Authority Tribunal
In Re: Robert W. Smith vs Unknown on 18 August, 1994
RULINGS Authority for Advance Ruling No. 201 of 1993 Decided On: 18.08.1994 Appellants: In Re: Robert W. Smith Vs. Respondent:
Hon'ble Judges:
S. Ranganathan, J. (Chairman) Counsels:
For Appellant/Petitioner/Plaintiff: Harihar Lal, Adv.
For Respondents/Defendant: None Subject: Direct Taxation Acts/Rules/Orders:
Income Tax Act, 1961 - Sections 2(30), 3, 3(1), 6(1), 10(5B), 245N and 245Q(1) RULING S. Ranganathan, J. (Chairman)
1. This is an application before this Authority constituted under the Finance Act, 1993, by the insertion of a new Chapter XIX-B in the Income-tax Act, 1961 (hereinafter referred to as "the Act"). It raises some interesting points and since this is the first application before this Authority, the questions that arise are discussed at some length.
2. The facts stated in the application may now be set out. The applicant, Robert W. Smith, is a citizen of the United States of America. He is a mechanical engineer holding a graduation degree from Purdue University of U. S. A. He has been employed since 1963 by Wm. Wrigley (Junior) Company of U. S. A. (hereinafter briefly referred to as "the U. S. company"). In the course of his experience of 30 years' service with the U. S. company, he has specialised in the area of construction and commissioning of chewing gum plants as well as the manufacturing process of the product. As International Liaison Engineer for the U. S. company he had participated in the erection and commissioning of a number of the company's projects which include projects at Chicago and Santacruz in U. S. A. and a project in China.
3. The U. S. company promoted a company named Wrigley's (India) Private Limited (W. I. P. L.) and this company is said to have been incorporated in India on October 5, 1993. The U. S. company is a major shareholder with 85 per cent. equity holding in W. I. P. L. The Indian company was formed for carrying on the business of manufacture and marketing of high quality chewing gums and other related confectionery products. Since the proposed Indian project is for high and superior quality products requiring specialised equipment and production process to be carried out in very hygienic conditions, the entire plant and machinery of W. I. P. L. is proposed to be designed and supplied by the U. S. company.
Also proposed is a transfer of technology for the manufacturing process of chewing gum and other related confectionery products. It was, therefore, considered necessary for the Indian company to engage a highly trained technical person having the required knowledge and exposure to the technology of Wrigley's for being able to establish the manufacturing facility and run it commercially and to train up the Indian employees to understand the technology and manufacturing process so that commercial production could be carried out successfully. The Indian company, therefore, proposed to engage the services of the applicant who was considered to have the necessary technical qualifications and experience in this specific field.
4. The applicant having been engaged in the U. S. company and its various projects outside India, came to India for the first time on May 12, 1993. Prior to 1993-94, it is stated, he has not been in India. On these facts, the applicant seeks an Advance Ruling of this Authority on two questions :
"(i) Whether, on the stated facts of the case, exemption under Section 10(5B) of the Income-tax Act, 1961, would be available ?
(ii) Whether, on the stated facts, the applicant would be considered as a 'technician' for the purpose of Section 10(5B) ?"
5. but, it is pointed out, the first question would basically involve the determination of the second question.
6. Before proceeding further, it may be convenient to set out the provisions of Section 10(5B) of the Act which exclude, from the total income of an individual, the tax paid on his income by his employer in the following circumstances : .
"(5B) in the case of an individual who renders services as a technician in the employment (commencing from a date after the 31st day of March, 1993) of the Government or of a local authority or of any corporation set up under any special law or of any such institution or body established in India for carrying on scientific research as is approved for the purposes of this clause or Sub-clause (viia) of Clause (6) by the prescribed authority or in any business carried on in India and the individual was not resident in India in any of the four financial years immediately preceding the financial year in which he arrived in India and the tax on his income for such services chargeable under the head 'Salaries' is paid to the Central Government by the employer (which tax, in the case of an employer, being a company, may be paid notwithstanding anything contained in Section 200 of the Companies Act, 1956 [1 of 1956]), the tax so paid by the employer for a period not exceeding forty-eight months commencing from the date of his arrival in India :
Provided that the Central Government may, if it considers it necessary or expedient in the public interest so to do, waive the condition relating to non-residence in India as specified in this clause in the case of any individual who is employed in India for designing, erection or commissioning of machinery or plant or supervising activities connected with such designing, erection or commissioning :
Explanation.--For the purposes of this clause, 'technician' means a person having specialised knowledge and experience in-
(i) constructional or manufacturing operations, or in mining or in the generation of electricity or any other form of power, or
(ii) agriculture, animal husbandry, dairy farming, deep sea fishing or ship building, or
(iii) such other field as the Central Government may, having regard to availability of Indians having specialised knowledge and experience therein, the needs of the country and other relevant circumstances, by notification in the Official Gazette, specify, who is employed in India in a capacity in which such specialised knowledge and experience are actually utilised."
7. The first difficulty in dealing with the application arises on the language of Section 245N(b) of the Act. Read with Section 245Q(1), this provision requires the person making an application to the Authority to be a "non-resident". On the definition contained in Section 2(30) of the Act, as applicable to the present case, a "non-resident" is a person who is not a "resident". Under Section 6(1) of the Act in so far as it is relevant for our present purposes, an individual is said to be resident in India in any previous year, if he-
(a) is in India in that year for a period or periods amounting in all to one hundred and eighty-two days or more ; or ....
(c) having within the four years preceding that year been in India for a period or periods amounting in all to three hundred and sixty-five days or more, is in India for a period or periods amounting in all to sixty days or more in that year.
8. As stated earlier, the applicant had arrived in India on May 12, 1993, and made his application on December 16, 1993. By the date of his application, the period of his stay in India had exceeded 182 days. He was, therefore, called upon to explain how his application was maintainable. The applicant submitted his reply on May 17, 1994. It was stated that, though he had arrived in India on May 12, 1993, he had gone out of India subsequently, as could be verified from his passport and that the applicant's stay in India up to the date of application was only 159 days and that, therefore, he should be considered to be a non-resident on the date of the application.
9. It may, however, be mentioned that, by this time, the applicant had accepted regular employment as general manager (technical) of W. I. P. L. with effect from February 1, 1994, and his stay in India had exceeded 182 days. It was, however, urged that the period of stay in India subsequent to the date of the application was irrelevant and immaterial for the purposes of Section 245N and that as the applicant's stay in India up to the date of the application, viz., December 16, 1993, was only 159 days, the applicant was a non-resident as on that date. It is, therefore, claimed that the application is maintainable. The first question for consideration is the correctness or otherwise of this claim.
10. While Section 245N stipulates that only a non-resident can make an application under Chapter XIX-B, it does not say in specific terms that he should be a non-resident as on the date of the application. In fact, it could not say so, for, as will be seen from the definitions set out earlier, conceptually, residence or non-residence for the purposes of the Act has to be determined with reference to a previous year (which is, generally, a financial year) and not with reference to a particular date. The plea, therefore, of the length of stay of the applicant in India between April 1, 1993, and December 16, 1993, being less than 182 days is neither here nor there. What is important is the status of the applicant in regard to a relevant previous year. Having regard to the fact that the applicant arrived in India on May 12, 1993, and seeks exemption in respect of his salary income assessable in the assessment years 1994-95 to 1998-99, one may think, at first blush, that the "non-resident" status of the applicant has to be determined for each of the previous years relevant to these assessment years. But this would not be correct as the exemption under Section 10(5B) is not restricted to non-residents. Non-residential status in a previous year for purpose of claiming relief and concessions in one's assessment is totally different from the non-residential status envisaged for maintaining an application under Section 245N.
11. It is, however, a little difficult to say which "previous year" should be taken into account for purposes of Section 245N. It cannot be the "previous year" in which the application is made for an application may be made very early in a financial year and may even have to be disposed of long before the end of the financial year. In such cases, unlike the present case, the full picture of the applicant's stay in India during the previous year may not be always available by the date of the application ' or even by the date of its disposal by the Authority. It appears, therefore, that the only "previous year" with reference to which the status of the applicant is determinable for purposes of Section 245N, must be the "previous year" preceding the financial year in which the application is made. It is, however, unnecessary to express a final opinion on this question in the present case for reasons to be presently stated.
12. In the present case, the applicant was non-resident in all earlier financial years up to and including 1992-93 and can, therefore, maintain this application if it is the length of his stay in India in the financial year 1992-93 that is to be considered. However, if one considers the whole of the financial year 1993-94 as the relevant previous year then, no doubt, the applicant may appear to be a resident in this previous year and the present application would not be maintainable as his stay in India during that year exceeds 182 days. The applicant's case, however, has to be considered in the light of the definition of "previous year" contained in Section 3 of the Act which leads to a different conclusion.
13. Section 3 in so far as it is relevant for our present purposes, reads :
"3. (1) Save as otherwise provided in this section, 'previous year' for the purposes of this Act, means the financial year immediately preceding the assessment year :
Provided that, in the case of a business or profession newly set up, or a source of income newly corning into existence, in the said financial year, the previous year shall be the period beginning with the date of setting up of the business or profession or, as the case may be, the date, on which the source of income newly comes into existence and ending with the said financial year."
14. The proviso, which is applicable here, substantially restricts the scope of the previous year with which we are concerned in the case of the applicant. As already stated, though the applicant came to India on May 12, 1993, and seems to have intermittently stayed in India for periods aggregating to 159 days till December 16, 1993, that period of stay was attributable to his employment with the U. S. company. At that time, he was not employed by W. I. P. L. nor had he any source of income in India. It has been stated--this has to be accepted as correct for the purpose of this application--that he took up employment with W. I. P. L. only with effect from February 1, 1994. In view of this emphatic statement, the relevant previous year will only be the period from February 1, 1994, till March 31, 1994. Since the stay of the applicant in India during the said period is less than 182 days, he has to be treated as a non-resident. In other words, the applicant is a "non-resident" whether we consider the financial year 1992-93 or the financial year 1993-94. The application is, therefore, in order and has to be disposed of on its merits.
15. The second question for consideration is whether the applicant is a "technician" within the meaning of Section 10(5B) of the Act. The expression "technician" has been defined by the Explanation to the above clause which has been set out earlier. On this definition, a person can be treated as a technician if he has specialised knowledge and experience in constructional and manufacturing operations and if he is employed in India in a capacity in which such specialised knowledge and experience are actually utilised. It has already been mentioned that the applicant is a qualified engineer and has been engaged over the years in the construction of chewing gum factories and the commissioning of their plants. In India also he has been employed only to look after the operations of construction of the factory of W. I. P. L. proposed to be set up at Bangalore and to supervise the carrying on of the manufacturing operations in the said factory. There can, therefore, be no doubt that the applicant is a technician within the meaning of Section 10(5B).
16. The more important question raised by the applicant is whether he is entitled to exemption under Section 10(5B) of the Act. This clause has been set out earlier. It enables an individual who fulfils the requirements of that clause, to exclude, in the computation of his total income, the tax paid by the employer on the salaries paid to him for a period not exceeding 48 months from the date of his arrival in India. The individual claiming the exemption should satisfy the following requirements :
(i) He must be a technician as defined in the Explanation ;
(ii) He must be in the employment of one of the several entities set out in the clause or in any business carried on in India ;
(iii) He must not have been resident in India in any of the four financial years immediately preceding the financial year in which he arrived in India ; and
(iv) The tax on his salary income should be paid by the employer.
17. The difficulty in the case of the applicant is created by the requirement that the individual in question must be in employment in any business carried on in India. And it arises because W. I. P. L., which is the employer in the present case, has not started its business in the manufacture and sale of chewing gum and other confectioneries. It is admitted on behalf of the applicant that W. I. P. L. is still at the stage of setting up its factory and installing its plant and machinery relating to the production of confectioneries but the manufacture and sale of confectioneries has not yet started. The question which arises is whether, having regard to the fact that W. I. P. L. has not yet commenced its business, the benefit of the exemption under Section 10(5B) can be granted to the applicant.
18. It may be mentioned here that though Section 10(5B) has been inserted only by the Finance Act, 1993, with effect from April 1, 1994, this category of exemption had been in the tax statutes all along. In the Indian Income-tax Act, 1922, the exemption was provided by Section 4(3)(xiva) inserted with effect from April 1, 1955, and it has been continued in the 1961 Act in Sections 10(6)(vi), (vii), (viia)(I) and (viia)(II). Though the provision has undergone several modifications as to the definition of "technician" as well as the quantum and period for which the exemption was available, the basic requirement that the technician must have been employed in a business carried on in India has been there right from the beginning. It is necessary, therefore, to scrutinise carefully the import of these words.
19. Shri Harihar Lal sought to get over the difficulty by suggesting that even the construction of the buildings and the setting up of the factory and plant would be a "business" in view of the wide definition of that word in Section 2(13) of the Act. This argument, however, has only to be stated to be rejected. Even granting that the setting up of a factory and plant may be loosely described as an adventure, it is not an adventure or concern in the nature of trade, commerce or manufacture to fall under the definition of the word "business". Only in the case of a dealer in factories can the setting up of a factory itself be described as a business.
20. In order, however, to appreciate the true import of the words "business carried on in India" used in Clause (5B), one has to consider the object and purpose of the introduction of this clause as well as the language of the other portions of the clause and its Explanation. Though no contemporaneous exposition of the object and purpose of the clause at the time of the insertion of Section 4(3)(xiva) in the 1922 Act by the Finance Act, 1955, is available, it was explained by the Board when the corresponding provision in Section 10(6)(vii) of the 1961 Act was amended in 1964, that these provisions for certain tax concessions to foreigners working in India had been introduced "in the context of the need for accelerating the industrial development of India for which it is, inter alia, necessary to encourage the inflow of foreign investments in fields in which technology is of high order and to acquire the scientific, technological and managerial knowledge and skill developed in foreign countries". It was noticed, in another circular of 1971, that these provisions had been liberalised from time to time. In promoting this object, no rational distinction can be made between a case where the expertise of the foreign technician is availed of in a running business and a case where the expertise is availed of for the purpose of setting up of buildings or machinery and plant for the purposes of a new industry. The concession is granted not by way of deduction from the profits and gains of a business carried on by an Indian businessman in which event the question whether the expenditure is incurred in the course of running a business or even before the commencement of the business would be vital. The exemption is granted by way of a tax concession to foreign technicians to encourage them to come to India and lend their expert knowledge and assistance to Indian industry for developing and modernising its plant and machinery. This is one aspect which has to be kept in mind.
21. Secondly, the definition of "technicians" also includes a person who has specialised knowledge and experience in constructional or manufacturing operations. While, normally speaking, manufacturing operations are those which are carried out in the course of the carrying on of a business, constructional operation is a wider expression. Construction of a building, plant or other equipment may also, no doubt be undertaken in the course of the carrying on of a business and with a view to extend the same but constructional operations are mostly undertaken at a stage prior to the setting up of the business. The inclusion of this word in the definition of word "technician" lends support to the view that even persons who assist with their expert knowledge in the putting up of buildings and plants whether it be at the stage of setting up a business or later, would be eligible for exemption.
22. There is also another provision which has to be kept in mind in this context. The Direct Taxes (Amendment) Act, 1974, introduced, with retrospective effect from April 1, 1973, a proviso in Section 10(6)(viia) which has also been reproduced in Section 10(5B). This proviso enables the Central Government, where it considers it is necessary and expedient in the public interest, to waive the condition regarding the non-residence of the technician in the four financial years immediately preceding the financial year in which he arrived in India where such technician is employed in India "for designing, erection or commissioning of machinery or plant or supervising activities connected with such designing, erection or commissioning".
Here again, while it is possible that plant and machinery may have to be designed, erected or commissioned, even in the course of a running business, this is a species of activity which is usually undertaken at the point of setting up of a business. It is when a person is setting up a new industrial establishment that he acquires plant and machinery or secures technical assistance for designing plant and machinery suitable for the industry. Foreign expertise is more often found necessary for the fabrication, installation, erection and commissioning of machinery at the stage of commencement of a business rather than later. The object of the provision would be best achieved by extending, rather than denying, the concession to such cases.
23. There is one further consideration which lends support to the above view. Clause (5B) grants exemption not only to foreign technicians employed in businesses but also to those in the employment of Governments, local authorities, statutory corporations and scientific research institutions. In respect of the latter, there are no words of limitation and even a foreign technician employed by them to set up a factory or construct buildings or design, fabricate or commission machinery and plant before the commercial activities start will clearly be entitled to the exemption. There is no logical or compelling reason why a limitation in this regard should be read into that part of the clause dealing with other businesses.
24. The above language of the relevant statutory provisions is an unmistakable indicator of the intention of the Legislature to grant exemption liberally in respect of foreign technicians. The object is to promote industrial development in India and to facilitate the acquisition of foreign expertise, knowledge and assistance for the setting up of industries in India. With the increase in the frontiers of knowledge inside the country in these matters, the scope of the exemption has been gradually reduced over the years but the basic idea of granting a concession in respect of foreign technicians who help to set up or manage Indian industries by reason of their specialised knowledge and experience has continued throughout. It is, therefore, necessary that a liberal interpretation should be given regarding the scope of this exemption and it should not be denied to a person who is really a foreign technician unless there is a clear indication in the Act that it should be not available in any particular situation.
25. If the provisions of Section 10(5B) are looked at from the above points of view, it will be appreciated that the emphasis in the words "business carried on in India" is not on the words "carried on" but on the words "in India". What the Legislature intends to emphasise by the use of these words is not to restrict the stage at which the foreign technician is employed but to emphasise that the benefit of the knowledge and experience of such technicians should be availed of by a business in India and not a business carried on elsewhere. There is no doubt in the present case that the business of W. I. P. L. is to be carried on in India. The benefit of the expertise of the applicant would accrue to a business in India and, therefore, it appears that there is no justification to refuse the exemption merely because W.I.P.L. has not yet started to carry on the business of manufacturing and sale of chewing gum or other confectioneries. This apart, even if some effect has to be given to the use of the words "carried on" used in the clause, it will be quite legitimate to give, in the context in which it is used, a wider meaning to the expression so as to include even the stages of setting up and commencement of a business. In doing so, one can derive analogy and support from the language used in some of the agreements for avoidance of double taxation between India and other countries. These agreements use the word "enterprise" to mean an industrial and commercial enterprise or undertaking carried on by a resident of one or other of the contracting countries. But such enterprise is deemed to have a permanent establishment in a contracting State, if it has a fixed place of business in that State in which the business of the enterprise is carried on and is deemed to have a fixed place of business if it carries on in that State a construction, installation or assembly project or the like. Or, again, there is a provision that an enterprise shall be deemed to carry on business through such permanent establishment if it carries on supervisory activities in connection with the building site or construction, installation or assembly project which is being undertaken in that State : See, for example, the agreements with France and Japan in this context. If one understands the expression in this wider connotation, it will not even be inappropriate to say that the business of W. I. P. L. is being carried on in India even though the actual stage of manufacture and sale of confectionery products has not yet started. The Authority is, therefore, of the opinion that the presence of the words "business carried on in India" in Section 10(5B) do not stand in the way of the applicant's eligibility for exemption.
26. As mentioned earlier, the exemption has been in existence for about 40 years now. At earlier stages, one of the conditions precedent for grant of the exemption was prior approval of the contract with the technician by the Government. No policy of denying such approval, or precedents where exemption has been denied to such technicians on the ground that their experience had been utilised at the stage of setting up a business has been brought to the notice of the Authority.
27. The conditions on fulfilment of which the exemption is granted are set out earlier. It has been held that the applicant is a technician. The facts stated in the petition show that he has not been a resident in India in any of the four financial years preceding the financial year 1993-94. He has arrived in India after April 1, 1993, as required by the section. The applicant is, therefore, entitled to the exemption granted under Section 10(5B), viz., that if any tax has been paid by his employer (W. I. P. L.) on the salaries paid to him for the services rendered by him as a foreign technician such tax would not be included in his total income for a period of forty-eight months from the date of his arrival in India.
28. Ruling.--The Ruling of the Authority on the two questions set out in the application is :
(1) On the stated facts of the case, the exemption under Section 10(5B) of the Income-tax Act, 1961, is available to the applicant.
(2) On the stated facts of the case, the applicant is a "technician" within the meaning of the Explanation to Section 10(53) of the Income-tax Act, 1961.