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Judgment
K. P. Radhakrishna Menon, J.—The assessment years we are concerned with are 1971-72, 1972-73, 1973-74 and 1974-75. The two assesses involved in the assessment proceedings are individuals who are not citizens of India. They, at the relevant time, were the employees of one company in Italy by name ANSALDO. ANSALDO had entered into a collaboration agreement with the Fertilizers and Chemicals Travancore Ltd., for short "FACT", a Government of India undertaking incorporated under the Companies Act, 1956, for the construction of an ammonia plant. During the pendency of this collaboration agreement, another Italian company by name Societa Italiana Impianti (hereinafter called "SII") succeeded to the business and interest of ANSALDO. The assessees thereupon became the employees of SII and this succession to the business and interest of ANSALDO by SII was recognised by the FACT.
As per Clause 3.19 of the agreement, SII shall make available at the plant site competent technicians and manufactures'' specialist erectors for supervision of site fabrication and erection and commissioning of such major equipment/machinery as may be mutually agreed upon. Consistent with this clause, the assessees were deputed by SII to do the work. By Clause 4.2, the FACT has to pay SII at the rates given in exhibit 2 attached thereto for each day of absence of the assessees from their usual place of work in Italy for getting themselves engaged in the work the company had undertaken in connection with the installation of the ammonia plant for the FACT. As regards the liability for tax, it is provided thus in Clause 5.1 of the agreement :
"It is understood that all prices and fees mentioned in Article 4 and subsequent prices and fees mutually agreed upon are and shall be free of any taxes and/or levies of any kind, that may be levied by any Indian authority in respect of ANSALDO''s activity and/or profits arising or accruing in or out of India as a result of the performance of ANSALDO''s supplies and services under the CONTRACT, including any such taxes and/or levies of any kind that may be levied on the income of the foreign personnel assigned to the project in India."
As per a specific provision in the collaboration agreement, the FACT had paid these assessees certain amounts directly. These are daily allowances. Apart from these payments, the FACT has to remit certain amounts direct to ANSALDO in terms of clause 3.19 of the agreement. In the returns filed by the assessees, they admitted only the amounts received by them directly from FACT, representing their daily allowances. They had included the "perquisite values" in respect of rent-free quarters in Part IV of the return and claimed exemption. The assessing authority, after considering the various aspects of the matter came to the conclusion that the exemption claimed by the assessees is not tenable. He, accordingly, found that the payments made by FACT represent the remuneration the assessees received for the services they rendered in India. In support of this finding, he made reference to the letter dated March 14, 1972 of SII to FACT wherein it had been stated that 70 per cent. of the payments was intended to cover the social insurance funds, health insurance services, etc. The assessing authority, thereafter, considered whether the assessees are entitled to the tax concession provided for u/s 10(6)(vii) of the Income Tax Act, 1961 (for short "the Act"), and found that the assessees are not entitled to the tax concession as they were found resident in India in one of the four financial years immediately preceding the financial year in which they worked in India.
Aggrieved by the orders of assessment, the assessees filed appeals before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner, in the case of the assessee, Mr. Bozzini, held that only 30 per cent. of the remittances made by FACT to SII would be liable to tax for the assessment year 1971-72. However, for the assessment year 1972-73, the Appellate Assistant Commissioner, a different officer, upheld in toto the Income Tax Officer''s orders on the point of the taxability of the remittances. But, for the assessment year 1973-74, the Appellate Assistant Commissioner held that the entire remittances were not taxable and held that only the amounts certified as salary received by SII is liable to tax. In the case of the other assessee, Eroppino Giovanni, the Appellate Assistant Commissioner held that 30 per cent. of the direct payments during the year 1971-72 would be taxable in India. He also held that the assessee was entitled to the benefit of Section 10(6)(vii). None the less, for the assessment year 1972-73, the Appellate Assistant Commissioner, a different Officer, confirmed the findings of the Income Tax Officer.
Against these orders, both the assessees and the Department filed appeals before the Appellate Tribunal. The Appellate Tribunal, after considering the case of both the assessees and the Department in extenso, entered, inter alia, the following findings :
(a) There is no employer-employee relationship between FACT and the assessees,
(b) The assessees being third parties to the collaboration agreement, cannot enforce their right against FACT and as such they can only look up to SII for any action following a breach of their contract of employment.
(c) The salary payable in Italy and in India as well as the perquisite of it getting tax-free in India is the salary income of the assessees.
(d) The tax on the salary income of the assessees paid by FACT as per the terms of the collaboration agreement is a perquisite within the meaning of Section 17 and hence the same can be assessed in the hands of the assessees as salary income.
(e) So although the fact is that FACT paid the taxes, as far as the assessees are concerned, the payment is by SII, their employer by arrangement with FACT. So the tax paid is by the employer.
Since the payments made by FACT under the contract were treated as perquisites, the Tribunal was of the view that they are liable to be grossed up for the purpose of determining the tax the assessees are liable to pay. The Tribunal, after considering the various methods of grossing up, ultimately found that the method adopted by the Income Tax Officer is the right method. A reference in this connection to the following findings of the Tribunal is profitable :
". ... As a concrete illustration of this type of grossing up, the reported case of Lord Michelham''s Trustees v. C. I. R. [1930] 15 TC 737 (CA) may be turned to page 740 where the grossed up payments are calculated. Because of the difference in law, this method is not applicable to India. So, finally, the position is, the method adopted by the Income Tax Officer is the right method."
Considering the claim of the assessees for the tax exemption provided for u/s 10(6)(vii), the Tribunal came to the conclusion that they are entitled to the same. A reference in this connection to the following excerpt from the statement of case, is relevant :
"The Tribunal found that the other conditions 4, 5 and 7 are also satisfied and so the assessee was entitled to the exemption u/s 10(6)(vii)."
The Tribunal, thereafter, has given certain directions to the assessing authority as regards the quantification of the exemption u/s 10(6)(vii)(ii).
The following question No. 1 at the instance of the Revenue and the other three questions at the instance of the assessee, according to the Appellate Tribunal, arise for consideration. The Appellate Tribunal, accordingly, has referred these questions for our opinion :
"1. Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was correct in law and fact in concluding that the assessee fulfilled the requirements of Section 10(6)(vii) arid that it is not necessary that he should have been continuously in service in India during the 60 months immediately following the expiry of the first 36 months of his first arrival in India in order to be eligible for exemption u/s 10(6)(vii)(a)(ii) ?
Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the method of grossing up adopted by the Income Tax Officer was the correct method?
Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the grossing up should include the amounts receivable in Italy?
Whether, on the facts and in the circumstances of the case, the Tribunal was justified in the finding that the income is assessable u/s 17 as salary income?"
From the facts found by the Tribunal, discernible from the discussion above, it is clear that the assessees are not the employees of FACT ; on the other hand, they continue to be the employees of SII. These findings of fact which remain unchallenged shall be kept in view while one searches for the answer to the questions posed in the case.
We shall now deal with the question referred to us at the instance of the Department. For the answer to be in the affirmative, the assessees shall establish the ingredients enumerated in Section 10(6)(vii). We shall now reproduce the section :
" 10. Incomes not included in total income.--In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included,--. . . .
(6) in the case of an individual who is not a citizen of India,-- . . . .
(vii) the remuneration due to or received by him chargeable under the head "Salaries" for services rendered as a technician in the employment of the Government or of a local authority or of any corporation set up under any special law or in any business carried on in India, if he was not resident in any of the four financial years immediately preceding the financial year in which he arrived in India to the extent mentioned below :
(a) where his contract of service is approved by the Central Government before the commencement of his service or within one year of such commencement,--
(i) in the case of a technician who has special knowledge and experience in industrial or business management techniques, such remuneration due to or received by him during the period of six months commencing from the date of his arrival in India ;
(ii) in the case of any other technician, such remuneration due to or received by him during the thirty-six months commencing from the date of his arrival in India, and where any such person continues .... to remain in employment in India after the expiry of the thirty-six months aforesaid and the tax on his income chargeable under the head ''Salaries'' is paid by the employer to the Central Government (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), the tax so paid by the employer for a period not exceeding sixty months following the expiry of the thirty-six months aforesaid."
This sub-clause which applies to an individual who is not a citizen of India provides: he shall be a technician in the employment (commencing from the day before April 1, 1971) of the Government or of a local authority or of any corporation set up under any special law or in any business carried on in India, he shall not be a resident in any of the four financial years immediately preceding the financial year in which he arrived in India and the remuneration due to or received by him for services rendered shall be chargeable under the head "Salaries". (See clause (a) of Sub-section (6)(vii)). His contract of service should be approved by the Central Government before the commencement of his services or within one year of such commencement. Such foreign technicians will be entitled to the benefit of tax exemption not only during the initial period of thirty-six months but also for the next twenty four months provided their special knowledge and experience is continuously available in India during the said periods. The words "continues to remain in employment in India" in the latter part of the sub-section would make it clear that a foreign technician is entitled to complete exemption even if, within the initial period of thirty-six months, he were to change his employer more than once, however, provided his contracts of employment with such employers during that period have been approved by the Central Government before the commencement of his service with each successive employer. The position would have been different had these expressions been "continues to remain in the same employment in India". This construction, in our view, would achieve the object sought to be achieved by this enactment, namely, to attract and make available to the industries in India the special knowledge and experience of foreign technicians. A non-citizen, non-resident technician, in order to avail of this tax concession, therefore, shall establish the above ingredients of which special mention shall be made to the existence of the relationship of master and servant between himself and the Government/local authority/business organisation which engaged him establishing the contract of service. Let us now see what is the position here. The Tribunal categorically has found that the assessees are not the employees of FACT ; they continue to be the employees of SII. The Tribunal has also held that FACT paid the tax as per the terms of the collaboration agreement to which the assessees are strangers. It cannot, therefore, be said that FACT paid the tax on behalf of the employer. These findings, inasmuch as they have not been challenged by the assessees, have become final. We, therefore, answer the question in the negative and in favour of the Department,
Before we take up questions Nos. 2 and 3, we shall endeavour to formulate our opinion in regard to question No. 4. The facts found by the Tribunal and are relevant in this" connection read : "So, the salary payable in Italy and India as well as the perquisite of getting it tax-free in India is salary income. Section 17 directly covers it". If FACT is the employer of the assessees, FACT is liable to pay tax on the tax paid by it because, as already stated, the same forms part of salary income. The content of Section 17, therefore, is required to be kept in view when we make attempts to get the answer to the question. Section 17 (leaving out the parts which are not relevant here) reads :
" 17. ''Salary '', ''perquisite'' and ''profits in lieu of salary'' defined.-- For the purposes of Sections 15 and 16 and this section,--
(1) ''Salary'' includes,-- .... (iv) any .... perquisites . . . ."
Section 15 (reference to this section is also relevant in the context) makes it clear that no payment can fall to be taxed under this section unless there exists the relationship of employer and employee between the payer and the payee. Merely because the individual is receiving remuneration by virtue of the fact that he is holding an office, it does not necessarily bring about the relationship of master and servant between himself and the person who pays him the remuneration or the relationship of an employer and an employee. It all depends upon the contract under which the individual who receives the remuneration is employed. If it is established that the individual is employed under a contract of service it can be held that there exists the relationship of an employer and an employee. On the other hand, if the individual is engaged to do the work pursuant to a contract for employment, it cannot be said that the payment received by such an individual is a perquisite within the meaning of Section 17. Applying this principle to the case on hand, it can be observed without fear of contradiction that the tax due by the assessees but paid by FACT, though forms part of the remuneration received by the assessees, cannot be charged under the head "Salaries" within the meaning of Section 15. It is profitable in this connection to recall the findings discernible from the order of the Tribunal which has become final as the same stands unchallenged, that the assessees are not the employees of FACT but continue to be the employees of SII. May be that, the same can be charged to tax u/s 14F read with Section 56, "income from other sources". We, therefore, are of the view that the Tribunal erred in treating the tax due by the assessees but paid by FACT (this payment at best can be said to have been made by a third party in that the payment cannot even be said to have been made on behalf of the employer) in terms of the collaboration agreement, as a perquisite within the meaning of Section 17 and hence liable to be charged u/s 15 of the Act. The answer to the fourth question, therefore, shall be in the negative and in favour of the assessees. In the light of this answer, the other two questions, in our view, do not arise for consideration. We, therefore, decline to answer them.
To sum up : The question referred at the instance of the Revenue is answered in the negative and in favour of the Department. The fourth question referred at the instance of the assessees is answered in the negative and in favour of the assessees.
A copy of this judgment under the seal of this court and the signature of the Registrar will be forwarded to the Income Tax Appellate Tribunal, Cochin Bench.