with the amount of the cheques less the collection charges and the assessee credited the account of the Supply Department and made corresponding debits to the bank's account and bank charges account. The assessee sent its formal stamped receipts to the Government of India only after the receipt of the cheques and not along with the bills submitted by it. On these facts, the stand of the Department was that the assessee received income, profits and gains in British India within the meaning of Section 4(1)(a) of the Indian Income-tax Act, 1922, on the ground that the encashment of the cheques in Bombay amounted to receipt of income in British India. It was also contended before the High Court and the Supreme Court that the posting of the cheques at Delhi operated as a payment in British India. On these facts, the Supreme Court held that in one view of the matter there was, in the circumstances of this case, an implied agreement under which the cheques were accepted unconditionally as payment, and, on the other side, even if the cheques were taken conditionally, the cheques not having been dishonoured but having been cashed, the payment related back to the dates of the receipt of the cheques and in law the dates of payments were the dates of delivery of the cheques. Further, the Supreme Court held that apart from the implication of an agreement arising from such business usage, since the assessee expressly requested the Government to remit the amounts of the bills by cheques, it clearly amounted to an express request by the assessee to send the cheque by post and once the Government posted the cheques in Delhi, in law, this amounted to payment in Delhi. It was thus concluded that the profits and gains in respect of the sales made in that case, to the Government of India were received in British India within the meaning of Section 4(1)(a).
19. Similarly, in the case of Jagdish Mills Ltd. (supra) the Supreme Court, inter alia held as follows-
Held, that according to the course of business usage in general which was followed in this case, the parties must have intended that the cheques should be sent by post which was the usual and normal agency for transmission of such articles; and there was necessarily imported an implied request by the company to send the cheques by post from Delhi thus constituting the post office its agent for the purposes of receiving those payments; the Appellate Tribunal was, therefore, right in its conclusion that the amounts of the cheques were received in British India and as such were liable to be taxed under Section 4(1)(a) of the Income-tax Act.
Where no express words are used requesting that the cheque be sent by post and the matter rests merely in the stipulation that the payment is made by cheque and if there is nothing more, the position in law is that the post office would not become the agent of the addressee and the mere posting of the cheque would not operate as delivery of the cheque to the addressee so as to pass the title in the cheques to the addressee. Where, however, on the facts and circumstances of the case, an implied request by the creditor to send the cheque by post can be spelt out, the post office would be constituted the agent of the addressee for the purposes of receiving such payment.
20. Dealing with the questions as to whose agent the post office is and the place where the payment is deemed to have been made, the Gujarat High Court in the case of Petlad Turkey Red Dye Works Co. Ltd. (supra) held as follows-
When cheques or hundis are posted by British Indian buyers in British India to the assessee outside British India, the quest on resolves itself into a narrow one, namely, whether the post office acts as the agent of the assessee or of the British Indian Buyers. If the post office acts as the agent of the assessee, as soon as the cheques and hundis are posted by British Indian buyers in British India, the title to the cheques and hundis passes to the assessee and the assessee receives the cheques and hundis in British India. If, on the other hand, the post office acts as the agent of the British Indian buyers, there will be no receipt of the cheques and hundis by the assessee until the cheques and hundis reached their destination.
In order to determine the place where payment can be said to have been received by a creditor from the debtor when such payment is made by post, the court must first inquire whether there is any agreement between the parties. If there is an agreement between the parties, it must determine the place of payment and in such a case there is no room for implication. If there is no agreement between the parties in regard to the place of payment, the court must see whether the cheque or hundi was posted by the debtor pursuant to a request made by the creditor to do so. If it is shown that the creditor authorised the debtor to send the cheque or hundi by post, the office would be the agent of the creditor for the purpose of receiving payment and the property in the cheque or hundi would pass to the creditor at the place where the cheque or hundi is posted by the debtor. Request, which would constitute the post office the agent of the creditor, may be express or it may even be implied from the facts and circumstances of the case. But such a request cannot be inferred from the mere fact that a large part of the sale proceeds was received by the creditor through post.
The Gujarat High Court in that case observed that the principle laid down by the Supreme Court in the case of Ogale Glass Works Ltd. (supra) is a general principle and applies as much to payment by hundi as to payment by cheque and from the mere fact that a large part of the sale proceeds were received by the assessee by means of cheques and hundis sent by British Indian buyers through post, it cannot be inferred that there was any implied request by the assessee to remit the sale proceeds by sending cheques and hundis through post and something more would be necessary before the court can be called upon to draw such an inference.
21. Similarly, in the case of Kathiawar Coal Distributing Co. (supra), wherein the assessee which had its place of business in Saurashtra, procured orders for the supply of coal from various mills in Part-A states and forwarded them to the Deputy Coal Controller in Calcutta and in turn received commission for its services from the mills in Part-A states, the Bombay High Court, dealing with the question as to the place of payment, the Bombay High Court held that the assessee received the commission for services rendered by it, viz. obtaining orders from the mills and getting the necessary quota from the Controller; every item of the services which the assessee rendered was rendered in Saurashtra; that the fact that the quotas and the orders were issued to the collieries in Calcutta was immaterial; and that as such the income accrued in a Part-B State, viz. Saurashtra. The Court also held in that case that in the absence of any finding that the assessee asked the mills to send the cheque by post, the receipt of income must be considered to have been in Saurashtra, as the cheques were received by the assessee in Saurashtra.
22. In the case of New Jehangir Vakil Milk Ltd. (supra), the Bombay High Court held that mere posting of the cheque from British India was not sufficient to hold that the cheques were posted in pursuance of an implied request made by the assessee to send them by post.
23. In the case of Hira Mills Ltd. (supra) the assessee, a non-resident company carrying on the business of manufacturing cotton textiles in Ujjain in a Native State outside British India, sold its products to buyers in British India pursuant to contracts entered into in Ujjain under which delivery was to be F.O.R. Ujjain. In submitting the bills in the prescribed form, the assessee wrote the instruction as to payment as follows-
Please pay by cheque to the Imperial Bank, Indore". The Bombay High Court in that case held that the instruction as to payment merely constituted the Imperial Bank at Indore a nominee of the assessee to receive payment on its behalf and the words "at Indore" did not have the effect of constituting Indore the place of payment. As the assessee had instructed that the payment be made by cheques and the normal course of sending the cheques was by post, there was an implied request to send the cheques by post and the post office receiving the cheques posted by the Supply Department at Delhi, was the agent of the assessee receiving payment of the bills. The sale proceeds received by cheques, in those circumstances, were held to have been received in British India within the meaning of Section 4(1)(a). The Court, however, held that as there was no request to make payment by drafts and there was nothing to show that a request to make payment by cheque was ordinarily understood in the commercial world to mean a request to make payment either by cheque or by draft, the posting of the drafts in payment of the bills by the Government of India could not be said to, be either on the express or on the implied request of the assessee. The sale proceeds received by demand drafts were received at Ujjain outside British India.
24. In the case of Patney & Co. (supra), the Supreme Court held that in the case of payment by cheque sent by post the determination of the place of payment would depend upon the agreement between the parties or the course of conduct of the parties. If it is shown that the creditor authorised the debtor either expressly or impliedly to send the cheque by post the property in the cheque passes to the creditor soon as it is posted. If there is an express request by the creditor that the amount be paid by cheque to be sent by post and it is so sent the payment will be taken to be at the place where the cheque is posted.
25. Similarly, in the case of Indian Aluminium Co. Ltd. (supra) the Calcutta High Court considering a question whether the fees received by the Canadian company accrued or arose in India, held that under the agreement, the service had actually been done by the non-resident company in Canada itself; that the know how was not applied under their guidance when such services were done; that there was also no business connection in India; and as such in the absence of anything in the agreement to show that the Canadian company had asked for the payment to be sent by post, the post office could not be treated as the agent of the non-resident company and hence there was no accrual, arising or receipt of fees by the non-resident company in India for the assessment years 1967-68 and 1969-70.
26. The Bombay High Court in the case of Thurappa Devenappa (supra) held that the post office in India is the agent of the person to whom the bill or note is posted, if there be express or implied authority to send by post; but if there be no such authority, the post office is the agent of the sender.
27. In the case of ESI Corporation (supra), dealing with the obligations of a debtor to a creditor to pay his debt, held inter alia in para-17 as follows-
The common law rule is a reasonable rule and it is in conformity with justice and equity because it recognises the obligation of the debtor to pay his debt and that obligation can only be discharged by the debtor going to his creditor and repaying the amount and the common law rule imposes this obligation only when there is no express contract to the contrary: Bharumal v. Sakhawatmal AIR 1956 Bom. lll. The principle is that when a man agrees to do any particular thing, he must do all that is necessary. If it be to pay money to A, on a particular day, he must seek A: Soward v. Palmer (1818) 129 E.R. 390. Section 49 of the Indian Contract Act does not preclude the application of the rule of English Common law that the debtor must seek out his-xreditor and pay his debt where the creditor happens to reside, unless there is an arrangement to the contrary; Ramalinga Iyer v. Jayalakshmi AIR 1941 Mad. 695, Annamalai Chettyar v. Daw Hnin U. AIR 1936 Bang 251, Muhammad Esuff Brother v. M.Hateem and Co. AIR 1934 Mad. 581.
28. The Madhya Pradesh High Court in the case of Kalyanmal Mills Tent Factory (supra) held as follows-
In order to determine the place where a negotiable instrument can be said to have been received by the assessee, the Court must first inquire whether there is any agreement between the parties as regards the place and payment. If there is an agreement between the parties, it must determine the place of payment and in such case there is no room for implication.
29. It is clear from the judicial pronouncements discussed above that it is the terms of the agreement between the parties that would clinch the issue and the point that has to be enquired into is whether there was an express or implied request by the payee to effect payment in a particular manner, viz. by cheque or draft sent through postal channel or through courier. Only in the event such a request is found to have been made by the payee, either by the very terms of the agreement or by his subsequent conduct that the post office or courier would be the agent of the payee. Where no express words are used requesting the cheque to be sent by post and the matter rests merely in the stipulation that the payment be made by cheque and there is nothing more, the post office would not become the agent of the addressee and mere posting of the cheque would not operate as delivery of the cheque to the addressee. Where however, on the facts and circumstances of the case, an implied request by the creditor to send the cheque by post can be spelt out, the post office would be constituted the agent of the addressee for the purposes of receiving such payment. As held by the Gujarat High Court in Petlad Turkey Red Dye Works Co. Ltd. (supra) the principle laid down by the Supreme Court in Ogale Glass Works Ltd 's case (supra) is a general principle and applies as much to payment by hundi as to payment by cheque and the request, which would constitute the post office, the agent of the creditor may be express or it may even be implied from the facts and circumstances of the case but such a request cannot be inferred from the mere fact that a large part of the sale proceeds was received by the creditor through post. In the absence of anything to suggest that it was at the request of the payee that the remittance was made by cheque or draft, sent through post, the post office would not constitute the agent to the payee and the property in the cheque or draft would pass to the addressee/payee, when it is received by him and in such an event the place of payment would also be the place of receipt of the cheque/draft by the payee and not the place where the cheque or draft has been obtained or posted.
30. A perusal of the agency agreements in the case on hand, copies of which are also filed before us in the paper-book, except in the case of assessee's agreement with A.P.C. Pharmaceuticals and Chemicals there was no indication whatsoever with regard to the method or manner in which payment of commission was expected to be made by the assessee. The agreements are silent on that aspect. Thus, there was no express request by the said foreign agents for making remittance of the commission in a particular manner. There is nothing on record to suggest that the said agents, by their subsequent conduct, impliedly requested the assessee to make remittance through post or through any other particular means. As held by the Gujarat High Court in the case of Petlad Turkey Red Dye Works Co. Ltd. (supra), from the mere fact that commission payments when sent by cheque through post were received by the agents, it cannot be inferred that there was any implied request by those agents to make remittance in a particular channel and something more would be necessary before the Court can be called upon the draw any such inference. In this view of the matter the CIT(A) was not justified in concluding that 'Even though there is no express request from any of the agents that payments should be made or sent through drafts purchased at Hyderabad, in the facts and circumstances of the case, it. has to be reasonably presumed that such is the intention between the appellant company and its agents that commission payments would be effected through drafts purchased at Hyderabad and remitted either through the Postal Channel or through couriers....Further, the very factum that such payments through drafts here received and acted upon by the agents would only show that such payments were in conformity with the general business usage prevalent in international business transactions ... the principle enunciated in Sri Jagdish Mills case would squarely apply to the facts of this case as an implied request has to be inferred from the facts and circumstances of this case." As already noted above, merely because the foreign agents have not refused to receive or conditionally received the cheques, etc, sent by the assessee in a particular manner or through a particular channel, viz. postal or courier, etc., it cannot be implied that the assessee adopted such a channel for remittance at the request of those agents. Mere acceptance and non-refusal of the payments made by the assessee by those agents would not amount to an implied request by them and there has to be something more than such an acceptance by the agents, to infer such an implied request by them for remittance through a particular channel. As held by the Bombay High Court in the case of Dalmia Dadri Cement Ltd. (supra), where a receipt is sought to be assessed as income received in the taxable territories, the burden is on the revenue to prove that the income was received in the taxable territories. In the case on hand, the payments in pursuance of all agreements except with A.P.C. Pharmaceuticals and Chemicals Ltd., Hongkong, have been made through postal/courier channel, etc. and Revenue having failed to establish that such a channel was adopted by the assessee for making remittance of commission to those agents, at their express or implied request in that behalf and as such having not proved that the office of the courier or post office in India constituted the agent of those foreign agents who received the commission and consequently that those foreign agents have received the payments of commission in India through such constituted agents viz, post office, courier office, etc. the commission payments cannot be brought to tax in India and as such assessee was not liable to deduct tax in respect of those commission payments.
31. Now dealing with the assessee's agreement with M/s. APC Pharmaceuticals, Hongkong, a copy of which is filed at pages-110 & 111 of the assessee's paper-book, Clauses 4 and 6 deal with 'collection of money' and 'Agency commission' and they read as follows-
(4) Collection of money :
The Agent shall see all the money relating to the supplies made against orders placed by the customers are resulted directly to the principal and the agent shall not collect any amount from the customer for the orders placed by them.
(6) Agency commission :
The agent shall be paid a commission of maximum of 12.5% (varying from product to product) on C&F Values. This will be paid in US Dollars and payable at Hongkong by telegraphic transfer through banking channels.
Thus, the agreement of the assessee with M/s. APC Pharmaceuticals and Chemicals Ltd., Hongkong, makes a clear mention with regard to the channel for making remittance of the commission by the assessee to the said agent and as such there is an express request by the said agent for making remittance of the commission through a particular channel. As per the said request of the agent, if the payment of the commission was made by the assessee by 'telegraphic transfer through banking channels', the bank that would receive the amount from the assessee for telegraphic transfer to the said agent, would constitute the 'agent' of that foreign agent in India and the said commission receipt of the foreign agent can be said to have arisen in India and thus making it liable to tax in India. However, we find from the tabulation furnished by the assessee before us, indicating 'Mode of Payment of Commission' to various agents, that the said request of the foreign agent, APC Pharmaceuticals has not been acted upon and the remittance of the commission has not been made in accordance with the request of the said foreign agent. The relevant columns of the said tabulation insofar as it relates to APC Pharmaceuticals, reads as follows-
Name of the Agent Draft issuing bank Draft Drawn on
___________________________________________________________
APC Pharmace- Canara Bank, Hyderabad The Bank of New
uticals York, New York
Bank of Baroda, Hyderabad The Bank of New
York, New York
State Bank of India, State Bank of
India, New
Hyderabad York Branch,
New York.
___________________________________________________________
It is evident from the said tabulation that as against the request of the APC Pharmaceuticals for making remittance of agency commission 'in US Dollars and payable at Hongkong by telegraphic transfer through Banking channels' the assessee made remittance of the same by obtaining Drafts from Canara Bank and Bank of Baroda, Hyderabad on the Bank of New York, New York and State Bank of India, Hyderabad on its New York Branch, New York. Thus, the remittance was made otherwise than 'telegraphic transfer through banking channels' payable at Hongkong. The banks from which the assessee obtained the drafts for making remittance of the commission to the foreign agent, would have constituted the 'agent' of the said foreign agent, viz. APC Pharmaceuticals, only if the remittance was made through that agent by 'telegraphic transfer through banking channels' payable at Hongkong, as per the request of the said foreign agent. Since those banks merely issued drafts to the assessee, for passing on the same to the foreign agent, they cannot be the agents of APC Pharmaceuticals, since the Banks were not engaged for making any 'telegraphic transfer' payable at Hongkong, as desired by the said APC Pharmaceuticals by the terms of the agency agreement. In this view of the matter, since the Banks in India, which issued the drafts in respect of commission payments to M/s. APC Pharmaceuticals or the post office or the courier through which those drafts were remitted to the said foreign agent, cannot be the agents of M/s. APC Pharmaceuticals, those commission receipts in the hands of M/s. APC Pharmaceuticals, cannot be brought to tax in India, since they have neither accrued nor arose in India. Consequently, assessee was not liable to deduct any tax in respect of these commission payments made by it to M/s. APC Pharmaceuticals.
32. In this view of the matter, we set aside the order of the CIT(A) on the aspect of short deduction of tax at source with regard to commission payments made to foreign agents.
33. Now taking up the issue relating to short deduction of tax at source on payments to foreign employees, amounting to Rs. 1,86,954, facts in brief are that the assessee has an office at Moscow. There were two employees working in that office. The assessing officer noticed that the assessee had taken only basic salary of those employees as taxable and T.D.S. had been deposited on the amounts of the basic salary. It was the contention of the assessee that after the disintegration of the U.S.S.R., law and order in Moscow were in a bad shape and that the assessee had to provide safety and security to the lives and limbs of its employees through a special allowance and such allowance was exempt under Section 10(14) of the Act. The assessing officer was of the view that the said special allowance having not been notified as an allowance eligible for exemption under Section 10(14), tax was indeed deductible in respect of that allowance.
34. On appeal, the CIT(A) confirmed the view taken by the Assessing Officer. It was contended by the assessee before the CIT(A) that the two employees at Moscow were non-residents and that the assessee had been making certain payments to the employees at Moscow by way of salaries and allowances. It was submitted that if something was not chargeable under the provisions of the Income-tax Act, the question of applying Section 195 would not arise. It was the contention of the assessee that since the services of the employees were rendered in Moscow, there was no accrual or arising of income in India and as such neither Section 195 nor Section 192 would apply. The CIT(A) noted that when the assessee-company was called upon to furnish details of salaries paid to its employees at Moscow and T.D.S. thereon, the assessee had voluntarily deducted tax amounting to Rs. 54,872 on the component of salaries and filed a revised return on 20-6-1994. It was on scrutiny of the said revised return, the Assessing Officer noticed that apart from the" component of salaries, the assessee-company had disbursed Special Allowance, House Rent Allowance and Conveyance Allowance, which had not been considered for the purposes of T.D.S. He noted the Revenue's contention that till the passing of the order under Section 201, assessee had never disputed the chargeability or otherwise of the salaries paid to its employees at Moscow and that the ground taken in the course of the appellate proceedings by the assessee-company that salary paid to non-resident employees at Moscow should not be brought to tax under Section 195 was a new ground and should not be admitted in the light of Rule 46A of The I.T. Rules. The CIT(A), observing that there was a master-servant-relationship subsisting between the appellant company on the one hand and its employees on the other; that the employees were rendering services to the assessee-company and received the allowance as a compensation for such services rendered; and that there was no dispute on the point that the locus of the company is at Hyderabad, which is within the territory of India, held that since the services were rendered by the employees under consideration to the assessee-company having its locus in India, there was a deemed accrual or arising of income in India. Distinguishing the decisions cited by the assessee, he observed that Section 192 for the purpose of deduction of tax at source, does not draw any line of distinction between payment of salary to a resident or a nonresident and as such the Assessing Officer was correct in holding the assessee-company responsible for not deducting tax at source with regard to the amounts paid to its employees at Moscow. Aggrieved by the order of the CIT(A) on this aspect, assessee preferred this appeal before us.
35. Reiterating the contentions urged before the lower authorities, the learned counsel for the assessee submitted that these employees working in Moscow office of the assessee, visit India for less than a month. In support of this contention, copies of their passports and visas are also filed before us. It is therefore, submitted that the assessee was perfectly justified in not deducting tax at source in respect of payments made to its employees at Moscow. He also relied upon the Bombay High Court decision in CIT v. Cooper Engg. Ltd. [1968] 68 ITR 457 and the Madhya Pradesh High Court decision in Gwalior Rayon Silk Co. Ltd. v. CIT [1983] 140 ITR 832. On the other hand, the learned Departmental Representative strongly supported the orders of the lower authorities.
36. We have considered the rival submissions and perused the orders of the lower authorities and the decisions relied upon by the learned counsel for the assessee. It is evident from the orders of the lower authorities that it was only when the assessee-company was called upon to furnish details or salaries paid to its employees at Moscow and T.D.S. thereon, the assessee had voluntarily deducted the tax amounting to Rs. 54,872 on the component of salary and filed a revised return on 20-6-1994. At that time, it was only the basic salaries paid that were taken into consideration and the tax payable on the special allowance, etc. paid by the assessee to the employees at Moscow were not deducted. It was only when the action of the assessee in not deducting the tax relatable to the special allowance, etc. was questioned, it came up with the plea that the employees were rendering services to the assessee-company and received the allowance as a compensation for such services rendered and as such the salary paid to non-resident employees at Moscow for the services rendered by them at Moscow should not be brought to tax under Section 195 in India; and that when something was not chargeable under provisions of the Income-tax Act, the question of applying Section 195 would not arise and as such neither Section 195 nor Section 192 would apply. Because the assessee deducted the tax amounting to Rs. 54,872 on the component salary and filed a revised return on 20-6-1994 immediately on receipt of intimation from the Department and when questioned about non-deduction of tax with regard to special allowance, came up with the pleas regarding the very assessability of the incomes of those non-resident employees to tax in India, the lower authorities confined themselves to the question of allowability of exemption in respect of special allowance, mechanically rejecting the other contentions of the assessee relating to the very assessability of the income of those employees in India. The learned counsel for the assessee has filed before us copies of passports of those two employees based at Moscow, who are non-resident Indians, visiting India for less than a month and submitted that they being non-residents, no tax with regard to their salary is deductible in India.
37. Provisions of Section 9(1) relevant for our purpose, dealing with Income deemed to accrue or arise in India' read as follows-
9(1) The following incomes shall be deemed to accrue or arise in India-
(i) ** ** **
(ii) income which falls under the head "Salaries", if it is earned in India;
Explanation : For the removal of doubts, it is hereby declared that incomes of the nature referred to in this clause for service rendered in India shall be regarded as income earned in India;
Before adverting to the question whether tax was deductible on the Special Allowance paid to the two employees in question, the assessability of the income earned by them to income-tax in India, has to be examined in the light of the above provisions. Since it is an undisputed fact that these two Moscow-based employees have been rendering services at Moscow and not in India, in view of the Explanation below Section 9(1)(ii) extracted above, the income received by them for the services rendered by them at Moscow cannot be said to be accruing or arising in India. When the salary itself cannot be said to have accrued or arose in India, perquisites like Special Allowance go alongwith it and they cannot equally be deemed to have accrued or arose in India and as such, the assessee is not liable to deduct tax in respect of the special allowance paid by it to those two Moscow-based employees. The CIT(A) did not entertain this plea of the assessee on the ground that it was not raised before the ITO and being a new plea, it cannot be entertained under Rule 46A of the I.T. Rules. This reasoning of the CIT(A), in our opinion, is not in accordance with the ratio laid down by the Supreme Court in the case of Jute Corporation of India Ltd. v. CIT [1991] 187 ITR 688. As per the said decision, the powers of the CIT(A) are coterminus with those of the Assessing Officer and the entire assessment is open before the First Appellate Authority. It was held therein that an Appellate Authority has all the powers which the original authority may have in deciding the question before it subject to the restrictions or limitations, if any, prescribed by the statutory provisions.
38. It is further to be seen that by virtue of Section 5(1), dependent upon the status of those two employees viz- whether they are residents or nonresidents in India, the taxability of the income earned by them in Moscow, has to be determined. We therefore, set aside the orders of the lower authorities on this aspect and remit the matter to the file of the Assessing Officer with a direction to re-decide this aspect afresh in the light of our above discussion in accordance with law and after giving the assessee, reasonable opportunity of being heard in the matter.
39. Assessee's next grievance in this appeal relates to interest payable of Rs. 7,33,765 under Section 201(1A). This ground is merely consequential. We, accordingly, direct the Assessing Officer to recompute this interest under Section 201(1A), while giving effect to this order.
40. In the result, assessee's appeal is partly allowed for statistical purposes.