High Court Of Kerala
Fertilisers & Chemicals Travancore Ltd. vs. CIT
Sections 9, 163, 195
Asst. Year 1972-73, 1973-74, 1974-75
S. Sankarasubban & S. Marimuthu, JJ.
IT Ref. Nos. 78 to 90 of 1998
19th November, 2001
Counsel Appeared
Jayasankar, for the Applicant : P.K.R. Menon & Georgekutty Mathew, for the Respondent
JUDGMENT
S. SANKARASUBBAN, J. :
These references are at the instance of the assessee against the judgment of the Tribunal, Cochin Bench in R.A. Nos. 269 to 281/Coch/1991, under s. 256(1) of the IT Act (hereinafter referred to as ‘the Act’) by the CIT, Cochin. The following questions of law are referred for the opinion of this Court :
(1) Whether, the Tribunal was right on the facts and circumstances of the case in holding that there was business connection between FACT and foreign collaborators i.e. M/s Societa-De-Prayon (formerly Engineering & Industrial Corporation) of Belgium, M/s Davy Power Gas Inc. U.S.A. and M/s Chemiebau Dr. A Ziren GombH and GoKG (now M/s Davy Power Gas Gab, West Germany) in the relative technical collaboration agreements entered into between FACT and the said companies ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that rendering of services by the technical personnel deputed under the agreements to FACT amounted to rendering of services by the foreign collaborators in India ?
(3) Whether, on the facts and circumstances of the case, the Tribunal was right in holding that there was no employer-employee relationship between FACT and the foreign technicians were deputed to render services to FACT under the aforesaid technical collaboration agreement ?
(4) Whether, on the facts and circumstances of the case, the Tribunal was right in law in holding that the ITO was justified in treating the assessee as the agent of the non-resident collaborators and bringing to tax that part of the remittances attributable to the activity carried on in India by deployment of the technical personnel ?
2. The assessee in this case is M/s Fertilisers & Chemicals Travancore Ltd. FEDO Division, Udyogamandal
(hereinafter referred to as ‘FACT’). The proceedings started in pursuance of an order passed by the ITO under s. 201(1) of the IT Act treating FACT Ltd., Udyogamandal as an assessee in default for failure to deduct at source payments made to the non-resident under s. 195 (1) of the Act and the assessments relevant to IT Ref. Nos. 481 and 482 and 1985 and IT Ref. No. 23 of 1990 were made on the FACT as agent of the foreign companies under s.
163 of the IT Act.
3. The question that arises in this case is whether the non-resident collaborators rendered services to the assessee in India. FACT Ltd. entered into collaboration agreement with three foreign companies. The agreement entered into by FACT with Engineering and Industrial Corporation of Luxumburg, Belgium (hereinafter referred to as “EIC”) on 6th Feb., 1968, provided for furnishing information and assistance necessary to enable FACT to quote for and build phosphoric acid plants in India and to supply services. The EIC agreed to supply to FACT the necessary staff for supervision of erection and for commissioning of the plant. The FACT remitted amounts to EIC towards the payments agreed upon in the accounting years relevant to the three asst. yrs. 197273, 1973-74 and 1974-75. The FACT entered into a similar agreement with Davy Power Gas Inc. of USA for the design and technical services for the construction of NPK fertilizer plant for its Cochin Division. The foreign collaborator agreed to make available to FACT technical personnel for engineering, construction and putting the plant in operation and verifying the performance guarantee thereof. The FACT made payments to the non-resident company in the accounting year ending 31st March 1972. Another collaboration agreement was entered into with Chemiebau Dr. A Sieren GmbH and CoKG, now known as Davy Power Gas GombH of West Germany for design and technical services for the construction of sulphuric acid plants for Travancore Titanium Products Ltd., Trivandrum, Hindustan Copper Ltd., Khetri and Cochin Fertiliser Project Phase-II, Ambalamedu. This agreement contained a provision for deputation of engineers by the foreign company for supervision of the commissioning of the plant.
4. The FACT remitted amounts to this foreign company during the accounting years relevant to the asst. yrs. 1972-73 and 1973-74. No tax was deducted at source from the above payments to the non-residents under s. 195(1) of the IT Act. It was so done on the basis that the non-resident collaborators had not rendered any service in India and so they had not earned or received any income in India liable to income-tax. The ITO, on a perusal of the collaboration agreements, held that all the services by the foreign collaborators were not rendered outside India, that the deputation of technical personnel for services in India amounted to rendering services in India and that the income attributable to such services accrued to the non-resident in India, 15 per cent of the total payments was treated as income accruing in India. As the payments were agreed to be made in India free of income-tax, the tax deductible at source from the income was on computation of “tax on tax basis”. Accordingly, the ITO proceeded under s. 201(1) of the Act and treated FACT as an assessee in default in respect of the tax payable. Appropriate orders were passed on this basis. In appeal, the AAC held that the place of supply of the services was the foreign country, that no part of the income arose in India as the payments were made under the collaboration agreement and that there was no basis for working out the tax on ‘tax on tax basis”.
5. In second appeal filed by the Revenue, the Tribunal held that the terms and conditions of the three collaboration agreements with the above three foreign companies were more or less similar to the one considered by the Madras High Court in CIT vs. Fried Krupp Industries (1980) 19 CTR (Mad) 257 : (1981) 128 ITR 27 (Mad) : TC 39R.1177. The Tribunal followed the decision of the Supreme Court in Carborandum Co. vs. CIT 1977 CTR (SC) 209 : (1977) 108 ITR 335 (SC) : TC 39R.1145 and the decision of the Madras High Court aforesaid and held that there would have been no operations carried on in India by the foreign companies and that the services rendered by the technical personnel are not attributable to any operations of the foreign companies, that the supply, deputation or making available such personnel for work in India along with the supply of engineering know-how or documentation have been outside India and that the further operation in India were the responsibility of the Indian company. The Tribunal also held that the terms of the agreement shown that the technical personnel made available to FACT became their employees. In effect, it was held that no operation attributable to the foreign companies which can give rise to any profits being earned in India arose and so FACT was not bound to make any deduction at source at the time of making payments to the foreign companies. Thereafter, questions of law were referred to the High Court and the references were IT Ref. Nos. 446 to 451 of 1985. These references were disposed of by judgment dt. 27th March, 1990, and is reported in CIT vs. Fertilisers & Chemicals Travancore Ltd. (1990) 86 CTR (Ker) 40 : (1990) 185 ITR 398 (Ker) : TC 39R.1244. After considering the judgment and the various agreements, this Court was of the view that the Tribunal failed to pose for consideration the appropriate question that arose before it and from an appropriate angle. This Court further held that the approach or perspective in which the matter was viewed did not bring home the aspect or basis on which the Revenue based the order impugned, or assailed by the assessee. Under s. 195(1) of the IT Act, if any person is responsible for paying any sum chargeable under the Act to a foreign company, he shall, at the time of payment thereof in cash, deduct income-tax thereon at the rates in force. Under s. 201 of the Act, if any person so responsible fails to deduct the income-tax, he shall be deemed to be an assessee in default. The above aspect did not receive direct or proper consideration at the hands of the Tribunal in disposing of the appeals. The said aspect could be evaluated or analysed only if the basic question, whether the foreign collaborator rendered any service in India in terms of the agreement on the basis of which it could be said that a portion out of the payments made to the foreign collaborator is income that accrued to such collaborator in India is answered. That will in turn depend on whether the agreement envisaged rendering of any service in India by the foreign collaborator for which payment was provided for. These aspects which necessarily arose for consideration were not adverted to nor is any definite finding entered by the Tribunal on the basis of the agreement executed between the assessee and the foreign collaborator. Absence of a finding on that score vitiates the order of the Tribunal. It cannot be said that the final fact-finding authority the Tribunal disposed of the appeals before it in accordance with law. We are constrained to hold so. On this basis, the only course left with us is to decline to answer the three questions referred to us in IT Ref. Nos. 446 to 451 and at the same time direct the Tribunal to restore the appeals to the file and consider the matter afresh in accordance with law.”
6. Thus, the cases were remanded to the Tribunal. The appeals were restored and the Tribunal was directed to consider the matter afresh. Subsequently, the Tribunal decided the matter by a consolidated order dt. 30th Aug., 1991. The Tribunal went through the agreement executed between the assessee and the non-resident and after analysing the various clauses in the agreement, held as follows : “It is not as if the agreement evidences instances of stray transactions. It is understood in cl. 4 of the agreement that “EIC remains free under special circumstances to sell phosphoric acid plants to the private sector of Indian industry subject to each case to the approval of the project by the Government of India. EIC remains free to collaborate with and grant licences to non-Indian companies operating from outside India for the sale of phosphoric acid plants in India. In cases any pray on process phosphoric acid plant is supplied by a non-Indian company EIC shall make its best efforts to the effect that the FACT services are used for this plant as far as possible. When FACT shall obtain an order for a phosporic acid plant. FACT will make their best efforts to ensure that the services of SEULCHRE may be used to the maximum by themselves or by their customers”. Thus under the agreement , business connection in India with FACT is established in the realm of training the Indian engineers or other employees of FACT or even the employees of customers of FACT”. Various decisions were referred to by the Tribunal. The Tribunal allowed the appeal and held that the assessee had defaulted payment of tax under s. 195(1) of the Act. It is against the above order that these references are made.
We heard learned counsel for the assessee and learned counsel for the Department. Various clauses in the agreement particularly cls. 6.1, 6.2, 9, 10, 10.1, 10.2, 12, 19 and 21, show that services have been rendered by the foreign company and the employees under them. There is nothing in the agreement to show that the employees of the foreign company, who rendered services here had rendered services as employees of the FACT. Clause 6.2 says thus “The services of the necessary staff for supervision of erection if such supervision is desired by FACT and for commissioning of phosphoric acid plant as agreed by both parties”. Regarding payments, cl. 9 states as follows : “For the services of the supervising engineers referred to 6.2 in accordance with EIC’s scale of daily rates current at the time and in accordance with standard EIC terms for the loan of such engineers set out in Schedule B to this agreement; provided that the rates may be varied from time to time by mutual agreement while taking into account the relevant information obtained from the competent authorities in Luxembourg or in Bengium”. Clause
10.1 says that all payments to EIC for services rendered under the agreement shall be made in Legian France in Luxembourg, except for expenses incurred in India by or on behalf of the supervising engineers referred to in 6.2 and 9 above. Thus, it is clear that the assessee is not entitled to any consent of technician in respect of services rendered in India. Thus, cl. 9 is clear that the services of the engineers were only loaned to FACT. There are no separate service agreements between the foreign technicians and the FACT. The foreign collaborators have agreed to assist the company in several ways such as by providing know-how, technician’s services, commissioning of the plant, etc. Though the contract, etc. originated in the foreign country, pursuant to such contracts the services of the foreign technicians were loaned to the Indian company; such foreign technicians did not themselves become employees of the Indian company. The foreign company spelt out the terms and conditions for the services of such technicians in India. The Indian company did not have any control over such technical personnel. The loaning of the services of the foreign technicians was incidental to the main activity of the sale of the know-now, etc. Therefore, the foreign collaborators rendered services in India through their technical personnel for certain specified periods and thus carried on some activity which contributed directly or indirectly to their earning of income.
In the above view of matter, we agree with the view taken by the Tribunal and we answer the question in favour of the Revenue and against the assessee.
[Citation : 255 ITR 449]