[1991]

59 TAXMAN 202 (KAR)

HIGH COURT OF KARNATAKA
Hyderabad Industries Ltd.
v.
Income-tax Officer
K. SHIVASHANKAR BHAT, J.
WRIT PETITION NOS. 8232 AND 8233 OF 1988
JANUARY 4, 1991

Section 195, read with section 10( 6A), of the Income-tax Act, 1961 - Deduction
of tax at source - Payments to non-residents - Whether in view of provisions of
section 10(6A) , tax deductible at source under section 195 would be on basis of
net amount payable to non-resident in Indian currency and there would be no
grossing up in respect of such tax for purpose of tax deduction at source - Held,
yes
FACTS

The petitioner had the benefit of the services of a non-resident company under an
approved agreement. For the services rendered by its engineers, the petitioner had to
pay U.S. Dollars 14,950 to the non-resident company. The petitioner requested the ITO to
determine the tax payable on the remittance of the amount and to issue a 'no objection'
certificate. The net amount payable in Indian currency was Rs. 1,64,73 8, the gross
amount was worked out at Rs. 2,74,563 on which the tax demanded was Rs. 1,09,325 as
per the 'no objection' certificate dated 18-5-1984. After paying the tax and remitting the
amount, the petitioner sought a refund of Rs. 45,930 contending that as per section
10(6A) (inserted with effect from 1-4-1984) the grossing-up of income could not be done
and that the tax payable on Rs. 1,64,738 was only Rs. 65,895. The petitioner's request for
rectification under section 154 was, however, rejected by the ITO. Thereafter, the
petitioner approached the Commissioner under section 264(1) but to no avail. The
Commissioner held that the proceedings under section 195 pertained to the deduction of
tax at source while section 10(6A) was confined to the assessment of the foreign
company. According to him, these were distinct and separate issues.
On writ:
HELD

Section 10(6A) nowhere confines its operation to assessment proceedings; there is no

exclusion of its operation from other proceedings under the Act. The language of section
10 is quite simple and clear. It governs the computation of the total income of the person
covered by it; a benefit which is not includible in the total income of a person necessarily
implies that the said benefit is not the 'income' of the person. The construction sought to
be placed by the respondents was based on a distinction which had no substance in it. It
is not understandable as to why a benefit which will not be included in the total income of
a person should be considered as income for the purpose of deduction of tax at source at
all. The purpose of deduction of tax at source is not to collect a sum which is not tax
levied under the Act; it is to facilitate the collection of the tax lawfully leviable under the
Act. The interpretation put by the respondents would result in collection of certain
amounts by the State which are not a tax qualitatively. Such an interpretation of the
taxing statute is impermissible. Accordingly, the orders of the taxing authorities rejecting
the petitioner's prayer for refund were set aside and the taxing authorities were directed
to refund the amount due to the petitioner as per law.
G. Sarangan and G.K. Gajendra Rao for the Applicant. G. Chandar Kumar and S.R.
Shivaprakash for the Respondent.
ORDER

1. The effect of section 10( 6A) of the Income-tax Act, 1961 ('the Act') on the working of
section 195 of the Act is to be considered in these writ petitions.
2. The petitioner had the benefit of the services of a non-resident company under an
approved agreement; petitioner had to pay certain sums to the non-resident company for
the services rendered, on its behalf, by its engineer. Petitioner had to pay US dollars
14,950 to the non-resident company; on this, the income-tax payable has to be paid by
the petitioner under section 195. Petitioner requested the 1st respondent to determine
the tax to be paid on remittance of the amount and to issue no-objection certificate. The
net amount payable in terms of Indian currency was stated as Rs. 1,64,738 and the gross
amount as Rs. 2,74,563; on this the tax of Rs. 1,09,825 was demanded as per no objection
certificate dated 18-6-1984. After paying the tax and remitting the amount, petitioner
sought refund of Rs. 45,930, pointing out that as per section 10(6A) (which was inserted
with effect from 1-4-1984), the grossing up could not be done. The tax payable on Rs.
1,64,738 was only Rs. 65,895. As per section 195, earlier, this tax, in turn will be grossed
up to the remittance, for further calculation and tax was to be computed on this grossed-
up sum; the idea being that, the tax paid by the petitioner is actually on behalf of the non-
resident and, therefore, the said amount also should be part of the amount on which non-
resident has to pay the income-tax. Under section 195, the process of grossing-up would
continue until the total amount due to the non-resident by the resident (like the
petitioner) gets exhausted. The net payment to the non-resident company after tax
deduction is treated as Rs. 1,64,738 (the agreed sum); if so the gross sum will be
equivalent to that sum from which the tax at 40 per cent has to be deducted to reach the
net figure of Rs. 1,64,738. In other words, the net figure is 60 per cent of the gross sum;
in this manner the gross sum payable is notionally arrived at Rs. 2,74,563.
3. In view of section 10(6A ), the petitioner sought rectification of the assessment order
under section 154 of the Act and requested the refund of the balance amount. This
request was rejected; hence, petitioner approached the second respondent, pointing out
that the provisions of section 10(6A) were clear and the object was to prevent levy of tax
on tax; the date of remittance was 10-5-1984, on which date section 10(6A)had come into
force. However, the Commissioner also rejected the petitioner's petition under section
264 of the Act.
4. The second respondent held that the proceedings under section 195 pertained to
deduction of tax at source, while section 10(6A) was confined to the assessment of the
foreign company; these are two distinct and separate issues.
Hence, writ petitions, as two remittances under two sets of no-objection certificates are
involved.
5. Section 10(6A) reads thus :
"Incomes not included in total income.—In computing the total income of a previous
year of any person, any income falling within any of the following clauses shall not be
 included—
(1) to (6) ******
(6A) where in the case of a foreign company deriving income by way of royalty or fees
for technical services received from Government or an Indian 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 on such income is payable, under the terms of such agreement, by
Government or the Indian concern to the Central Government, the tax so paid.
Explanation : For the purposes of this clause,—
(a ) 'fees for technical services' shall have the same meaning as in Explanation 2 to
clause (vii) of sub-section (1) of section 9;
(b)'foreign company' shall have the same meaning as in section 80B;
(c )'royalty' shall have the same meaning as in Explanation 2 to clause (vi) of sub-
section (1) of section 9;"
6. Section 10 is in Chapter-in bearing the nomenclature 'Incomes which do not form part
of total income'. Omitting unnecessary words and confining the language to the instant
case section 10(6A) says that, in the case of a foreign company deriving income . . . for
technical services received from . . . an Indian concern . . ., the tax on such income is
payable. . . by the Indian concern to the Central Government, the tax so paid, shall not be
included in computing the total income of such a person, that is, the foreign company.
Standing by itself, therefore, the tax paid on behalf of the foreign company for the
remittances in question shall not be treated as part of the income derived by the foreign
company. But the contention of the revenue, here is that, section 10(6A) has nothing to
do with the deduction of tax at source and it is attracted only for purposes of computing
the total income of a foreign company. In other words, the contention seems to be that, in
case the foreign company has to face an assessment proceedings, then only section
10(6A) will be attracted.
Subject to certain exemptions, which is not relevant here, as per section 195, any person
responsible for paying to a non-resident, etc., any sum chargeable under the Act, 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 draft or by any other mode,
whichever is earlier, deduct income-tax thereon at the rates in force." [Emphasis
supplied]
Therefore, payment to the non-resident is actually the income of the foreign company;
section 195 recognises the payment as such an income. In fact, levy of tax thereon,
whether at source or subsequently, can only be on the basis that it is the income of
foreign company.
Section 10(6A) nowhere confines its operation to an assessment proceedings; there is no
exclusion of its operation from other proceedings under the Act. Language of section 10
is quite simple and clear. It governs the computation of the total income of the person
covered by it; a benefit, which is not includible in the total income of a person,
necessarily implies that the said benefit is not the 'income' of the person.
7. The construction sought to be placed by the respondents is based on a distinction,
which has no substance in it. It is not understandable as to why, a benefit which will not
be included in the total income of a person, should be considered as 'income' for the
purpose of deduction of tax at source at all. Purpose of deduction of tax at source is not
to collect a sum which is not a tax levied under the Act; it is to facilitate the collection of
the tax lawfully leviable under the Act. The interpretation put on those provisions by the
respondents would result in collection of certain amounts by the State, which is not a tax
qualitatively. Such an interpretation of the taxing statute is impermissible.
8. The Central Board of Revenue has formed the same opinion as above is clear from
para 12.1 of its Circular No. 372 dated 8-12-1983 (see Taxman's Direct Taxes Circulars,
Vol. 2,1985 edn., p. 962), which reads thus :
"12.1 A new clause (6A ) has been inserted in section 10 [of the Income-tax Act] to
provide that where income is derived by a foreign company by way of royalty or fees
for technical services received from Government or an Indian concern in pursuance
of an agreement made by the foreign company with Government or the Indian
concern after 31st March, 1976, and tax on such income is payable, under the terms
of such agreement, by Government or the Indian concern to the Central Government,
the tax so paid will not be included in computing the total income of the foreign
company. In other words, there will not be any' grossing up' in respect of such tax.
Where the relevant agreement is made by the foreign company with any State
Government or Indian concern, the exemption under this provision will be available
only if the agreement is approved by the Central Government. The expressions
'royalty' and 'fees for technical services' will have the meaning assigned to them
respectively under Explanation 2 to section 9(1)(vi) and section 9(1)(vii) [of the
Income-tax Act] and the expression 'foreign company' will have the meaning assigned
to it in section 80B [of the said Act]." (p. 970)
9. No other contention was raised by the parties before me.
10. In view of the above, petitioner is entitled to succeed. The impugned orders dated 30-
12-1987 (Annexures E & K) are set aside. Respondents are directed to make
consequential orders and refund the amounts due to the petitioner in accordance with
law and in the light of the observations made above. Rule made absolute. No costs.