Pace Education (P.) Ltd. vs Inspecting Assistant ...
1989 Latest Caselaw 605 Del

ORDER

Per V. P. Elhence, Judicial Member - The assessed is aggrieved of the order dated 24-2-1987 of the learned Commissioner of Income-tax, Delhi-III, New Delhi for the assessment year 1985-86, passed under section 263 of the Income-tax Act, 1961.

2. The assessed is a company. It moved an application dated 10-11-1985 before the Inspecting Asstt. Commissioner (Asst.) under section 197 for grant of "No Objection Certificate" for remitting an amount of 13,000 US dollars to one Mr. Stephen Blash (an US Expert on Computer Education and an employee of M/s. Yourdon Inc. USA) without deduction of income-tax at source. The details of the amount of 13,000 US dollars were as follow :

(i) Remuneration for lectures for 20 day @ 150 US dollars per day

3000 US dollars

(ii) Courseware Publication charges ....

1000 US dollars

Total ....

13,000 US dollars

The assessed stated before the Inspecting Asstt. Commissioner (Asst.) that Mr. Stephen Blash had been invited to deliver lectures in the Seminar and Workshop organized by the assessed on "Software Project Management and Control and Structures Systems Development" in the field of computer education from August 16, 1985 to September 4, 1985 (20 days). It was that his visit as also the aforesaid programme had been cleared by the concerned Ministries namely, Ministry of External Affairs (Americas Division) and the Department of Electronics (Computer Development Division). According to the assessed, these payments were not taxable in view of section 10(6) (vi) for the Income-tax Act, 1961 as the conditions prescribed there under were satisfied. The IAC (Asst.) recorded an order under section 195(2) on 5-12-1985. The IAC (Asst.) held that the provisions of section 10(6) (vi) were not applicable as the payment was being made to a foreign enterprise and not to an employee of a foreign enterprise for services rendered by him. It was held that Mr. Stephen Blash had not rendered any services in his individual capacity but on being deputed to do so in accordance with the terms and conditions of the agreement dated 1-4-1985 which had been entered into by M/s. Yourdon Inc. USA with the assessed for the rendition of professional services and in due discharge of the liabilities as per that companys bill dated 20-8-1985. The learned IAC (Asst.) referred to certain clauses for the said agreement in that regard. It was held that the payment made to M/s. Yourdon Inc. USA for lectures delivered by their nominee during the Seminar, was covered under the definition "Technical services" under Explanation 2 to section 9(1) (vii). Applying the provisions of section 115A (1) (b) (iii) as applicable for the assessment year in question, it was held that the assessed was liable to deduct tax at source out of the said payment @ 40%. The IAC (Asst.), therefore, held that the agreement dated 1-4-1985 entered between M/s. Yourdon Inc. USA and the assessed company had been approved by the Central Government. The IAC (Asst.) also observed that no objection for the remittance of the balance amount would be granted only after the tax was deducted and paid to the Government account. It has been stated on behalf of the assessed in writing that against the above order no appeal was filed by the assessed before the CIT (A). Such an appeal could be filed under section 248 of the Act, Instead the assessed filed a revision petition before the Commissioner on 16-12-1985 under section 264 which is still pending.

3. The learned Commissioner being prima facie of the view that the aforesaid order of the Inspecting Asstt. Commissioner (Asst.) was erroneous in so far as it was prejudicial to the interests of revenue, issued a notice dated 4-8-1986 to the assessed under section 263. He took the view that the agreement dated 1-4-1985 had not been approved by the Central Government and therefore, the provisions of section 115A (1) (b) (iii) were not applicable. He was of the view that the procedure for approval involved the taking on record of the agreement by the Secretariat of Industrial Approvals under the Ministry of Industry and the grant of approval by the concerned Administrative Ministry (Department of Electronics). He held that the approval granted by the Department of Electronics on 5-7-1985 was for engaging the services of Mr. Stephen Blash of M/s Yourdon Inc. USA and not for the agreement as such. He was also influenced by the fact that it had been clarified in the approval accorded by the Department of Electronics that it was from the technical angle only. The assessed gave a detailed reply dated 8-9-1986 to the said notice. In the said reply it was said that the order of the learned IAC (Asst.) far from being prejudicial to the interests of revenue, was in fact highly prejudicial to the interests of the assessed company, for which reason it had filed a revision petition before the Commissioner under section 264. It was said that no deduction of tax at source was required to be made in relation to the abovementioned remittance. It was said that the said agreement was not acted upon between M/s. Yourdon Inc. USA and the assessed company and instead, the services in question were rendered by an employee of M/s. Yourdon Inc. USA namely by Mr. Stephen Blash. It was reiterated that section 10(6) (vi) was attracted. It was said that services were rendered to the assessed company by Mr. Stephen Blash and M/s. Yourdon Inc. USA was not to receive any payment in respect thereof. Reference was also made in this connection to the Telex massage dated 28-4-1986 from M/s. Yourdon Inc. USA and the certificate therewith to the effect that Mr. Stephen Blash had rendered the services contemplated under the agreement and that the entire remuneration of 13,000 US dollars was to be received by Mr. Stephen Blash in his individual capacity as employee of M/s. Yourdon Inc. USA for services rendered by him. Reliance was also placed on the decision of Appellate Tribunal in the cases of ITO v. Nagarjuna Coated Tubes Ltd. [1986] 16 ITD 393 (Hyd.) and Bhadrachalam Paper Boards Ltd. v. ITO [1986] 16 ITD 680 (Hyd.). In the alternative it was said that in terms of section 115A (1) (b) the agreement dated 1-4-1985 could be said to have been duly approved by the Central Government. It was said that the Secretariat for industrial approvals comes into the picture only where there is a collaboration agreement with the foreign enterprise and not in a case of the present nature. In this connection, reference was also made to an office memorandum dated 23-12-1982 circulated by the Department of Economic Affairs, ministry of finance wherein it has been clarified that administrative ministries will deal with all cases of engagement of foreign technicians/experts for visits of less than 12 months. however, the learned Commissioner took the same view as he had taken in the notice that was issued by him under section 263. He was of the view that M/s. Yourdon Inc. USA was liable to tax in India on the sum of 13,000 US dollars @ 65% + surcharge of 3.25% and not @ 40% as directed by the IAC (Asst.). He, therefore, directed the IAC (Asst.) to amend the order under section 195(2) accordingly.

4. Before us, on behalf of the assessed, the contentions put forward before the IAC (Asst.) as also before the learned Commissioner were reiterated by Shri C. S. Aggarwal, Advocate. He submitted that the order of the learned Commissioner was based on an improper appreciation of the facts of the case and the evidence on the record. On the other hand on behalf of the department Shri Rajendra Kumar, the learned Departmental Representative strongly supported the order of the learned Commissioner. He submitted that there was in existence no agreement other than the agreement date 1-4-1985 between M/s. Yourdon Inc. USA and the assessed company and that there was no correspondence or agreement between the assessed and Mr. Stephen Blash. He also submitted that the assessed was not right in saying that the agreement dated 1-4-1985 had not been acted upon. He submitted that Mr. Stephen Blash was an employee of M/s. Yourdon Inc. USA and that everything flowed from the said agreement. He reiterated that the approval if any, was applied for and taken only for the remittance of 13,000 US dollars to Mr. Stephen Blash.

5. We have considered the rival submissions as also the decisions referred to above. The question whether, in terms of section 263, the order passed by the assessing officer was erroneous in so far as it was prejudicial to the interests of revenue, has to be seen on the basis of the material which existed before such assessing officer. This being the position, it will not be permissible to the assessed to seek to rely on the telex message and the confirmation thereof made by M/s. Yourdon Inc. USA (copies at pages 23 and 28 of the assesseds paper book) received after the passing of the order dated 5-12-1985 of the IAC (Asst.) and during the pendency of the revision under section 264 filled by the assessed on 16-12-1985. The learned Departmental Representative is right in pointing out that there is no correspondence or agreement with Mr. Stephen Blash of the assessed company. The agreement which the assessed company had, was with M/s. Yourdon Inc. which was executed on 1-4-1985. There is no material on the record to show that this agreement was not acted upon. In may be that the assessed in its application under section 197 was seeking exemption under section 10(6) (vi) with reference to the remittance of the remuneration of US $ 13,000 to Mr. Stephen Blash but the real question to be seen is whether Mr. Stephen Blash was acting in his individual capacity or in his capacity as a nominee of M/s. Yourdon Inc. USA in terms of clause 7 of the said agreement effected on April 1, 1985 by and between M/s. Yourdon Inc., 1501 Broadway, New York and the assessed company. Clause 4 of the said agreement contains a guarantee by the assessed company to organize at least one seminar circuit in 1985. Specific dates and courses were to be mutually agreed upon as provided by clause 5. The scale according to which payment of US $ 13,000 was to be made accorded with the scale prescribed enclose 7 of the agreement i. e. reimbursement of courseware material @ US $ 500 on any particular day and remuneration @ US $ 150 per day. The seminar was actually for 20 days from August 16, 1985 to September 4, 1985. The above clause requires M/s. Yourdon Inc. to depute one Senior consultant employed with them to conduct the technical seminar and workshop and he/she was to be paid the remuneration. Clause 8 of the said agreement provided that it was to remain in effect till April 30, 1987. The order of the learned IAC (Asst.) notices a very important fact namely that the bill dated August 20, 1985 had been raised no by Mr. Stephen Blash but by M/s. Yourdon Inc. Therefore, on the basis of the material on the record, we are of the view that the provisions of section 10(6) (vi) were not to be applied on the facts of the present case, even though the assesseds claim before the IAC (Asst.) was that the requirements of that provision stood satisfied. The next question, therefore, would be whether the IAC (Asst.) was justified in applying the provisions of section 115A (1) (b) (iii) on the basis that the agreement dated 1-4-1985 had been approved by the Central Government. On this point, the learned Commissioner has observed that the procedure for approval involved the taking on record to the agreement by the Secretariat of Industrial Approvals under the Ministry of Industry and the grant of approval by the concerned Administrative Ministry (which, in this case, was the Department of Electronics). On the other hand, the assesseds case was that the Secretariat of industrial Approvals comes into the picture in the case of collaboration agreements with foreign enterprises. The learned Departmental Representative has not placed any material before us to support this observation made by the learned Commissioner. On the other hand, O. M. No. F. 1/85/EC/78 dated 23-11-1982 issued by the Department of Economic Affairs, Ministry of finance, government of India is to the effect that the Administrative ministries would deal with all other cases of engagement of foreign technicians/experts up to 12 months. In fact the learned Commissioner himself held that the approval to the agreement was to be accorded by the Administrative Ministry i. e. the Department of Electronics. We find that on 27-5-1985 National Institute of information Technology (NIIT) wrote to the Department of Electronics referring to the signing of the contract between M/s. Yourdon Inc. and the assessed-company and the discussions which it had at the Ministry of finance and Reserve Bank of India that only approval of the expenditure incurred and justification for remittances was required and that is how "No Objection" was asked for from the Department of Electronics for the remittance of US $ 13,000 to Mr. Stephen Blash. Since Mr. Stephen Blash was to conduct the seminar as the nominee of M/s. Yourdon Inc. USA and had no separate identity of his own, this request tantamount to a request for seeking the approval of the Central Government to the agreement even though what was mentioned was that "No Objection" was required for remittance of US $ 13,000 to Mr. Stephen Blash. The department of Electronics (Computer Development Division) vide its letter dated 5-7-1985 informed the Director, NIIT giving "No Objection" to inviting Mr. Stephen Blash of M/s. Yourdon Inc. USA for conducting a series of Workshops on "Software Project Management and Control" and Structures Systems Development in Delhi and Bombay for 20 days (the dates mentioned in that approval were from July 22, 1985 to August 10, 1985) and for remitting 13,000 US dollars as the professional fee of Mr. Stephen Blash and courseware charges. When it was mentioned in this letter that clearance was from technical angle only and other clearances from Ministries/Departments may be obtained directly, it only meant that the Central Governments approval would be complete only when clearances from the Ministry of External Affairs etc. had also been taken. The Ministry of External Affairs gave the No Objection on 29-8-1985 in pursuance of the request of NIIT dated 17-6-1985. This "No Objection" was from the political angle. There is no material on the record to show that approval of any other department of the Government was to be taken for the purposes of section 115A (1) (b). The letter dated 4-12-1985 of M/s. Yourdon Inc. to the assessed is quite relevant. It runs as follow :-

"As per our agreement dated April 1, 1985 with M/s Pace Education Pvt. Ltd., B-4/159, Safdarjung Enclave, New Delhi-110 020, India, we have undertaken that remittance be made to Mr. Stephen Blash towards his remuneration and reimbursement of courseware charges."

It shows that it is the agreement dated 1-4-1985 which was being operated and in pursuance whereof the assessed was directed to make remittance to Mr. Stephen Blash towards his remuneration and reimbursement of courseware charges. We have on the record another approval dated 10-4-1986 from the Department of Electronics addressed to NIIT for the conduct of seminars/workshops by Mr. Stephen Blash and Dr. D. N. Chorafas and for foreign exchange remittances to them for the durations mentioned therein. It was clarified in that letter that the words "No Objection" in that departments clearance letters in the case of the above two foreign nationals may be read as "Approval", although it was further clarified that that approval was from the computer angle only and other clearances were to be secured by NIIT from other Ministries/Department of the Government under the laws applicable on the subject matter. We are therefore of the view that on the basis of the aforesaid material on the record, the learned Commissioner was not right in holding that no approval had been taken by the assessed in terms of section 115A (1) (b). However, he was right in holding that the claim made by the assessed that the payment made to Mr. Stephen Blash was exempt under section 10(6) (vi) was not tenable. In the result the order passed by the learned Commissioner has to be quashed.

6. The appeal filed by the assessed is accordingly to be treated as partly allowed.