JUDGMENT
V.K. Singhal, J.
1. The Income-tax Appellate Tribunal has referred the following question of law arising out of its order dated May 23, 1983, in respect of the assessment year 1976-77 under Section 256(1) of the Income-tax Act, 1961 :
“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the absence fee of Rs. 47,428 was not taxable in the hands of the assessee as a revenue receipt and also in further holding that tax paid by the Indian company on behalf of the assessee could not be grossed up and included in the income of the assessee ?”
2. The facts of the case are that the assessee is a non-resident company and it entered into an agreement with an Indian company, Messrs. Instrumentation Ltd., Kota. According to the said agreement, the assessee-company was to send the technicians/employees to India to assist the Indian company in the manufacture of licence products and parts. During the relevant accounting period, Messrs. Instrumentation Ltd. paid to the assessee-company a sum of Rs. 47,428 by way of “absence fee” towards the compensation for the losses incurred by the assessee-company on account of salary to be paid in Japan on the absence of its technicians/employees from Japan. According to the terms of the agreement, the Indian company was to make the payment of the “absence fee” without deduction of any taxes and if any tax became payable in respect of such payments, the same were to be borne by the Indian company. The Inspecting Assistant Commissioner (Assessment) held that the absence fee received by the assessee-company represented income arising to it from a business connection in India and was taxable in its hands under Clause (i) of Sub-section (1) of Section 9 of the Income-tax Act, 1961. It was further held that the tax liability of the assessee on this account which was payable by the Indian company on its behalf was includible in the gross amount and the same was taxable in the hands of the assessee-company. The appeal before the Commissioner of Income-tax (Appeals) was allowed on the ground that it was not the income of the assessee-company but was deemed to be the income of the employees under Section 9(1)(ii) of the Income-tax Act as the assessee-company had not rendered any service in India. The order of the Commissioner of Income-tax (Appeals) was confirmed by the Income-tax Appellate Tribunal.
3. Learned counsel for the Revenue has submitted that the “absence fee” is income in accordance with the provisions of Section 9 of the Income-tax Act.
4. We have considered the arguments of learned counsel for the parties. The provisions of Section 9(1)(i) and (ii) of the Income-tax Act are as under :
“9. (1) The following incomes shall be deemed to accrue or arise in India —
(i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India.
Explanation.–For the purposes of this clause–
(a) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India, shall be only such part of the income as is reasonably attributable to the operations carried out in India ; . . . .
(ii) income which falls under the head ‘Salaries’ if it is earned in India.
Explanation.–For the removal of doubts, it is hereby declared that income of the nature referred to in this clause payable for service rendered in India shall be regarded as income earned in India.”
5. From a perusal of the above provisions, it would be evident that Section 9 creates a legal fiction by which the income is deemed to accrue or arise in India and the condition which has been contemplated is that such income should accrue or arise whether directly or indirectly through or from any business connection in India. In other words, this section is applicable to a situation where the income is actually accruing or arising to a person outside India, but is deemed to accrue in India. Non-residents are not assessable in respect of their incomes which accrue outside India and, therefore, this deeming provision was enacted to make them liable to tax in respect of the income received abroad but through or from any business connection in India.
6. In the assessment order framed by the Inspecting Assistant Commissioner various terms of the agreements have been reproduced from which it is evident that the assessee-company has to assist the Indian company in setting up a plant in any part of the country including Palghat for manufacturing the licence products and/or licence parts (control valves and its accessories) and for this purpose the assessee-company has to supply the information regarding engineering data, technical data and secret processes, information with all the latest techniques and developments and/or benefits of the latest research in respect of the licence products and/or license parts to the extent necessary for manufacture, application, engineering, testing, service and repairs, etc. The technical documents containing know-how were required to be delivered by the Japanese company to the Indian company at Tokyo or elsewhere in Japan. The assessee-company has also to train the technicians of the Indian company in Japan so that the Indian company’s employees may acquire the necessary know-how for the manufacture of the machinery on the basis of the technical documents supplied by the assessee-company, and the direct labour costs incurred by the assessee-company in preparing for and conducting courses of instructions and practical training are covered by the lump sum payment made by the Indian company pursuant to Article 4 of the agreement. It has also been agreed that the assessee-company will send engineers and trained employees to India to assist the Indian company in the manufacture/servicing of the licence products and licence parts. It is this part-of the agreement which is the subject-matter of the dispute in respect of which the Indian company has remitted a sum of Rs. 47,428 to the assessee-company being the “absence fee” for the service rendered by its two technicians in India. The two technicians were in India during the period from September 27, 1975, to December 20, 1975, and the amount paid to the assessee-company as “absence fee” in respect of these two technicians was considered by the assessing authority as income under the provisions of Section 9(1) of the Income-tax Act In appeal, the order passed by the Inspecting Assistant Commissioner (Assessment) was set aside and it was held that the amount which has been paid by the Indian company may be deemed to have been paid to the employees under the provisions of Section 9(1)(ii) of the Income-tax Act and as such it is not the income of the assessee-company. The relevant clauses of agreement are as under :
“A. Subject to its own requirements of the personnel referred to below, YH shall depute trained employees to the Republic of India to assist IL in the manufacture and servicing of any licence products and/ or license parts involving a period of stay to a maximum of 100 man-months. YH will send its employees to IL at IL’s expense as and when requested by IL on such terms and conditions set forth hereunder :
Employees of YH so sent to the Republic of India shall at all times while engaged in such services in the Republic of India remain employees of YH, but while on the property of IL or a third party, shall be subject to reasonable rules and regulations made by IL or such third party.
B. IL recognises that the lump sum payment made by IL to YH pursuant to Article 4 of this agreement does not cover whatever expenses that may be incurred by YH in sending its trained employees to the Republic of India and agree to reimburse YH the following :
1. Travelling expenses (from Tokyo International Airport to Tokyo International Airport) ;
Air Flight Ticket
__
Tourist class travel to be performed by Air
India whenever possible.
Railway
__
Fastest Train’s first class ACC.
Others
__
Actual cost.
2. Throughout the duration of the stay of YH employee in the Republic of India IL shall provide him with free furnished accommodation of appropriate quality and free transport.
3. Living expenses to the employees at the rate of Rs. 3,500 per month.
4. Absence fee to be paid to YH (salary to be paid in Japan for losses to YH due to employee’s absence) at the rate of free Yen 3,00,000 per month and a proportionate part thereof for a proportionate part of man-month. Such absence fee shall be computed from the time YH employee leaves Tokyo until such time as he returns to Tokyo.
5. IL shall bear and pay all costs, charges and expenses whatsoever including travel, hotel expenses and the like while YH employee is required to travel on duty in the Republic of India.
6. IL agrees that the payment of the above-mentioned expenses will be made to YH within thirty (30) days after receipt of debit note from YH. IL also agrees that it will provide to YH employees sent to the Republic of India reasonable amenities such as use of office space and equipment, transportation, normal office and secretarial assistance.
D. IL shall hold YH free and harmless from and against any and all claims, actions and costs of any kind whatsoever, which may be made by, on behalf of, or against any of the personnel of YH deputed to IL hereunder for compensation or damages by reason of any accident, injury or other lawful act of commission or omission on his part suffered to, or caused or committed by, such YH personnel while in the course of his duties in the Republic of India.”
7. In Carborandum Co. v. CIT [1977] 108 ITR 335 (SC), it was held that (at page 344) :
“The American company had made the services of the foreign personnel available to the Indian company outside the taxable territory. The latter took them as their employees, paid their salary and they worked under the direct control of the Indian company. The service rendered by the American company in that connection was wholly and solely rendered in the foreign territory. Even assuming, however, that there was any business connection between the earning of the income in the shape of the technical fee by the American company and the affairs of the Indian company yet no part of the activity or operation could be said to have been carried on by the American company in India.”
8. In Bharat Heavy Plate and Vessels Ltd. v. Addl. CIT [1979] 119 ITR 986 (AP), the decision of the apex court in the case of Carborandum Co, [1977] 108 ITR 335 was considered and it was found that the services rendered by the American company were wholly and solely rendered in the foreign territory and, therefore, it was held by the apex court that the technical service fee received by the non-resident company from the Indian company did not accrue or arise in India. In the case of Bharat Heavy Plate and Vessels Ltd. [1979] 119 ITR 986 (AP), the non-resident company had made the services of the foreign personnel available to the Indian company within the taxable territory. The assessee did not take the foreign personnel as their employees nor were they paid any salary by the Indian company. The personnel worked not merely under the control of the assessee-company and the terms of the agreement would show that both the assessee and the non-resident company had control over the personnel. Both the companies had the authority to change the composition and the number. In the present case also, the foreign company was to send its trained employees to India. The employee so sent was not to be considered as employee of the Indian company and hence the decision of the case of Carborandum Co, [1977] 108 ITR 335 (SC) is not applicable. In N. Sciandra v. CIT [1979] 118 ITR 675, the Calcutta High Court found that the agreement provided that all payments had to be made by the Corporation to the Italian company and the Corporation had to pay to Ansaldo a stipulated amount on account of the services of the assessee. Apart from that, the Tribunal had not found that there was a relationship of employer and employee between the assessee and the Corporation. The certificate issued by the Corporation does not specifically state that the assessee is an employee of the Corporation. All that it states is that the assessee had been engaged by the Corporation. The certificate does not also record by whom the remuneration is payable to the assessee. No deduction on account of the salary payable to the assessee-was made by the Corporation nor did the Income-tax Officer at any time ask the Corporation to explain why such deduction was not made. In these premises, it was held that a relationship of employer and employee was not established between the said Corporation and the assessee. From the facts of the aforesaid case, it would be evident that the assessment was sought to be made on the employee who has worked in India which is not the case in the present matter. The amount which has been paid to the assessee was on account of business connection. The various clauses of the agreement between the two companies were discussed in detail by the assessing authority and it cannot be denied that the relationship between the two companies was business relation and the amount which has been paid by the Indian company to the assessee-company was on account of business connection. The amount which has been paid by the Indian company to the assessee-company cannot be considered to be the salary paid to the two technicians. There was no relationship of employer and employee and the technicians were on deputation on behalf of the assessee-company. In the order of the Commissioner of Income-tax (Appeals) which has been upheld by the Income-tax Appellate Tribunal, it has been held that the services could be rendered by the company itself through its employees and if the employees have been sent on deputation it could be said that the services were rendered by the company itself. As it has been found that the payment has been made by the Indian company on account of business connection and the corresponding expenditure cannot be claimed by the assessee-company since the same could be claimed in the assessment to be made in Japan, those deductions are not allowable in India. The “absence fee” is in the nature of reimbursement or compensation of the amount which the assessee may be required to pay to its employees in Japan. It is not the exact amount which the assessee is paying by way of salary to its employees but the amount fixed under the agreement irrespective of the actual payment and, therefore, so far as the assessee-company is concerned, it will be deemed to be income in the hands of the assessee-company liable to be included in the total income for the purpose of taxation. The assessee-company has not made the payment in India and, therefore, the expenditure could ‘not be allowed.
9. In these circumstances, we are of the opinion that the Income-tax Appellate Tribunal was not justified in holding that the absence fee of Rs. 47,428 was not taxable in the hands of assessee and also further holding that the absence fee paid by the Indian company could not be grossed up and included in the income of the assessee. It cannot also be considered that the assessee-company was a trustee in receiving the amount on behalf of its employees. The tax which has been paid by the Indian company has, therefore, to be added to the amount of absence fee.
10. The reference is answered in favour of the Revenue and against the assessee. No order as to costs.