Case Law Details

Case Name : Grasim Industries Ltd. & Ors. Vs S. M. Mishra, CIT & Ors. (Bombay High Court)
Appeal Number : (2011) 199 Taxman 184 (Bom)
Date of Judgement/Order :
Related Assessment Year :
Courts : All High Courts (3796) Bombay High Court (681)

In the Bombay High Court

Grasim Industries Ltd. & Ors. Vs S. M. Mishra, CIT & Ors.

(2011) 199 Taxman 184 (Bom)

JUDGEMENT

The short question that arises for our consideration in this petition is whether the amount paid by petitioner No. 1 to petitioner No. 2 outside India as consideration in terms of the basic engineering and training agreement dated October 22, 1989 is liable to Indian income-tax as income deemed to have accrued to petitioner No. 2 in India in view of section 9(1)(vii) of the Income-tax Act, 1961 ?

2. Petitioner No. 1 is a company incorporated in India in which public are substantially interested and has principal place of business at Bombay. Petitioner No. 2 is a company incorporated under the laws of Delaware and has principal place of business in Pennsylvania, USA. Petitioner No. 2 does not have any office or place of business in India and is not resident in India. Petitioner No. 1 being desirous of setting up a sponge iron plant approached petitioner No. 2 for technical assistance. By an agreement dated October 22, 1989 (for short “the BEAT agreement”), petitioner No. 2 agreed to render to petitioner No. 1 outside India certain engineering and other related services in relation to the sponge iron plant. By another agreement (the supervisory agreement), petitioner No. 2 agreed to provide certain supervisory services to petitioner No. 1 in India. By the BEAT agreement petitioner No. 2 was to prepare basic engineering drawings specifications, calculations and other documents and design and also prepare monthly schedule of non-Indian activities outside India. Petitioner No. 2 was to deliver to the authorised representative of petitioner No. 1 the designs, drawings and data outside India. Petitioner No. 2 also agreed to train outside India certain number of employees of petitioner No. 1 in order to make available to such employees scientific knowledge, technical information, expertise and technology necessary for commissioning, operation and maintenance of the sponge iron plant. As a consideration, petitioner No. 1 agreed to pay to petitioner No. 2 a sum of US $ 16,231,000, net of Indian income-tax, if any, leviable. Other terms and conditions of the agreement are not material for the purpose of this petition. The Government of India vide its letter dated September 28, 1989, as amended by a letter dated December 14, 1989, approved the terms of the technical collaboration. Both letters were superseded and substituted by another approval letter dated February 6, 1990. The Reserve Bank of India also approved the terms and conditions of the BEAT agreement by its letter dated November 28, 1989, and payment of US $ 16,231,000 subject to the condition that a “no objection certificate/tax clearance certificate” issued by the income-tax Department should be produced at the time of each remittance. In accordance with the BEAT agreement, petitioner No. 2 delivered the total basic engineering package to the representative of petitioner No. 1 in Pennsylvania (USA) between November 1989 and August 1990. Petitioner No. 2 also imparted training to the 22 key personnel of petitioner No. 1 at HYL’s plant in Mexico as provided in the BEAT agreement.

3. Petitioner No. 1 through its letter dated December 5, 1989 requested to the Assistant Commissioner of Income-tax (respondent No. 3 herein) to issue a “no objection certificate” as required by the RBI sanction for payment of the first instalment of consideration payable by it to petitioner No. 2. In the said letter, petitioner No. 1 emphasized that the provisions of section 9(1) (vii) of the Income-tax Act (for short “the Act”) which deems the payment of fees for technical services to a non-resident by a resident were not applicable as no part of the activity for earning the technical fees was carried out in India and therefore, the income did not accrue or arise to petitioner No. 2 in India. Respondent No. 3, however, by his reply dated December 5, 1989, expressed a view that considering the provisions of section 9(1)(vii) of the Act, the fees payable by petitioner No. 1 to petitioner No. 2 were taxable as income deemed to have been accrued to petitioner No. 2 in India. Thereupon, petitioner No. 1 effected tax deduction at source (TDS) on the first instalment of US $ 5,356 million and paid as tax Rs. 2,73,73,084 under protest on December 6, 1989. Again as insisted by respondent No. 3, petitioner No. 1 effected tax deduction at source and paid under protest as tax Rs. 2,81,83,272 on the second instalment of US $ 5.356 million under protest on September 5, 1990. For the assessment year 1990-91, petitioner No. 2 submitted its return of income on March 31, 1992, under the Act declaring the total income at “nil” contending that income earned by it under the BEAT agreement was not deemed to have accrued or arisen in India as it had no territorial nexus with India. Petitioner No. 2 took credit for TDS of Rs. 2,73,73,084 and claimed its refund. By an order dated November 31, 1992, respondent No. 3 negatived the contention of petitioner No. 2 and charged it to tax holding that the amount received by it under the BEAT agreement was an income deemed to have arisen in India. Similarly, for the assessment year 1991-92 the petitioner filed its return of income on October 27, 1992, declaring income of Rs. 83,54,810 for supervisory services in terms of the supervisor/ agreement and declaring “nil” income in respect of the amount received by it under the BEAT agreement as it did not arise in India. Petitioner No. 2 claimed credit of the TDS of Rs. 2,81,83,272 and claimed its refund. By an order dated March 16, 1993, respondent No. 3 rejected the claim of petitioner No. 2 for refund in respect of the TDS deducted by petitioner No. 1 under the BEAT agreement and completed the assessment.

4. Aggrieved by the said assessment order dated November 30, 1992 for the assessment year 1990-91, petitioner No. 2 preferred an appeal under section 246 of the Income-tax Act before respondent No. 2. Similarly aggrieved by the order of assessment dated March 16, 1993 for the assessment year 1991-92, petitioner No. 2 filed another appeal under section 246 of the Income-tax Act, before respondent No. 2. By an order dated July 7, 1993, respondent No. 2 dismissed the appeal filed by petitioner No. 2 regarding the assessment year 1991-92. It is not clear what happened to the other appeal filed by petitioner No. 2 regarding the assessment year 1990-91 though we proceed on the assumption that the same must also have been rejected on similar grounds.

5. The petitioners have approached this court inter alia challenging the constitutional validity of section 9(1)(vii) of the Act. The petitioners have also challenged the orders of assessment passed by respondent No. 3 and the order in appeal passed by respondent No. 2. At the hearing of the petition, Mr. Mistry appearing for the petitioner did not press the challenge to the constitutional validity of clause (vii) of sub-section (1) of section 9 of the Act. Mr. Mistry, learned counsel for the petitioner, however submitted that in respect of the offshore services rendered by petitioner No. 2 to petitioner No. 1 under the BEAT agreement no income-tax was payable. In support, he relied on a decision of the Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd. v. DIT (2007) 288 ITR 408(SC). For section 9(1) (vii) to be applicable, submitted Mr. Mistry, it is necessary that the services of a non-resident are not only utilised in India but also rendered in India or have a live link with India so that the entire income from the fees earned by the non-resident becomes taxable in India. Since the services under the BEAT agreement were rendered by petitioner No. 2 to petitioner No. 1 wholly outside India, the amount paid by petitioner No. 1 and received by petitioner No. 2 outside India could not be treated as an income of petitioner No. 2 taxable in India.

6. In view of the challenge to the constitutional validity of section 9(1) (vii) having been given up, learned Additional Solicitor General did not address us.

7. Mr. Suresh Kumar, learned counsel for the respondents submitted that in Ishikawajima (supra), the hon’ble Supreme Court has only interpreted section 9(1)(vii)(c) of the Income-tax Act and that decision was not applicable to the present case as the income earned by way of a fee by petitioner No. 2 from petitioner No. 1 was taxable under section 9(1)(vii)(b) of the Act. The respondents were therefore right in treating the amount paid by petitioner No. 1 to petitioner No. 2 under the BEAT agreement as an income deemed to be received by petitioner No. 2 as taxable under section 9(1)(vii)(b) of the Act. He further submitted that all the income received by a non-resident by way of a fee for technical services payable by a resident would be deemed to be earned by the non-resident in India unless it fell within the exception provided in sub-clause (b) of section 9(1)(vii) itself.

8. Before we proceed to consider the rival submissions of the parties, it is necessary to clarify that the petitioners are not challenging the assessment to tax the income received by way of fee by petitioner No. 2 from petitioner No. 1 under the supervisory services agreement. They do not dispute that the services under supervisory services were rendered by petitioner No. 2 in India and as such the income received therefrom is liable to income-tax. The dispute relates only to the amount paid by petitioner No. 1 to petitioner No. 2 under the BEAT agreement dated October 22, 1989.

9. Section 4 of the Income-tax Act is the charging section. It creates a charge in respect of total income of a person. The total income has been defined under section 5 of the Act differently in respect of a person who is a resident in India and a person who is not resident in India. Sub-section (1) of section 5 provides that the total income of a person who is resident in India shall include all income from whatever source derived which (a) is received or deemed to be received in India, or (b) accrues or arises to him in India, or (c) accrues or arises to him outside India during the year. Subsection (2) of section 5 provides that the total income of a person who is a non-resident shall include all income from whatever source derived which (a) is received or deemed to be received in India by or on behalf of such person, or (b) accrues or arises or deemed to accrue or arise to him in India during the year. Sub-clause (c) present in sub-section (1) is conspicuously absent in sub-section (2) of section 5 of the Act. The distinction in computing the total income of a person who is resident in India and a person who is not resident in India is obvious. In respect of a resident Indian, his global income (that is whether earned or received in India or out of India) is subject to the Indian income-tax. But in respect of a nonresident person only his income which is received or accrued or deemed to be received or accrued in India is subject to Indian income-tax. This is because Indian Parliament does not have a power to tax income of a nonresident, non citizen earned outside India. In order to tax any income of a non-resident, there must be a territorial nexus of receipt or accrual of the income with the Indian territory. Reference in this connection may be made to the following observations of the Supreme Court in Ishikawajima (2007) 288 ITR 408, 444(SC):

“The global income of a resident although is subjected to tax, the global income of a non-resident may not be. The answer to the question would depend upon the nature of the contract and the provisions of the DTAA.

What is relevant is receipt or accrual of income, as would be evident from a plain reading of section 5(2) of the Act. The legal fiction created althougn in a given case may be held to be of wide import, but it is trite that the terms of a contract are required to be construed having regard to the international covenants and conventions. In a case of this nature, interpretation with reference to the nexus to tax territories will also assume significance. Territorial nexus for the purpose of determining the tax liability is an internationally accepted principle.”

10. Section 9(1) of the Income-tax Act lists the incomes which shall be deemed to accrue or arise in India. For the purpose of ascertaining which incomes accrue or arise or are deemed to have accrued or arisen to a non-resident in India, aid would have to be taken of section 9 of the Act. The relevant clause, for our purpose is clause (vii) of sub-section (1) of section 9 of the Act which reads thus :

“9. (1) The following incomes shall be deemed to accrue or arise in India : . . .

(vii) income by way of fees for technical services payable by—

(a) the Government; or

(b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or

(c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India :

Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day of April, 1976, and approved by the Central Government.

Explanation 1.—For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date.

Explanation 2.—For the purposes of this clause, ‘fees for technical services’ means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy …”

11. Section 9 of the Act creates a fiction under which certain incomes are deemed to have arisen or accrued in India. The fiction creal ed by section 9 is to be considered having regard to the other provisions of the Act and also keeping in view the fact that while the legislative competence of Parliament extends to enact a law taxing global income of an Indian so far as the income of a non-resident is concerned it can tax his income only to the extent it arises or accrues in India. Parliament, of course, can define what income of a non-resident accrues or arises or deemed to accrue or arise in India, but the definition cannot be stretched so far as to treat the income of a non-resident which has no nexus with the Indian territory as deemed to have accrued or arisen in India. In Ishikawajima (supra) the Supreme Court has held that the territorial nexus doctrine plays an important part in the assessment of tax (see paragraphs 37 to 39 of 288 ITR 408).

12. Section 9(1)(vii) of the Act says that the income by way of fees for technical services payable by three classes of persons shall be deemed to have accrued or arisen to the recipient in India. The three classes of payees are described in three sub-clauses, viz. (a), (b) and (c) of clause (vii). Sub-clause (a) is in respect of an income received by way of fees payable by the Government. Sub-clause (b) is regarding the income by way of fees payable by a person who is a resident in India and sub-clause (c) is in respect of an income by way of fees payable by a person who is a non-resident. So far as sub-clause (a) is concerned, it admits of no exception and every rupee received as an income by way of fees for technical services paid by the Government to him is deemed to have accrued or arisen to the recipient in India. So far as sub-clause (b) is concerned, income by way of fees for technical services payable by a person who is a non-resident is deemed to have accrued or arisen to the recipient in India “except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purpose of making or earning any income from any source outside India. The expression “by such person” appearing in section 9(1) (vii) (b), in our opinion refer to the recipient of the income and not to the person making the payment. This would be clear if one looks to the opening words of sub-section (1) of section 9 which reads “the following income shall be deemed to accrue or arise in India”. Section 9(1) refers to the income which is deemed to have accrued or arisen in India by the recipient of the income. The expression “such person” appearing in sub-clause (b) of section 9(1)(vii) therefore refer to the recipient because one has to consider whether the income received by him (the recipient) is deemed to have accrued or arisen in India. Section 9 does not contemplate taxing the payer but contemplates taxing the recipient for the income received by him. In our considered view, the expression “such person” appearing in sub-clause (b) of section 9(1)(vii) refers to the recipient of the income and not to the payee. If we were to construe the expression “such person” appearing in section 9(1)(vii)(b) as to the person who makes the payment for technical services it would give rise to a startling results. We would demonstrate this by means of an illustration. Take a case where a resident Indian goes abroad, falls sick, and avails services of a pathological laboratory for testing his blood and pays the fees to the laboratory for the technical services of blood analysis performed by it. Obviously, the payment made by the Indian resident for the technical services payable to the owner of the laboratory who is a non-resident would fall in the first part of sub-clause (b) of section 9(1)(vii) of the Act and the fee received by the owner of the laboratory would be subject to the Indian income-tax unless it falls within the exception provided under sub-clause (b) itself. If we were to read the expression “such person” in sub-clause (b) to refer the person making the payment i.e., the resident Indian, then obviously the case would not fall within the exception because the fees were not payable in respect of any business or profession carried on by “such resident Indian” outside India. Consequently, the income received by the owner of the pathology laboratory would be subject to Indian income-tax. By no stretch of imagination, the owner of the pathology laboratory who is a non-resident Indian can be subjected to income-tax because Parliament obviously would have no legislative competence to tax him in respect of services rendered by him (who is a non-resident and non-citizen) outside Indian territory. However, if the expression “such person” appearing in sub-clause (b) of section 9(1)(vii) is construed to refer to the recipient of the fees, then he would be covered by the exception and not liable to pay Indian income-tax.

13. If we apply sub-clause (b) of section 9(1)(vii) of the Act so construed to the facts of the case at hand, the fees received by petitioner No. 2 for technical services from petitioner No. 1 would fall within the exception carried out by sub-clause (b) of section 9(1)(vii) of the Act and not taxable in India.

14. Mr. Suresh Kumar, learned counsel for the respondents submitted that in Ishikawajima (supra) the Supreme Court had only considered sub-clause (c) of section 9(1)(vii) of the Act. Inviting our attention to the observations made in paragraphs 91 and 95 (at pages 444 and 445 of ITR) as also the observations made in sub-para 7 (at pages 447 of the ITR) he submitted that the decision in Ishikawajima (supra) is no authority for interpretation of sub-clause (b) of section 9(1)(vii) of the Act and we cannot apply the ratio of the decision of Ishikawajima (supra) to the facts of the present case. We are unable to agree.

15. In Ishikawajima (supra) facts were that Ishikawajima, the appellant therein, was to develop, design, engineer and procure equipment, materials and supplies to erect and construct storage tanks for liquified natural gas (LNG) at the specified temperatures i.e. (-) 200 degrees celsius, to an Indian company. The contract involved (i) offshore supply, (ii) offshore services, (iii) onshore supply, (iv) onshore services, and (v) construction and erection. The price was to be paid for offshore supply and offshore services. An application was filed by the appellant before the Authority for Advance Rulings for determination of several questions including question No. 3 which was as follows :

“3. On the facts and circumstances of the case, whether the amounts received/receivable by the applicant from Petrone LNG for offshore services are chargeable to tax in India under the Act and/or the Indo-Japan tax treaty ?”

16. The Authority for Advance Rulings answered question No. 3 by holding that the amount received by the appellant from the Petrone: LNG for offshore services was liable to be taxed in India both under the; provisions of the Income-tax Act as well as under the Indo-Japan Treaty. Aggrieved the appellant was in appeal before the Supreme Court. Allowing the appeal of the appellant the Supreme Court held that for section 9(1)(vi) to be applicable, it was necessary that the services not only be utilised within India, but also be rendered in India or have such a live link with India that the entire income of the fees becomes taxable in India. The Supreme Court adopted a twin test of (i) services being utilised in India, and (ii) rendered in India or to have such a live link with India for taxing in India the income earned by a non-resident for technical services rendered outside India. Though the Supreme Court has referred to sub-clause (c) of section 9(1) (vii) in some part of its judgement it was obviously considering the case of tax ability of income of a non-resident for technical services rendered outside India which falls under section 9(1)(vii)(b) of the Act The decision of the Supreme Court in Ishikawajima (supra) was considered by a Division Bench of this court in Clifford Chance v. Deputy CIT (2009) 318 ITR 237(Bom), Income Tax Appeal No. 182 of 2002 decided on December 19, 2008 (Coram : Dr. S. Radhakrishnan and V. C. Daga JJ.). In paragraph 44 of the decision, after referring to the Ishikawajima citation High Court of this court observed (page 250) :

“Reading the provision in its plain sense, as per the Apex Court it requires two conditions to be met—the services which are the source of the income that is sought to be taxed, has to be rendered in India, as well as utilised in India, to be taxable in India. Both the above conditions have to be satisfied simultaneously. Thus, for a non-resident to be taxed on income for services, such a service needs to be rendered within India, and has to be part of a business or profession carried on by such person in India.”

17. In that case also this court was considering the taxability of income of a nonresident falling under sub-clause (b) of section 9(1)(vii) of the Act.

18. In Jindal Thermal Power Company Ltd. v. Deputy CIT (TDS) (2010) 321 ITR 31 (Karn), a Division Bench of the Karnataka High Court has also taken the same view and has held that for the purpose of taxing in India the income earned by a non-resident, the twin criteria of rendering services in India and the utilisation of services in India is required to be applied.

19. Even if it is assumed that the decision of the Supreme Court in the case of does not apply for considering the tax ability of income under sub-clause (b) of section 9(1) (vii) of the Act on interpretation of the words “by such person” appearing in (b), we are of the view that for an income received by the non-resident (such person) by way of a payment from a resident Indian for technical services rendered to him would be subject to the Indian income-tax only if it satisfies the twin test namely that the income was received in respect of services

(i) rendered in India, and

(ii) utilised in India or has such a live link with India that it can be treated as accrued or arisen in India.

20. Examined on this test, the income received by petitioner No. 2 cannot be deemed to have arisen or accrued in India because the services under the BEAT agreement were not rendered within India though the drawings, designs received from petitioner No. 2 may have been utilised by petitioner No. 1 in India. The law requires both the conditions to be satisfied viz, services rendered in India and utilised in India. For these reasons, we are of the view that the income by way of fees for technical services by the petitioner is not liable to the Indian income-tax under the Act. Consequently, the petition is allowed and the assessment orders made by respondent Nos. 2 and 3 in original or in appeal subjecting the income received by petitioner No. 2 from petitioner No. 1 under the BEAT agreement dated October 22, 1989, to Indian income-tax are quashed and set aside. The respondents are directed to pass fresh orders excluding the income received by petitioner No. 2 by way of a fees for technical services from petitioner No. 1 under the BEAT agreement. Rule is made absolute to the extent indicated above.

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