ORDER
S.N. Rotho, Accountant Member
1. These two appeals, one filed by the assessee and the other filed by the department, are heard together and disposed of by this common order for the sake of convenience.
2. Both these appeals are directed against the common order dated 1-12-1982 of the Commissioner (Appeals) so far as it relates to his Tncome-tax Appeal No. 64 (Ori.) of 1981-82 only. It. is this appeal that deals with the order under Section 195 of the Income-tax Act, 1961 (‘the Act’) passed by the assessing officer in respect of Mr. S.C. Czerniak and Mr. E.D. Porter. In these two appeals we are concerned only with that order of the assessing officer and the corresponding appellate order.
3. The assessee-company had entered into a technical collaboration agree ment on 18-1-1979 with Ferro Corporation of USA. Under this agree ment, the assessee had to make certain payments to the foreign company in respect of the visits of the aforesaid two persons during their visit to India. The payments made to these two persons amounted to US dollars 8,392. The assessee-company made a petition dated 27-3-1981 under Section 195(2) to the assessing officer requesting to determine the appro priate proportion of the aforesaid sum that would be chargeable under the Act. In course of hearing before the assessing officer, it was urged on behalf of the assessee that the aforesaid payments were not charge able to tax under the Act at all because of the provisions of Section 10(6)(vi) of the Act. The assessing officer did not agree with the conten tion of the assessee. He observed that the agreement dated 18-1-1979 is a composite one and the payment of US dollar 8,392 referred to above was envisaged and paid under the said agreement. The agreement also says that payment can be made to the foreign company direct or at its option to its employees. The aforesaid payment was made in accordance with the option exercised by the foreign company as contained in its letter dated 9-3-1981 addressed to the assessee. He also found that the foreign company was under an obligation to send those persons in con nection with the rendering of the service under the agreement arising out of the aforesaid contract between the foreign company and the assessee. In other words, the aforesaid payments were made by the assessee to those persons not because of any employer-employee relationship between the assessee and those persons or between the foreign company and those persons. The payments were made solely because of the contractual obligation of the assesee to pay the amount envisaged under the contract to the persons nominated by the foreign company. In this view of the matter, the assessing officer held that the entire payment formed a part of the consideration for rendering the technical services under the aforesaid agreement. Consequently, he held that the aforesaid sum of US dollars 8,392 represented technical fees received by the foreign company through its nominees and directed the assessee to deduct tax at 40 per cent thereof in accordance with the provisions of Section 115A of the Act.
4. The assessee appealed to the Commissioner (Appeals) and contended that the order of the assessing officer was erroneous. The Commissioner (Appeals), however, agreed with the assessing officer that the claim of the assessee to the effect that the entire payment is exempt from tax was not acceptable. However, he directed that the air fare and other incidental char ges paid to the aforesaid persons were not a part of technical fees. Conse quently, he directed the assessing officer to reduce the taxable income by the amount of the air fare and other incidental charges.
5. Aggrieved by the above order of the Commissioner (Appeals) both the assessee and the department are in appeal before us. Shri B.K. Mohanty, the learned representative for the assessee, urged before us that the action of the revenue authorities was wrong. He stated that no amount of the payment to the aforesaid two persons was liable to tax in India. He pointed out that the payment made to the aforesaid two persons was over and above the lump sum US dollars 1.5 lakhs but they were paid for services rendered in India. Hence, he urged that they represented salary in accordance with the Explanation to Section 9(1)(ii) of the Act. Next, he referred to Section 10(6)(vi) and urged that the amounts received in the hands of the aforesaid two persons were exempt under that section. He referred to the decision in the case of CIT v. J. Jenkin Thomas [1975] 101 ITR 511 (Mad.) for the proposition that the salary can be paid either by the employer direct or even by a third party. Hence, he urged that no part of the aforesaid payment was liable to tax and the orders of the revenue authorities should have been to that effect. Coming to the departmental appeal, he urged that the air fare and the incidental charges were mere reimbursement of expenses already incurred in order to earn the income and so they have rightly been held by the Commissioner (Appeals) as not taxable under the Act.
6. On the other hand, Mr. B. Mishra, the learned representative for the department, not only supported the order of the Commissioner (Appeals) but also urged that the Commissioner (Appeals) erred in directing to reduce the aforesaid payment by the amount of air fare and incidental charges. He stated that the decision in the case of J. Jenkin Thomas (supra) was concerned with the income under the head ‘Salaries’ whereas the case of the department in the present case is that the payment made by the assessee to the aforesaid two persons was not salary. The amount paid was under the agreement as directed by the foreign company and it was paid wholly as consideration for the technical services rendered by the foreign company. It is true, he contended, that the payments were made to the aforesaid two persons while they were in India; but that was done at the express written instructions of the foreign company as contained in its letter dated 9-3-1981. In other words, the payments were made to the foreign company constructively through its agents. They were not salaries because there was no employer-employee relation between the recipients and the assessee-company. He stated that those persons might have been remunerated at their usual rates by the foreign company which may not have any relation to the amounts paid to them. The amounts stated in the agreement were merely a measure of the amount to be paid not for the rendering the services by the visitors but for rendering the technical services by the foreign company through the visitors. In this view of the matter, he urged that the entire payment made under the agreement partook the nature of technical fees under the contract and so the whole of it became taxable at the rate specified under Section 115A.
7. We have considered the contentions of both the parties as well as the facts on record. As stated earlier, the present appeals relate to an order under Section 195(2) passed by the assessing officer against which an appeal has been provided for in Section 248 of the Act. The question that is raised in these appeals is as to whether the aforesaid payments are liable to tax, either wholly or in part, under the Act. We have gone through the agreement dated 18-1-1979. The preamble of the agreement as well as Clause 2 of the agreement clearly show that it is a technical collaboration agreement. The foreign company is to provide the technical know-how for the production of crude silicon carbide by use of electric furnaces. Clause 3 of the agreement says that the lump sum consideration payable by the assessee was US dollars 1.5 lakhs. Over and above the said payment, the assessee-company can request for certain services to be rendered at its factory site in India. This contingency is envisaged and provided for in Clause 8 of the agreement. This clause says that if the request of the assessee is accepted by the foreign company and if any person is to render services on the spot, then the Indian company will pay additional amount at the rate of US dollars 280 per day and all other incidental expenses and air fare. It is, therefore, clear that the entire payment made under Clause 8 of the agreement was a part of the amounts payable under the agreement. The payment made under Clause 8 is in addition to (and not a part of) the lump sum payment of US dollars 1.5 lakhs. Hence, the entire payment made to the two persons in question, including the air fare and incidental charges, is, in our opinion, nothing but payment made under the technical collaboration agreement amounting to technical fees. We find force in the arguments raised for the department that these payments were not salary because these payments were not made to the two persons for the services rendered by them for their own benefit. In other words, the visitors were not acting independently but they were acting merely as agents of the foreign company. If they are employees of the foreign company, then they would be paid salary at the rate agreed upon between themselves and the foreign company. The amount mentioned in the agreement, in fact, represents the consideration for rendering technical services by the foreign company and this is only a measure of the amount to be paid by the assessee. Once we come to the conclusion that the payments are not salary, then the Explanation under Section 9(1)(ii) does not come into play at all. The definition of ‘technical fees’ given in Explanation 2 to Section 9(1)(vii) also supports this conclusion. Any amount paid for rendering managerial, technical or consultancy services has been defined to be technical fees. One of the exceptions is the amount paid which becomes chargeable under the head ‘Salaries’ in the hands of the recipient. We have already held that the amount is not chargeable as salary in the hands of the recipients because they acted as conduit pipes or mere agents and the amounts were constructively received by the principal, because of Clause 8(b) read with the letter dated 9-3-1981 of the foreign company. Hence, we come to the conclusion that the entire sum of US dollars 8,392 was liable to tax under the Act at the rate of 40 per cent as laid down in Section 115A. In this connection, we may state that at first sight, it appears that the air fare and incidental charges are non-taxable. But it is not so, if one remembers Section 44D of the Act. This section clearly says that no deduction in respect of expenditure or allowance shall be allowed in computing the income by way of technical fees. It is not necessary to state the reason for this enactment ; but it appears to us that the deduction is denied because of the lower rate of 40 per cent prescribed under Section 115A in place of maximum rate applicable to the non-residents which was operative earlier to the amendment. Be that as it may, we hold that the assessing officer was quite correct in his decision, and so we vacate the order of the Commissioner (Appeals) and restore that of the assessing officer. We wish to make it clear that our finding in these appeals concerns only the order under Section 195(2) relating to collection of tax, and this order will not stand in the way of considering matters concerned in the direct assessments of the foreign company or the aforesaid two visitors under the Act.
8. In the result, the assessee’s appeal is dismissed while the departmental appeal is allowed.