Delhi High Court

Escorts Ltd. vs Union Of India on 26 September, 2002

Equivalent citations: 2003 129 TAXMAN 519 Delhi

JUDGMENT

The petitioner in this writ petition has, inter alia, questioned the orders dated 5-1-1988, 18-1-1988 and 11-8-1987 passed by the respondent Nos. 2 & 3 respectively. The basic fact of the matter is as follows :

The petitioner is a public limited company registered and incorporated under the Companies Act, 1956. It entered into an agreement with Smit Tak Towage and Salvage(s) Private Limited, a Singapore based company in terms whereof the mooring job of the Floating Dock at Port Blair was entrusted to the latter. The said company was incorporated at Nhava Sheva Port near Bombay. The said contract was entered for at lump sum price of U.S. $ 1,73,500.

2. However, in terms of clause 7 thereof, the work was to be completed within an estimated period of 16 days. Clause 6(C) of the said contract reads thus :

Performance

(a) Smit Tak shall undertake to use their best endeavors to perform and complete the work within the shortest possible time as described in clause (3).

(b) Escorts shall ensure that equipment and facilities shall be provided in time and shall render all possible assistance in the execution of this contract.

(c) Escorts shall undertake to ensure also that the work to be carried out by Smit Tak will not be stopped or delayed during the course of the progress. Should the work needs to be stopped or delayed by circumstances, other than Force Majeure, which is beyond Smit Taks control, Smit Tak reserves the right to consider this stoppage as change order.

(d) For any change order applicable to this Contract, the following rates of the vessels described in Appendix A and hereunder shall apply :

Smit-Lloyd 100 Class : US Dollars 5,000 per day.

Tug and Barge : US Dollars 1,000 per working day.

Team of Divers : US Dollars 600 per working day

Team of Riggers : US Dollars 250 per working day.

Project Manager : US Dollars 1,000 per day.

3. According to the petitioner, the said Singapore based company, having regard to the delay occurred in the mooring work, claimed additional payment for extra period of 7 days. However, the same by negotiation, entered into between the parties, was settled at 4 days 21 hours and accordingly M/s. Smit Tak claimed payment of US Dollars 24,375 vide debit note dated 16-6-1987 which is as follows :

"Being change orders (Demurrage) charges incurred in Port Blair for the above work, amounting to 4 days 21 hours at US Dollars 5,000 per day or prorata, as agreed upon, this being full and final settlement".

4. According to the petitioner, although expression demurrage has been used therein in truth and substance, it was fee for technical services. In support of the said contention, the petitioner has relied upon a letter of the said company dated 3-9-1987 which is to the following terms :

The sum of US Dollars 24,375 is claimed from Escorts Limited, on account of the change orders work performed, in pursuant to the Mooring Contract of Escorts Limited floating dock "Escorts 1" at Port Blair, Andaman Islands between 17-5-1987 and 7-6-1987.

The sum of US Dollar 24,375 herewith claim covered an additional work period beyond the stipulated work period of sixteen days, for which a lump sum of US Dollars 1,73,500 was separately specified in the contract. The additional work required and carried out with the concurrence of Escorts Limited, was due to unexpected technical deficiencies at the site and for rectifying these deficiencies, Smit Tak provided additional services of identical nature as was provided for earning the lump sum fee of US Dollars 1,73,500 under the same Mooring Contract.

The change orders described herein (which under marine contracts, are also referred as demurrage) are standard marine contractual provisions and these change orders occurrences are normal for such nature of work or in any other such type of mooring work.

The claims put forward to Escorts Limited are reasonable when compared to various other marine contracts of this nature completed by Smit Tak.

5. The respondent No. 3, however, by reason of the impugned letter dated 11-8-1987 treated such payment under the heading "any other payment" and provisions of section 10(6A) of the Income Tax Act were held to be not applicable. The petitioner in its letter dated 7-8-1987, inter alia, stated as under :

"With reference to our Application dated 8-7-1987 we have to bring to your kind notice that the said payment is to be made to the Singapore Company in view of the provisions contained in the mooring agreement with them dated 29-8-1986. As per Clauses 6 and 7 of the said Agreement and delay beyond the stipulated period of 16 days in completion of the mooring work which was not attributable to M/s. Smit Tak Towage and Salvage(S) Pte. Ltd. will be charged at the rate of US Dollars 5,000 per day. As already explained to you the delay of about 7 days was caused firstly because of non-availability of the required length of chains for mooring purposes readily for the unexpected depth of sea at the site of mooring at Port Blair, and secondly because M/s. Smit Tak were not allowed to work on week ends by the Indian Nevy. In support of the above we have already filed photo copies of the Telex messages dated 26-5-1987 (Para 2AAA) and 28-5-1987. From the above it is very apparent that the payment which is now being made to Smit Tak is in respect of provision of services of technical personnel made available them for a period longer than what was stipulated in the agreement with them for which payment was to be made in addition to the lump sum payment agreed for the mooring work. Thus, the payment under reference cannot be anything else than the payment on account of 'fee for technical services. The rate of tax on such payment is 30% which has been duly deposited and the challan receipt filed before you. It is once again confirmed that the provisions of section 10(6A) are applicable in this case as the recipient is a company and as such grossing up of taxis not required.

We hope you will find the above in order and issue the necessary No Objection Certificate at an early date."

6. The petitioner, however, filed an appeal. The appellate authority vide its order dated 6-10-1987 opined that the said appeal was not maintainable. In view of the observations made therein, the petitioner filed an application under section 264 of the Income Tax Act. By reason of the impugned order dated 5-1-1987, respondent No. 2 herein while holding that the revision petition is not maintainable, arrived at the following findings :

"4. I have considered this petition filed under section 264 of the Income Tax Act. I have also perused the records of the case. The following features of the case have to be noted :

(i) The petitioner company had not raised any objection before the Inspecting Assistant Commissioner (Appeals) against treating the demurrage charges as "other sums" and not as fees for technical services.

(ii) the "order" (it is only a letter dated 11-8-1987 as per which the views of the Inspecting Assistant Commissioner (Appeals) were communicated to the assessed before issuing the no objection certificate has been made the subject of an appeal to the Commissioner (Appeals) and hence in terms of section 264(4)(c) of the Income Tax Act, the "order" of the Inspecting Assistant Commissioner (Appeals) cannot be revised.

(iii) The petitioner-company had not made any application to the Inspecting Assistant Commissioner under section 195(2) either of the Income Tax Act.

(iv) At any rate, the Inspecting Assistant Commissioner (Appeals) cannot be directed to refund (the tax to the petitioner-company at this stage since the action of the Inspecting Assistant Commissioner (Appeals) is, if at all, prejudicial not to the petitioner-company but to the company to whom the amount has been remitted after deducting the tax.

(v) As per the debit note dated 16-6-1987 of M/s. Smit Tak Towage Salvage(S) Pte. Ltd., the payment represents the "change orders (demurrage) charges incurred in Port Blair for the above work, amounting to 4 days 21 hours at US Dollars 5,000 per day or pro-rata, as agreed upon, this being full & final settlement". This payment in terms of clause 6(c) of the contract dated 29-8-1986 for stoppage of the work and consequent delay by circumstances other than force majeure. This payment, evidently, cannot be considered as fees for technical services.

7. Before the appellate authority, the petitioner has also raised the contention that having regard to the clauses 6 & 7 of the said agreement, the afore-mentioned M/s. Smit Tak and Salvage Private Limited was entitled to an additional payment in the event of "any delay beyond the stipulated period of 16 days in completion of the mooring work, which was not attributable to M/s. Smit Tak will be charged by the Singapore Company at the rate of US Dollar 5,000 per day and on pro rata for part of the day". It has not been disputed that the lump sum payment made to the said company being US Dollar 1,73,500 was a part of the fee for technical services rendered to the petitioner. The said amount was treated as such and taxes were paid accordingly. The question which ought to have been raised by the respondent Nos. 2 & 3 were as to whether only because the said company used the word expression demurrage instead and in place of fee for technical services despite the relevant facts that the said company has been paid in terms of the said contract could be benefit of section 10(6A) of the Income Tax Act denied to the assessed? Having heard the learned counsel for the parties, we are of the opinion that the respondent Nos. 2 & 3 have committed a jurisdictional error insofar as it failed to take into consideration the nature of transaction as contended by the assessed.

8. As noticed hereinbefore, the Singapore based Company also clarified in its afore-mentioned letter dated 3-9-1987 that the expression demurrage charges had been used, having regard to the provisions normally made in a marine contract although in effect and substance, the same comes within the purview of fee for technical services. Fee for technical services have been defined in Explanation Happended to section 9 of the Income Tax Act.

9. Clause 7 of the contract is in the following terms (sic) :

"(vii) Income by way of fees for technical services payable by

(a) the government; or

(b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or

(c) A person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India :

Provided that nothing contained in this clause shall apply in relation to any income by way offees for technical services payable in pursuance of art agreement made before the 1-4-1976, and approved by the Central Government.

Explanation 1For the purposes of the foregoing proviso, an agreement made on or after the 1-4-1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposal approved by the Central Government before that date.

Explanation 2For the purposes of this clause, fees for technical services means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head Salaries.

10. A bare perusal of the aforementioned provision will clarify and go to show that the same carries definite import. The transaction entered by and between the petitioner and the aforementioned company was, therefore, required to be considered in the light of the aforementioned provision. The question was not considered from this angle. As by reason of the impugned order, the respondent Nos. 2 and 3 failed to exercise their jurisdiction vested therein by law, in our opinion, a jurisdictional error has been committed. By reason of the said orders, the said respondents had failed to perform their statutory duties to which they were otherwise obliged to.

11. For the reasons aforementioned, the impugned order cannot be sustained which is accordingly set aside. The matter is remitted back to the competent authority for consideration of the matter afresh. The writ petition is allowed.

12. No costs.