ORDER
CH. G. KRISHNAMURTHY, PRESIDENT :
The assessed in these three appeals is M/s. Escorts Ltd., New Delhi. For the purpose of erection and commission of Heavy Vertical Digit race Die/Sinking/Copy Milling Machine, it applied to and obtained the approval of the Government of India to the payment of 8500 U. S. Dollars to M/s. Rambaudi Industrial, Italy as charges for the erecting of the above machine. The Italian Company has to depute two technicians for the purpose of erection for a period of 7 days and the above amount was the fees fixed. The assessed-company will have to bear the expenses on account of to and fro air fare, accommodation, local transport in India in Indian rupees. The assessed-company is also to bear all the applicable taxes in India on the above payment. This was the permission conveyed to the assessed by the Ministry of Industries, Department of Industrial Development, Government of India by its letter dt. 23rd Sept., 1987. It also obtained the approval of the Reserve Bank of India for the engagement of the services of the abovementioned foreign technicians. While granting the permission by letter dt. 26th Sept., 1987 the Reserve Bank of India made it clear that the grant of approval was not to be construed as exemption from payment of income-tax. It was described as expatriates passage charges. Sec. 10(6A) of the IT Act provided that in the case of a foreign company deriving income by way of royalty or fees for technical services received from Government or an India concern in pursuance of an agreement made by the foreign company with Government or the Indian concern after the 31st day of March, 1976 and approved by the Central Government, the tax payable on such income is determined by S. 115A(i)(ii) of the IT Act at 30% i.e., S. 115A r/w S. 10(6A) determines the rate of tax payable on the royalties or fees for technical services received by a foreign company from the Government of India or an Indian concern under an agreement approved by the Government of India at 30%. The fees payable in the assesseds case to the foreign technicians was considered by it as fees for technical services and on that assumption tax calculated at 30% on 8500 US Dollars was paid on 18th Jan., 1988 vide challan dt. 18th Jan., 1988, which worked out to Rs. 33,380. It then applied on 20th Jan., 1988 to the IAC (Asst.) Central Range II, New Delhi for the issue of a No objection certificate for the remittance of 8500 US Dollars to the Italian company by enclosing the relevant documents along with the challan in evidence of the payment of tax at 30%. It is to be noted here that S. 10(6A) will apply to such payments of royalty or fees for technical services, which are governed by an agreement made by the foreign company with the Government of India and approved by the Government of India after 31st March, 1976. In the assesseds case there is no such agreement except the letters of approval issued by the Government in the Ministry of Industries and the Reserve Bank of India. The assessed-company construed these approvals as amounting to agreement referred to in S. 10(6A) of the IT Act. On or about 23rd Feb., 1988 the IAC (Asst.) to whom the application for the issue of a no objection certificate was made requested the assessed to file a copy of the agreement entered into with the foreign company, in response to which the assessed-company furnished a copy of the approvals, etc., without specifically mentioning that there was no agreement entered into with the foreign company. On 21st March, 1988 the assessed-company deposited a further sum equivalent to 1093 US Dollars being additional tax in respect of the remittance under reference without applying the provisions of S. 10(6A) and requested the IAC (Asst.) to issue the necessary no objection certificate reiterating its opinion that the arrangement entered into with the foreign company with the help of the letters of approvals amounted to entering into agreement with them and the agreement referred to in S. 10(6A) should not necessarily mean a formal written agreement. Thereafter the Dy. CIT (Asst.) by his order dt. 16th May, 1988 passed under S. 195 held that the sum of 8500 US Dollars could not be taken as fee for technical services to be taxed at the rate of 30% only and that the said payment was of the nature of other payments and that the tax to be deducted thereon should be as per the provisions of Finance Act of 1988 which means 65% and required the assessed to deduct tax at 65%. He also pointed out that the rupee equivalent to 8500 US Dollars is to be taken as net of tax and, therefore, the gross amount was to be taken as income of the foreign company M/s. Rambaudi Industrial and that the gross amount of income after grossing up would work out to rupee equivalent to 26,772 US Dollars and the tax payable thereon at 65% would work out to rupee equivalent to 18,272 US Dollars and if that amount was deposited with the Government, the no objection certificate would be issued. By this order the contention of the assessed that to these payments the provisions of S. 10(6A) would apply was rejected.
2. It may be mentioned here that under S. 195 any person responsible for paying to a non-resident, any interest on securities or any other sum chargeable under the provisions of the IT Act not being salaries shall at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or a draft or by any other mode, deduct income-tax thereon at the rates in force. Sub-s. (2) of S. 195 provided that where the person responsible for paying any such sum to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the Assessing Officer to determine by general or special order the appropriate proportion of such sum so chargeable and upon such determination the tax shall be deducted only on that proportion of such sum, which is so chargeable. It is under this section that the application was made to the IAC(Asst.) for the issue of a no objection certificate on the view that the tax payable on 8500 US Dollars was only 30%, which request was rejected by the Dy. CIT (Asst.) by the order passed under S. 195.
3. Sec. 248 of the IT Act provided for an appeal to the CIT(A) against the order passed under S. 195. However, the assessed did not prefer any appeal against this order to the CIT(A) instead it filed an application on 28th May, 1988 before the Dy. CIT (Asst.) under S. 154 urging that the tax at 65% payable on the 8500 US Dollars should only be on the income component that was embedded in the sum of 8500 US Dollars. In other words the assessed-company accepted the view of the Department that to this payment the provisions of S. 115A r/w S. 10(6A) would not apply and that the sum in question was not fee for technical services or royalty and that it represented other income, on which the tax payable was at the rate of 65%. But what it contended was that 8500 US Dollars was not the gross income but there were some expenses to be incurred thereon and the tax should be levied only on the net income and to arrive at that net income, some expenses on estimate basis should be deducted from 8500 US Dollars. For the purpose of estimate of the expenditure, the provisions of r. 10 of the IT Rules were invoked. It also pointed out that surcharge at 5% was not payable in respect of the tax on remittances to a non-resident company. It pointed out that these discrepancies as they were apparent from the records of the case should be rectified under S. 154. This application made under S. 154 was not accepted by the Dy. CIT (Asst.) and by an order passed on 29th June, 1988 the plea made on behalf of the assessed-company was rejected except to the extent of cancellation of the levy of surcharge at 5%. The Dy. CIT (Asst.) pointed out in his order that r. 10 of the IT Rules would apply to determination of income from transactions with non-resident and in any case it was not a mistake apparent from the record and also pointed out that the assessed-company has failed to furnish any material to show what could be the expenditure that could be incurred or was incurred out of 8500 US Dollars. Now peculiarly enough the controversy between the assessed and the Department was reduced to whether the fee of 8500 US Dollars for the purpose of levy of tax at 65% should be taken as gross income or any expenditure should be allowed there from and all the other controversies referred to earlier were dissolved. We have mentioned in great detail about this controversy only to appreciate the background in which the claim of the assessed was made.
4. Against this order under S. 154 an appeal was filed before the CIT(A), however, raising a ground that the Dy. CIT (Asst.) had erred in holding that the payment in this case was not in the nature of fee for technical services and that it should be taxable under the head other income. The CIT(A) rejected this ground by observing :
“I have carefully considered the matter. The main issue raised by the learned counsel is as to whether the remittance made by the foreign party is of the nature of “Fee for technical services” or “other income”. This issue, to my mind, is clearly beyond the scope and ambit of “mistake apparent from record”. Sec. 154 has a limited jurisdiction and can be invoked for setting right glaring or flagrant mistakes which stare one from the face of the records. It would not cover mistakes which can be established by a long drawn process of reasoning or about which two conceivable opinions can possibly be canvassed. In the instant case, I see no discrepancy or mistake in the order of the D. C. (Asst.) passed under S. 195 which needs rectification under S. 154. This appeal is, therefore, in any case without any merit and is hereby dismissed.”
5. It is against this order that the present appeals are filed contending that the CIT(A) was not justified in holding that the order passed by the Dy. CIT (Asst.) under S. 195 was not rectifiable under S. 154 and that in any case the amount payable in this case was not in the nature of fees for technical services. Shri O. P. Vaish appearing for the assessed had some difficulty in maintaining this position before us for long. He eventually gave up this point for the reason that whether the amount in question should be regarded as fees for technical services or other income is a matter of dispute and matters involving dispute for the determination of the correctness of an issue are not amenable to rectification under S. 154. Now we are only left with the question whether the amount of 8500 US Dollars should be taken as gross income or net income for the purpose of taxation at 65%. While Shri O. P. Vaish contended that it should be only net income that is liable to tax as under the scheme of the IT Act gross income was never to be taxed, the Departmental Representative contended that as no application under S. 195(2) was made, the assessed was not at all aggrieved and consequently no appeal lay against such an order. He also pointed out that the request of the assessed was that the expenditure should be estimated on the basis of r. 10 of the IT Rules, which is totally inapplicable. Shri O. P. Vaish, however, got out of this initial hurdle thrown in his way by the Departmental Representative by pointing out that an application under S. 195(2) was made and that it is only response to that, that an order under S. 195 was passed by the Dy. CIT (Asst.) and it was to rectify that order that an application under S. 154 was made and, therefore, this objection made by the Departmental Representative was not maintainable at all. To this contention the contention of the Departmental Representative was that even when an opportunity was given to the assessed to show the extent of expenditure incurred, or could be incurred and when that opportunity was not availed the assessed cannot lay the blame at the door of the Department, to which the reply of the learned counsel for the assessed was that no opportunity was ever given and that the assessed came to know about this aspect of the matter only when it received the order passed under S. 195. There was also some contest as to whether the tax was paid or not but finally it was resolved in favor of the assessed when it was shown that there was evidence that the tax was deducted at 30% and the challan was enclosed even along with the application made before the Dy. Commissioner (Asst.) for the issue of a no objection certificate. Another objection that arose was whether when the assessed agreed to pay the tax at 30%, could it be said that the assessed was denying its liability in toto, which appeared to be the purport of S. 195. But this point was overcome by placing reliance upon a decision of the Supreme Court in the case of CIT vs. Wesman Engg. Co. P. Ltd. (1991) 188 ITR 327 (SC) where the Supreme Court pointed out that the expression “denying the liability” would include even a case of partial denial i.e., even when the rate of tax was objected to and it does not necessarily mean total denial of liability.
6. Having resolved all these disputes, points and counter points, we are left with only one issue as to whether the rate of tax of 65% should be charged on the gross income or net income and what are the materials available to determine the net income. Under the Income-tax law, the income liable to tax has always to be computed in accordance with the various provisions laid down in that behalf in the Act and it is to that income that the rates of tax laid down in the Finance Act have to be applied. There is no denying of this proposition and it is axiomatic. That was the reason why in the IT Act definitions are provided for the meaning of the expressions gross total income and total income because there is vital difference between the gross total income and total income also. While S. 2(24) defines income as including various items mentioned therein, the IT Act envisaged the need for the definition of the total income and it provided in S. 2(24) the definition of the word total income as “total income means the total amount of income referred to in S. 5 computed in the manner laid down in this Act”. Thus the total income is that income which is computed in the manner laid down in the Act and referred to in S. 5 of the IT Act. Unless the income is computed in the manner laid down in the Act, the income cannot be termed as total income. The IT Act envisaged certain deductions to be made in computing the total income and those deductions are referred to in a separate Chapter VIA. Sec. 80A of the IT Act provided that in computing the total income of an assessed there should be allowed from his gross total income in accordance with and subject to the provisions of this chapter the deductions specified in Ss. 80C to 80U. At the same time it also provided that the aggregate amount of the deductions under this Chapter shall not in any case exceed the gross total income of the assessed. It, therefore, became necessary to define the meaning of the expression gross total income and that definition was provided in S. 80B(5) of the IT Act, which lays down :
“Gross total income” means the total income computed in accordance with the provisions of this Act, before making any deduction under this Chapter.”
Thus we have definitions for the meaning of the expressions “total income” and “gross total income” both of them have to be computed in the manner laid down in the Act according to the provisions made therefore. Sec. 2(37A) provided the definition of the rate of tax for the purpose of deduction under S. 195 as the rates or rate of income-tax specified in S. 115A or the rate or the rates of income-tax specified in this behalf in the Finance Act of the relevant year, whichever is applicable. Thus we have the statutory injunction to arrive at the total income, which is to be computed in the manner laid down in the IT Act and the definition of the rate or rates of tax for the purpose of deduction under S. 195. When S. 195 provided that the rate or rates of income-tax specified shall be the rate specified in this behalf in the Finance Act of the relevant year, we have necessarily to go to the Finance Act to find out the rate of income-tax. In Paragraph E rates of income-tax applicable to domestic companies are provided. Part II of the Finance Act provided the rates of deduction of tax at source in certain cases and the opening paragraph of Part II provided as under :
“In every case in which under the provisions of Ss. 193, 194, 194A, 194B, 194BB, 194D and 195 of the IT Act, tax is to be deducted at the rates in force, deduction shall be made from the income subject to deduction at the following rates :”
In cl. 2(a) the rates in the case of a domestic company are provided and it says in last sub-cl. (ix) “on any other income : 65%”. So the tax to be deducted on any other income is thus specified by the Finance Act at 65%. When it referred to income, it must necessarily, in our opinion, mean the total income and the total income must necessarily mean total income as computed under the provisions of the IT Act, which means not the gross total income but the net income. It may be that in several cases the gross total income may be the net income. It is equally possible that in certain cases there are certain obvious expenditure to be incurred to arrive at the net income. We do not wish to refer to any examples because they can be multiplied. A careful reading of sub-s. (2) of S. 195 provides a clue that the income referred to in S. 195 can only mean net income and not gross income because it provided that where the person responsible for paying any sum to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the Assessing Officer to determine the appropriate proportion of such sum so chargeable and upon such determination, tax shall be deducted under sub-s. (1) only on that portion of the sum which is so chargeable. This means that if the person responsible for paying any sum considers that the whole of it is not liable to tax and only a part of it is liable to tax, then he can ask the ITO to determine the appropriate proportion of such sum, so that the tax can be deducted only on that portion of the sum. This clearly means that the whole of such sum is never contemplated to be the sum liable to tax and a portion of it can always be exempt from tax or liable to such deductions as are to be determined and only a part of it could be liable to tax. This is possible only when a portion of the sum chargeable is not liable to tax. Income “not liable to tax” can only arise when there is allowable expenditure against the gross income or when a portion of the income is not otherwise liable to tax. The proportion of the income liable to tax is, therefore required to be determined by the ITO at the instance of the person responsible to pay the income chargeable to tax. This responsibility is statutorily cast upon the Assessing Officer and against his decision in order that it is in conformity with the law, an appeal is provided. This is a sort of presumptive assessment. Thus when S. 195(2) clearly provided for the determination of the sum on which tax has to be deducted, it cannot be said that the rate of tax is still applicable only on the gross income. Of course it is always a matter of proof and evidence as to what is the expenditure that is to be allowed from the gross income. That depends upon the nature of proof that the assessed adduces to determine the net income. The sub-section thus enables an assessed to make an application to determine the proportion of the income liable for the deduction of tax and casts a duty upon the Assessing Officer to determine by an order appropriate proportion of such sum so chargeable when the assessed applies for it. The gross income must be modified depending upon the proof produced by the assessed. If this is clear the question would then be about what is the nature of the proof that the assessed could offer. At this juncture we are invited to read that portion of the order of the Dy. CIT(Asst.) where he has mentioned that the assessed has not, inspite of opportunities, produced material about the expenditure incurred. But Shri O. P. Vaish denied any such opportunity being given and made a statement to that effect at the Bard Barring the mention in the order, no proof is available to buttress the assertion.
7. Since it is now shown that if upon production of material, the expenditure incurred is to be ascertained and deducted from the gross income and the rate of tax of 65% is to be applied only on such net income and since the grant of opportunity was denied, we think it is fair and proper in the circumstances of the case to remit the case back to the Dy. CIT (Asst.) and direct him to allow the assessed an opportunity to adduce evidence about the expenditure incurred or likely to be incurred for deduction from the gross income and then to apply the rate of 65% only to such net income as arrived at. This process is permissible under S. 195 and can be enforced through an application under S. 154, if there was failure, to do so. No debate is involved to arrive at the answer that it is the net income on which the rate of tax is to be applied although several points were raised to contest this proposition of law which is patent and clear from the provisions of S. 195(2) of the IT Act.
8. In the result, we direct the Dy. CIT (Asst.) to modify the assessments accordingly and in the light of our earlier observations, we are not going into the question as to the nature of the gross income.
9. In the result, the appeals are allowed in part.