Gujarat H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that Mr. Guzek was an employee of the assessee-company and that the provisions of section 40(c)(iii) were attracted ?

Counsel Appeared

D. N. Mehta, for K. C. Patel, for the Petitioner : B. J. Shelat, i/b M. R. Bhatt of M/s R. P. Bhatt & Co., for the Revenue

M. B. SHAH, J.:

For the asst. yrs. 1968-69 and 1969-70, it was the contention of the assessee, Peass Industrial Engineers (P) Ltd., Navsari, that Mr. Guzek was not in the service of the assessee, but he was deputed by its collaborator, M/s Mettler’s Sons Limited, Switzerland, on the basis of an agreement for supply of “know-how” dt. 3rd June, 1965, and on the basis of further agreement of the same date for technical services. The authorities below, i.e., the ITO, the AAC and the Tribunal, rejected the said contention of the assessee. Being dissatisfied by the order passed by the Tribunal, the assessee preferred a reference application and on the basis of the said reference, the following questions are referred by the Tribunal under s. 256(1) of the IT Act, 1961, for our opinion :

For the asst. yr. 1968-69 :

“1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that Mr. Guzek was an employee of the assessee-company and that the provisions of section 40(c)(iii) were attracted ?”

For the asst. yr. 1969-70 :

“2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that Mr. Guzek was an employee of the assessee-company and that the provisions of s. 40 (a)(v) were attracted ?”

2. At the time of hearing of this matter, learned counsel, Mr. Mehta, for the assessee, vehemently submitted that Mr. Guzek was not an employee of the assessee-company. He was deputed by M/s Mettler’s Sons Limited and Mr. Guzek was in the service of the said firm. He contended that, merely because an amount, as agreed, is paid to Mr. Guzek, it would not mean that he was an employee of the assessee-company. He further contended that the assessee was not in a position to terminate the services of Mr. Guzek and that the assessee was not in a position to direct Mr. Guzek to do a particular work in a particular manner. He submitted that, looking to the fact that he was a technical expert and the know-how was not known to the assessee, it was not possible for the assessee-company to supervise the work which was to be done by him. As against this, Mr. Shelat, learned counsel for the Revenue, vehemently submitted that the authorities below, after appreciating the evidence which was produced on record, have arrived at the conclusion that the assessee-company paid salary to Mr. Guzek and, therefore, during that period, there was a relationship of “master and servant” between the assessee and Mr. Guzek.

For appreciating the aforesaid contention, we would first refer to the agreement for supply of “know-how” dt. 3rd June, 1966. As per the said agreement, M/s Mettler’s Sons Limited were in possession of secret technical know- how and other technical information relating to the manufacture of the products which the assessee-company were desirous of manufacturing and for that purpose the assessee-company have requested M/s Mettler’s Sons Limited to supply and impart to them the said “know-how” for exploitation in India. For supply of the said know-how, the consideration agreed to between the parties is as under : “6. In consideration of the obligations by Mettler undertaken under this agreement, Peass would pay to Mettler in Switzerland a sum of Swiss Francs 98,416— (Swiss Francs ninety eight thousand and four hundred sixteen only) equivalent to Rs. 1,08,000 (rupees one lakh and eight thousand only).

6.(a) The amount payable by Peass shall be paid as under : (1) Twenty-five per cent. immediately (within thirty days of approval of the agreement by the Government of India and the Reserve Bank of India) after the agreement is signed. (2) Seventy-five per cent within thirty days of receipt of drawings by Peass’ representative in Switzerland.”

5. The next agreement between the parties is for supply of technical services and the royalty agreement. It, inter alia, provides that Mettler is in a position to tender technical advice and assistance in regard to the use of technical know-how in connection with the production, manufacture and sale of the products and it was agreed to provide Peass (assessee) as far as possible the services of technical personnel to advise Peass for the aforesaid purposes. The agreement provided that it would be open to Peass to send its engineers to Switzerland for training. All their costs were to be borne by the Peass. It further provided that, at the request of Peass, M/s Mettler’s Sons Limited would make available the services of technical personnel to assist Peass in erection, installation, starting of the plant and the manufacturing operations on the conditions mentioned in cls. 5 and 6 of the said agreement. Clauses 5 and 6 of the said agreement read as under : “5. If and when Peass makes a request in writing or if Mettler consider it necessary they shall make available to Peass in the territory the services of technical personnel well acquainted with manufacturing problems to assist Peass in connection with such problems as Peass may encounter in their manufacturing operations and to assist Peass in the supervision of the erection and installation and the starting of the plant, on the following conditions : (a) Peass shall pay the air passage of such engineers from Switzerland to India and back ; (b) Peass shall bear and pay all hotel and travelling expenses to such engineers in the territory ; (c) Peass shall pay such salary to the engineers from the day they leave till the day they return to Switzerland, as may be mutually agreed upon between the parties.

6. Mettler’s technical personnel will ensure that the products manufactured by Peass in India will be of the same high standard as manufactured by Mettler in Switzerland and would give the same satisfactory performance.”

6. From the aforesaid two documents, it is apparent that for supply of technical know-how, the assessee was required to pay separately as per the agreement for supply of “know-how”. At the same time, by a separate agreement of the same date, the assessee-company was entitled to send its engineers to Switzerland at its cost for training purposes. Similarly, Mettler was to send, at the request of the assessee-company, some technical personnel to advise the assessee-company, in carrying on the manufacturing operations and in the supervision of the erection, installation and starting of the plant. For that purpose, the assessee-company was required to pay salary to the concerned engineer from the day he left Switzerland. The assessee-company was also required to pay air passage and was required to bear and pay all hotel and travel expenses in India. That means, the assessee-company was required to pay salary including all perquisites for the stay of the concerned engineer in India. The result of this agreement is that from the day the engineer of M/s Mettler’s Sons Limited starts from Switzerland, all his expenses are required to be borne and the salary is required to be paid by the assessee and for all purposes, he would be an employee of the assessee. It may be that the assessee-company cannot terminate the services of the concerned engineer of Mettler’s Sons Limited, but it can certainly refuse to take the service of the said engineer and refuse to pay him any amount as salary for various reasons including misconduct of the concerned engineer. In other words, it can be said that Mr. Guzek would be either on deputation or on loan service with the assessee. Further, if Mr. Guzek was not in service, there was no necessity of stating that he was paid salary by the assessee-company. Normally, salary would be paid by a master to his employee.

7. As against this, Mr. Mehta, learned counsel for the assessee, referred to the letter dt. 7th Sept., 1966, written by the assessee-company to the Consulate-General, Switzerland, wherein it is, inter alia, stated that Mr. Guzek was to come to India to assist in manufacturing of machines which were produced in India and submitted that as the words used in the said letter are “to assist the assessee”, it cannot be said that Mr. Guzek was the employee of the assessee-company. For this purpose, he referred to another letter dt. 12th Sept., 1966, written by M/s Mettler’s Sons Limited to the assessee which also, inter alia, reads : “We will depute our engineer Mr. Harry T. Guzek to India to assist you in any manufacturing operations and ensure that the machines produced by you are equivalent to the machines produced by us here in Switzerland.”

8. In our view, a further reading of this letter clearly reveals that the services of Mr. Guzek were to be utilised by the assessee-company by paying monthly remuneration. It provides that the assessee was required to pay 800 Francs as monthly remuneration from the day he leaves and reaches Switzerland. Other conditions provide that air passage, boarding, lodging and travelling expenses were to be borne by the assessee. The assessee was also required to pay Rs. 150 as pocket expenses of Mr. Guzek.

9. Considering the aforesaid facts, in our view, the Tribunal was justified in law in holding that Mr. Guzek was an employee of the assessee-company and that the provisions of s. 40(c)(iii) were attracted. We may note at this stage that no dispute is raised by learned counsel for the assessee that once it is held that Mr. Guzek was an employee of the assessee-company, the provisions of s. 40(c)(iii) would be attracted.

10. In the result, questions Nos. 1 and 2 are answered in the affirmative, i.e., in favour of the Revenue and against the assessee. The reference stands disposed of accordingly with no order as to costs.

[Citation : 211 ITR 348]