Commissioner of Income Tax vs Fertilisers and Chemicals Travancore Ltd.

K.S. Paripoornan, J.—At the instance of the Revenue (Commissioner of Income Tax, Cochin), certain questions of law which proceed on common basis have been referred by the Income Tax Appellate Tribunal for the decision of this court herein. Income Tax References Nos. 446 to 451 of 1985 relate to the assessment years 1972-73, 1973-74 and 1974-75. Income Tax References Nos. 481 and 482 relate to the assessment years 1975-76 and 1977-78 and Income Tax Reference No. 23 of 1990 relates to the assessment year 1976-77. These are connected cases. The following three questions of law have been referred for the decision of this court in Income Tax References Nos. 446 to 451 of 1985:

"1. Whether, on the facts and in the circumstances of the case, the proceedings initiated u/s 201 of the Income Tax Act are unwarranted and invalid in law ?

Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact in holding that-

(i) no operations have been carried on in India by the foreign companies and the services rendered by the technical personnel are not attributable to any operations of the foreign companies ?

(ii) the supply, deputation or making available such personnel for work in India along with the supply of engineering know-how or documentation had been outside India and the further operations in India were the responsibility only of the Indian company ?

Whether, on the facts and in the circumstances of the case, and on an interpretation of the agreement, the Tribunal is right in law and fact in holding that the technical personnel made available to FACT became their employees, there had been no operation attributable to the foreign companies which can give rise to any profits being earned in India ?"

The following questions have been referred for the decision of the court in Income Tax References Nos. 481 and 482 of 1985 :

"1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact in holding that:

(i) there have been no operations carried on in India by the foreign companies and the services rendered by the technical personnel are not attributable to any operations of the foreign companies ?

(ii) the supply, deputation or making available of such personnel for work in India along with the supply of engineering know-how or documentation had been outside India and the further operations in India were the responsibility of the Indian company only ?

Whether, on the facts and in the circumstances of the case and on an interpretation of the agreement, the Tribunal is right in law and fact in holding that the technical personnel made available to "FACT became their employees and there had been no operation attributable to the foreign companies which can give rise to any profits being earned in India ?"

The following two questions of law have been referred for the decision of this court in Income Tax Reference No. 23 of 1990 :

"1. Whether, on the facts and in the circumstances of the case, is the Hon''ble Tribunal right in holding that no income was earned in India by the foreign company through the services rendered by the foreign company ?

Whether, on the facts and in the circumstances of the case, is the Hon''ble Tribunal right in Molding that the assessee cannot be treated as an agent of the foreign company and assessed to tax in respect of the payment made to the foreign technicians by the foreign company ?"

The Appellate Tribunal disposed of the appeals relating to the assessment years 1972-73, 1973-74 and 1974-75, in Income Tax Applications Nos. 243 to 248 (Coch) of 1977-78, by a common order dated March 31, 1982. This common order forms the subject-matter of Income Tax References Nos. 446 to 451 of 1985. The above common order was followed by the Appellate Tribunal for the years 1975-76 and 1977-78, in its appellate order dated December 14, 1984, rendered in Income Tax Applications Nos. 41 and 47 (Coch) of 1983, which is the subject-matter of Income Tax References Nos. 481 and 482 of 1985. Again, the said common order dated March 31, 1982, was followed by the Appellate Tribunal in Income Tax Application No. 507 (Coch) of 1982, relating to the assessment year 1976-77, which is the subject-matter of Income Tax Reference No. 23 of 1990.

The respondent in these cases is the common assessee--Fertilizers and Chemicals Travancore Ltd., FEDO Division, Udyogamandal (hereinafter referred to as "FACT"). In Income Tax References Nos. 446 to 451 of 1985, the proceedings started in pursuance of an order passed by the Income Tax Officer u/s 201(1) of the Income Tax Act treating FACT Ltd., Udyogamandal, as an assessee in default for failure to deduct at source payments made to the non-resident u/s 195(1) of the Act and the assessments relevant to Income Tax References Nos. 481 and 482 of 1985 and Income Tax Reference No. 23 of 1990 were made on the FACT as agent of two foreign companies u/s 163 of the Income Tax Act.

We heard counsel for the Revenue, Mr. P.K.R. Menon, as also counsel for the assessee, Menon and Pai. The crux of the matter involved in these referred cases is whether non-resident collaborators (companies) rendered services to the respondent-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 February 6, 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 EIG 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 assessment years 1972-73, 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 this non-resident company in the accounting year ending March 31, 1972. Another collaboration agreement was entered into with Chemiebau Dr. A. Sieren GmbH and CoKg, now known as Davy Poer Gas GmbH 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. The FACT remitted amounts to this foreign company during the accounting years relevant to the assessment years 1972-73 and 1973-74. No tax was deducted at source from the above payments to the non-residents u/s 195(1) of the Income Tax 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 Income Tax Officer, 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 Income Tax Officer proceeded u/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 Appellate Assistant Commissioner 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". In second appeal filed by the Revenue, the Appellate 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 Commissioner of Income Tax, Tamil Nadu-V Vs. Fried Krupp Industries, . The Appellate Tribunal followed the decision of the Supreme Court in Carborandum Co. Vs. Commissioner of Income Tax, Madras, 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 operations in India were the responsibility of the Indian company. The Tribunal also held that the terms of the agreement showed 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. Proceedings initiated u/s 201 of the Income Tax Act was held unjustified. It is, thereafter, at the instance of the Revenue that the three questions of law formulated hereinabove have been referred for the decision of this court in Income Tax References Nos. 446 to 451 of 1985 which arise out of the common appellate order of the Tribunal dated March 31, 1982, in Income Tax Applications Nos. 243 to 248 (Coch) of 1977-78. Since the Appellate Tribunal has only followed the above order in the other two sets of cases, it will be sufficient if we deal with Income Tax References Nos. 446 to 451 of 1985 in detail.

Both sides agreed that annexure-D1 in Income Tax References Nos. 446 to 451 of 1985, copy of the agreement dated February 6, 1968, entered into between FACT Ltd., and Engineering and Industrial Corporation, Luxembourg (EIC), can be taken as a representative one to understand the scope of the controversy in these cases. It is necessary to quote verbatim a few clauses in the said agreement:

EIC will provide FACT with the information and assistance necessary to enable FACT to quote for ,and build phosphoric acid plants in the Republic of India. FACT will report in a form to be agreed full details of all enquiries they receive immediately on receipt to enable EIC to approve all the technical aspects of the tender to be agreed details of all orders they receive immediately on receipt....

For every order received by FACT, except as provided under 5.4, EIC will supply :

6.1. The services for which EIC has provided the abovementioned quotation.

6.2. The services of the necessary staff for supervision for erection if such supervision is desired by FACT and for commissioning of phosphoric acid plant as agreed by both parties ...

FACT shall also make the following payments to EIC.

For the services of the supervising engineers referred to in 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 while taking into account the relevant information obtained from the competent authorities in Luxembourg or in Belgium.

Payments.

10.1 All payments to EIC for services rendered under this agreement shall be made in Belgium Francs in Luxembourg, except for expenses incurred in India by or on behalf of the Supervising Engineers referred to in 6.2 and 9 above...

10.3. It is understood that no taxes are leviable under the Indian Tax Laws for the services rendered by EIC under the terms of this agreement. In the event of any such tax being levied in India, FACT will ensure that all payments to EIC shall be made in Luxembourg in Belgium currency in such manner as would, after deduction tax, leave in hands of EIC the net amounts due for the contract of sale concerned.

So long as Indian law permits, FACT will seek approval of the Government of India for exemption from or concessions in payment of Indian taxes on the remuneration to foreign technicians lent to FACT under this agreement...

FACT and EIC shall agree to a statement in writing giving performance figures for each Phosphoric Acid Plant for which FACT receives an enquiry. If the plant fails to meet the performance figures EIC will without any charge to FACT modify its designs and furnish new designs to the extent necessary to enable the plant to meet the performance figures. In addition EIC and FACT will agree on a statement setting out the figures which EIC is prepared to warrant for the Phosphoric Acid Plant in question and stating the conditions under which EIC will give such warranties including a share in any penalties or liquidated damages for which FACT may be liable under its contract..

EIC shall use its best endeavours to obtain permission for FACT and its customers to visit Phosphoric Acid Plants built by EIC and FACT shall use its best endeavours in the contract for the design and manufacture of a Phosphoric Acid Plant and to reserve the right for EIC to inspect it at reasonable times...

This agreement will remain in force for 7 years and can be extended for a further 5 years at FACT''S demand and with EIC''s approval."

The Appellate Tribunal, in its order, referred to the short history of the case, the agreement entered into between FACT and EIC dated February 6, 1968, and the rival contentions of the Revenue as well as the asses-see and posed the question that arose for consideration in paragraph 9 of its order as follows :

"The question whether the activities of the technical personnel lent or deputed by a foreign company amounted to a business activity carried on by that company in India was considered by the Supreme Court in Carborandum Co. Vs. Commissioner of Income Tax, Madras, ."

After discussing the said case and the decision in Aziende Colori Nazionali Affini, Italy Vs. Commissioner of Income Tax, Bombay City-I, and the decision in Commissioner of Income Tax, Tamil Nadu-V Vs. Fried Krupp Industries, of its order, the Appellate Tribunal held as follows, in paragraph 12 of the order :

"The terms of the three agreements now under consideration are more or less similar. What we have to consider is whether the undertaking by the foreign companies to depute their experts or to make available the services of the technical personnel or to supply the services of supervisory staff and the consequent operations are activities connected with the business of the foreign companies. On the principles stated by the Supreme Court in Carborandum Co. Vs. Commissioner of Income Tax, Madras, and followed by the Madras High Court in Commissioner of Income Tax, Tamil Nadu-V Vs. Fried Krupp Industries, and applied to the terms of the agreement before us, we have no hesitation to hold that there have been no operations carried out in India by the foreign companies and the services rendered by the technical personnel are not attributable to any operations of the foreign companies. The supply, deputation or making available such personnel for work in India along with the supply of engineering know-how or documentation had been outside India and the further operations in India were the responsibility of the Indian company only. The terms of the agreements go to show that the technical personnel made available to FACT became their employees. It is, therefore, clear that there had been no operations attributable to the foreign companies which can give rise to any profits being earned in India. While making the remittances to the foreign company FACT was not, therefore, bound to make any deduction at source."

We are afraid that the Appellate Tribunal has failed to pose the question that arose before it for consideration from a proper angle. It was the duty of the Appellate Tribunal to construe the various clauses contained in the agreement entered into between FACT and EIC dated February 6, 1968, to find out whether the stand of the Revenue that at least a portion of the services rendered by the foreign collaborator is in India and accordingly a portion of the income of the foreign collaborator accrued in India. Instead of posing the said question which arose for consideration, the Appellate Tribunal referred to three decisions, Carborandum Co. Vs. Commissioner of Income Tax, Madras, , Aziende Colori Nazionali Affini, Italy Vs. Commissioner of Income Tax, Bombay City-I, and Commissioner of Income Tax, Tamil Nadu-V Vs. Fried Krupp Industries, and proceeded on the basis that the terms of the agreements under consideration in these cases are more or less similar. We are afraid that the Appellate Tribunal was rather swayed by the three decisions and failed to apply its mind to the relevant contract entered into by Messrs. FACT Ltd. with the foreign collaborator--EIC. Indeed, before us, counsel for the Revenue very much stressed Clauses 6, 6.1, 6.2, 9 and 10.1 and contended that amongst other payments which FACT shall make to EIC, payment for services of the supervising engineers, referred to in Clause 6.2 (for supervision for erection and for commissioning of phosphoric acid plant), by FACT to EIC was provided for and payments to EIC for services rendered shall be made in Belgium Francs in Luxembourg. Counsel for the Revenue contended that a portion of the services rendered by the foreign collaborator (EIC) was in India, income accrued therefrom and in the consolidated payments made, such services rendered in India by the foreign collaborator were also taken in.

Before us, counsel on either side invited our attention to the following decisions : Carborandum Co. Vs. Commissioner of Income Tax, Madras, ; BHARAT HEAVY PLATE and VESSELS LTD. Vs. ADDL. COMMISSIONER OF Income Tax, A. P., ; Aziende Colori Nazionali Affini, Italy Vs. Commissioner of Income Tax, Bombay City-I, ; Skoda Export Vs. Additional Commissioner of Income Tax, Andhra Pradesh, and Commissioner of Income Tax, Tamil Nadu-V Vs. Fried Krupp Industries, .

On the other hand, counsel for the assessee contended that the Appellate Tribunal has in effect, though not in so many words, accepted the plea of the assessee that no services were rendered by the foreign collaborator in India and that the services rendered by the technical personnel are not attributable to any operations of the foreign companies in India.

We perused the appellate order passed by the Appellate Tribunal dated March 31, 1982, with care. It should be stated that the Appellate Tribunal failed to pose for consideration the appropriate question that arose before it and from an appropriate angle. 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. u/s 195(1) of the Income Tax 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. u/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 Appellate Tribunal on the basis of the agreement executed between the assessee-FACT Ltd. and the foreign collaborator. Absence of a finding on that score vitiates the order of the Appellate Tribunal. It cannot be said that the final fact-finding authority--the Appellate Tribunal--disposed of the appeals before it in accordance with law. We are constrained to hold so. On this basis, the only course left to us is to decline to answer the three questions referred to us in Income Tax References Nos. 446 to 451 of 1985 and at the same time direct the Income Tax Appellate Tribunal to restore the appeals (I. T. A. Nos. 243 to 248/Coch/1977-78) to the file and consider the matter afresh in accordance with law.

In disposing of I. T. A. Nos. 47 and 41 (Coch) of 1983, which are the subject-matter of Income Tax References Nos. 481 and 482 of 1985, the Appellate Tribunal only followed its earlier decision rendered in I. T. A. Nos. 243 to 248/Coch/1977-78 by a common order dated March 31, 1982. Similarly, in disposing of I. T. A. No. 507 (Coch) of 1982, which is the subject-matter of Income Tax Reference No. 23 of 1990, the Appellate Tribunal again followed the common order passed in I. T. A. Nos. 243 to 248/Coch of 1977-78 dated March 31, 1982. Since we have held that, in passing the common appellate order in I. T. A. Nos. 243 to 248/Coch of 1977-78 dated March 31, 1982, the Appellate Tribunal has failed to pose the proper question from a proper angle or perspective and has also directed the Appellate Tribunal to dispose of the appeals afresh, the proper course, in the circumstances, would be to decline to answer the questions referred to this court by the Income Tax Appellate Tribunal in Income Tax References Nos. 481 and 482 of 1985 and also in Income Tax Reference No. 23 of 1990. We decline to answer the questions in these referred cases as well, but at the same time, direct the Income Tax Appellate Tribunal to restore the concerned appeals to file and consider the matter afresh in accordance with law.

The references are disposed of as above.

A copy of this judgment, under the seal of this court and the signature of the Registrar, shall be forwarded to the Income Tax Appellate Tribunal, Cochin Bench.