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PETITIONER: COMMISSIONER OF INCOME TAX, WEST BENGAL

       Vs.

RESPONDENT: WESMAN ENGG. CO. (P.) LTD.

DATE OF JUDGMENT24/01/1991

BENCH: KASLIWAL, N.M. (J) BENCH: KASLIWAL, N.M. (J) RAMASWAMY, K.

CITATION:  1991 AIR  570            1991 SCR  (1) 117  1991 SCC  (2) 323        JT 1991 (1)   229  1991 SCALE  (1)66

ACT:      Income  Tax  Act, 1961: Sections 195,  248,  251(1)(c): Jurisdiction  of the appellate authority-Whether extends  to determining quantum of sum chargeable.      Section  195(2):  Order passed by assessing  authority- Whether appealable under section 248.

HEADNOTE:      The respondent-assessee, a private limited company  and a  licensee, under an agreement was required to pay  to  its foreign  colaborators  (licensors) certain  amounts  towards cost  of  working drawings and royalty.  It applied  to  the Income  Tax  Officer to grant the necessary  certificate  to enable  it  to  approach  the  Reserve  Bank  of  India  for remittance  to  its foreign collaborators.  The  Income  Tax officr  held  that  the remittance represented  payment  for supply  of technical know-how and for use of the trade  name and manufacturing right of the licenser company and that the said   amount neither fell within the exempted category  nor did the agreement for avoidance of double taxation apply  to the  case, and directed the assessee to deduct tax @ 65%  on the sum to be remitted.      The  assessee did not dispute the assessability of  the royalty,  but challenged in appeal, that since the whole  of the  sum towards the cost of working drawings  exceeded  the remuneration,  the  same  was  not  taxable,  and  that  the assessment  was  barred  by the  Double  Taxation  Avoidance Agreement.   The Appellate Asstt. Commissioner rejected  the Double  Taxation Avoidance plea, but determined the cost  of the working drawings at 75% and the net profit chargeable at 25%  of  the  amount  to be  remitted  to  the  non-resident company.      The  Revenue  appealed before  the  Appellate  Tribunal challenging  the  jurisdiction of  the  appellate  authority under  s. 248 to determine the quantum of income,  and  that the  Appellate  Asstt. Commissioner was  wrong  in  allowing expenses @ 75% of the remittance.  The assessee filed cross- objection.   Holding that the Appellate Asstt.  Commissioner could  pass an order regarding the quantum, that the  amount fixed by him                                                        118

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could  not be said to be unreasonable, and that  the  amount brought  to charge by the Income Tax Officer was not  exempt under the Double Taxation Avoidance Agreement, the  Tribunal dismissed  the Department’s appeal  and partly  allowed  the assessee’s cross-objection.      At  the instance of the Revenue, the Tribunal  referred the question to the High Court which was answered in  favour of the assessee.      In  the  appeal by certificate to this  Court,  it  was contended  that: the order passed by the Income Tax  Officer under  s. 195(2) was not appealable to the Appellate  Asstt. Commissioner under s. 248, and that the appellate authority had  no  jurisdiction to deal with the quantum  of  the  sum chargeable  under the provision of the Income Tax  Act  from which the assessee was liable to deduct tax under s. 195.      Dismissing the appeal, this Court,      HELD:   1.1  Once an appeal has been preferred  to  the Appellate Asstt. Commissioner under s. 248 of the Income Tax Act,  1961,  on the matter of liability of  the  company  to deduct  taxes, the appellant authority was well  within  its competence to pass an order on quantum also. [124D]      1.2    Section  251(1)(c)  gives  full  power  to   the appellate authority to pass such orders in the appeal as  it thinks fit. [125A]      1.3  The right to appeal under s. 248 of the Income Tax Act  is  clear and it cannot be said that such  a  right  is restricted  and  the Appellate Asstt. Commissioner  was  not competent to fix the quantum or to revise the proportion  of the  amount  chargeable under the provisions of the  Act  as determined by the Income Tax Officer. [124F]      2.  The language of s. 248 of the Income Tax Act,  1961 is wide enough to cover any order passed under s. 195.   The Appellate Asstt. Commissioner was also competent to pass  an order  with regard to quantum when once he is seized of  the matter. [123F; 124D]      3.  Under s. 248 a person having deducted and paid  tax under s.195 may appeal to the Appellate Asstt.  Commissioner denying  his  liability  to make such deduction  and  for  a declaration  that he is not liable to make  such  deduction. [124E]      Meteor  Satellite Ltd. v. Income Tax Officer  Companies Circle IX, Ahmedabad, [1980] 121 ITR 311, held inapplicable.                                                        119

JUDGMENT:      CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1535 (NT) of 1978.      From  the  Judgement and Order dated 10.2.1976  of  the Calcutta High Court in Income Tax Reference No.220 of 1969.      S.C.  Manchanda, K.P. Bhatnagar and Ms.  A.  Subhashini for the Appellant.      C.S.S. Rao for the Respondent.      The Judgement of the Court was delivered by      KASLIWAL, J.  This appeal by grant of certificate under Section  261  of the Income Tax Act, 1961 by High  Court  of Calcutta rises the following question for consideration:           "Whether  on  the facts and circumstances  of  the          case  in an appeal filed under Section 248  of  the          Income Tax Act, 1961, the A.A.C. had juridiction to          deal  with the quantum of the sum chargeable  under          the  provision  of  the said  Act  from  which  the          assessee was liable to deduct tax under Section 195          thereof?"

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    Brief  facts  of  the case are   that  the  respondent- assessee is a private limited company incorporated in India. The   assessee   company  carried  on   some   business   in collaboration with M/s. Wilhelm Ruppmann,  Industrieofenbau, Stuttgart  W, Gutenbergstr.  By an agreement entered on  1st January,  1963 it was agreed that the foreign  collaborators would grant to the Indian company during the term:      (a)   the exclusive right to manufacture  the  licenses equipment in India.      (b) the exclusive right to sell the licensed  equipment in India under the "Wesman Ruppnan" such sale to be effected by the agency agreed upon,      (c)  permit licensees to export the licensed  equipment freely   outside  India,  except  to  countries  where   the licensors  have similar license-arrangements. Clause  5  of  the agreement provided  for  payment  to  the licensees of the following sums:                                                        120          (a)  "A payment of 5 per cent towards the  cost  of          detailed working drawings in terms of clause 3 (b).          The payment for these drawings shall be  admissible          in  those cases where new drawings are supplied  by          the  Licensors  abroad  i.e. from  their  or  their          associates  works  design offices at  Stuttgart  or          elsewhere in Europe.          This  payment  shall not be  admissible  for  minor          modification  of  drawings and designs  which  have          already been purchased from the Licensors and  paid          for by the Licensees nor on repeat orders  executed          by the Licensees.          This  fee  shall be calculated  on  the  ex-factory          selling  price  of  the  licensed  products   after          deducting the value of imported components used  in          the  manufacture thereof, if any, payment for  cost          of  drawings  shall be arranged  by  the  Licensees          against supply of individual furnance designs, such          payment  being effected forthwith against  delivery          of drawings."          (b)  "A royalty at 5 per cent (five) which will  be          subject  to  Indian  taxes on the  annual  net  ex-          factory  sale  value  of  each  licensed  equipment          manufactured  by the Licensees shall be payable  to          the Licensors. The value of imported components, if          any,  that  may be used in the manufacture  of  the          Licensed  equipment shall be deducted in  computing          the ex-factory price of the licensed equipment  for          purpose of payment of royalty.  The payment has  to          be  effected together with the report  referred  to          under Clause 6".      The  assessment year involved in the case  is  1964-65. In the matter of remittance to the non-resident company, the assessee  vide applications dated June 4, 1964  and  18.8.64 requested   the  Income  Tax  Officer  to  grant   necessary certificate in order to enable them to approach the  Reserve Bank  of India for remittance to their  collaborators.   The said  applications  related  to the  invoice  in  regard  to supply of drawings for manufacture of furnances in India  in accordance  with their collaboration agreement.  The  Income Tax  Officer placing reliance on the terms of the  agreement came  to  the  conclusion  that the  payments  made  by  the applicant   company  to the  non-resident  collaborators  in Germany  could  be  grouped under the  heads  Royalties  and remuneration  for labour or personal services.  According to the  Income Tax Officer neither the remittance fell  within the exempted

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                                                      121 category  nor  did  the agreement for  avoidance  of  double taxation  between  Indian and the  Federal  German  Republic apply  to the facts of the instant case.  According to  him, the  payment  of  the remittances in respect  of  which  the applications had been made represented payment for supply of technical   know-how   and  for  use  of  trade   name   and manufacturing  right  of the licensor company.  He  did  not agree  with  the  submissions of the  assessee  company  and disposed  of  the  said applications vide  order  dated  5th September,  1964  under Sec. 195(2) of the Income  Tax  Act, 1961  directing the assessee company to deduct tax @ 65%  on the entire sum proposed to be remitted.      The  assessee  company  preferred  an  appeal  to   the Appellate  Assistant Commissioner.  It did not  dispute  the assessability of the royalty @ 5% mentioned in Clause  5(b) of  the agreement aforesaid.  It, however,  challenged  that the whole of the sum of 5% specified in clause 5(a) was  not chargeable  to income tax in India.  In regard to  the  same the assessee submitted that there was no liability to deduct tax  in terms of the order of the Income Tax Officer as,  in its  opinion,  (a) the services, if  any,  enumerated  under clause  5(a) of the agreement were performed  outside  India and the payments were also being made outside India so  that the  amount paid was not chargeable to tax under the  Indian Statute, (b) there was a bar to assessment under the  Income Tax  Act,  1961 in terms of an agreement  for  avoidance  of Double  Taxation  between  India  and  the  Federal   German Republic referred to above and (c) in the alternative, since the  cost of the work drawings to the foreign  collaborators exceeds the remuneration, the same was not taxable.      The Appellate Assistant Commissioner did not accept the first  two  of the aforesaid contentions  of  the  assessee. With regard to the third contention, however, the  Appellate Assistant Commissioner came to the conclusion that it  would be  reasonable to determine the said cost by estimate  which he  did  at  75  per cent of the amount  paid  to  the  non- resident.   In his opinion the net profit chargeable to  tax was accordingly 25% of the amount paid.      The  department filed an appeal against  the  aforesaid order  of  the  Appellate  Assistant  Commissioner  and  the assessee  filed  a cross objection, before the  Income  Tax Appellate  Tribunal.  Both the departmental appeal  and  the assessee’s cross objections were heard together and  decided by  a consolidated order of the Tribunal.  The  departmental representative made two submissions.  The first was that the A.A.C.was wrong in holding that the quantum of income  could be determined                                                        122 in  an  appeal under Section 248.  The second was  that  the A.A.C.  was  wrong  in  allowing  expenses  at  75%  of  the remittance.   The  first  point  of  the  assessee’s   cross objection   was   covered  by  the  first  ground   of   the departmental  appeal  mentioned  above.   The  second  point raised  in the assessee’s cross objection was to the  effect whether  the payment  for the cost of drawings  were  exempt from  the  tax  under  the  provisions  of  Double  Taxation Avoidance Agreement or not.  The Tribunal, taking the points raised  in  the  departmental  appeal  first,  came  to  the conclusion that it was difficult to accept the argument that a  total denial enable an appeal to be filed but not a  part denial  with reference to part of the payment  subjected  to deduction  of  tax.   In the opinion  of  the  Tribunal  the interpretation of Section 248 of the Income Tax Act as given by  the A.A.C. was correct.  According to the  Tribunal  the

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A.A.C.  could  pass  an order regarding  the  quantum.   The Tribunal  held  that  the  same could  not  be  said  to  be unreasonable.   In  the result the departmental  appeal  was dismissed.  In regard to the assessee’s cross objection, the Tribunal  held  that first part of the  cross-objection  had already  been  dealt  with in the appeal  preferred  by  the departmental  and  to  that  extent  the  assessee’s   cross objection  on  the said issue automatically  succeeded.   In regard  to  the  second  issue, the  Tribunal  came  to  the conclusion  that the amount brought to charge by the  Income Tax  Officer  was  not  exempt  under  the  Double  Taxation Avoidance  Agreement between India and the Federal  Republic of Germany vide Articles 3(1) and 16 of the Agreement.   The assessee;s cross objection was thus, partly allowed.      At the instance of the Commissioner of Income Tax, West Bengal-1 the Tribunal referred the above mentioned  question for the opinion of the High Court.  The High Court  followed its earlier Judgement dated 12th August, 1970 in Income  Tax Reference  No. 31 of 1970 (Commissioner of Income  Tax  West Bengal-1 Calcutta v. M/s. Beni Ltd., Calcutta) and  answered the  said question in the affirmative and in favour  of  the assessee by order dated 10th February, 1976.  The department filed  an  application for leave to appeal  to  the  Supreme Court  and the High Court by order dated 8.9.1977  certified it  to be a fit case for appeal to the Supreme  Court  under Section  261  of  the  Income Tax Act,  1976  and  issued  a certificate accordingly.      We  have heard Mr.S.C. Manchanda, Sr. Advocate for  the appellant but nobody appeared for the respondent.  The  High Court  in  answering the reference placed  reliance  on  its earlier Judgement dated August 12, 1970 but the copy of  the said  Judgement has not been supplied in the paper  book  as such we were derived to go through the                                                        123 reasoning given by the High Court in answering the reference in the affirmative and in favour of the assessee.      It was contended by Mr. Manchanda that the order passed by  the Income Tax Officer under Sec. 195(2) of  the  Income Tax  Act, 1961 (hereinafter referred to as the Act) was  not appealable to A.A.C. under Sec. 248 of the Act.  His further contention was that the order passed by A.A.C. was  totally without  juridiction  and the only remedy available  to  the assessee  was  to file a writ petition to High  Court  under Article  226 of the Constitution of India.  In  our  opinion this question does not arise before us nor such question was raised  in  the  reference  before  the  High  Court.    The Commissioner  of  Income  Tax  only  sought  to  refer   the following question for the opinion of the High Court:          "Whether,  on  the facts and circumstances  of  the          case  in appeal filed under Section 248 Income  Tax          Act, 1961, the Appellate Assistant Commissioner had          jurisdiction  to deal with the quantum of  the  sum          chargeable under the provision of the said Act from          which  the assessee was liable to deduct tax  under          Section 195 thereof?" The  above question does not contain the objection  that  no appeal was maintainable under Section 248 of the Act against the  order  of the Income Tax Officer passed  under  Section 195(2)  of the Act.  The High Court was not called  upon  to decide any question of juridiction as sought to be raised by Mr.  Manchanda before us nor the High Court has granted  any certificate in this regard.  So far as the question referred to  the  High Court is concerned, its  language  shows  that there  was no controversy about the appeal filed under  Sec. 248 of the Act and the only question raised was whether the

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A.A.C. had jurisdiction to deal with the quantum of the  sum chargeable  under the provisions of the said Act from  which the  assessee  was  liable  to deduct  tax  under  Sec.  195 thereof.   The argument thus raised by Mr. Manchanda  before us  that Order under Sec. 195 (2) was not  appealable  under Sec.  248 of the Act, is not available.  Even otherwise  the language of Sec. 248 of the Act is wide enough to cover  any order  passed  under Sec. 195 of the Act.  The  case  Meteor Satellite Ltd. v. Income Tax Officer, Companies  Circle-IX, Ahmedabad,  [1980]  121 ITR p. 311 cited in support  of  the above contention by Mr. Manchanda is of no relevance.      It was next contended by Mr. Manchanda that the  A.A.C. was  wrong  in holding that the quantum of income  could  be determined  in  an appeal under Section 248.   It  was  also argued that the A.A.C. was                                                        124 also   wrong  in  allowing  the  expenses  at  75%  of   the remittance.  It would be proper to reproduce Section 248  of the Act which reads as under:           Section 248: Appeal by Person Denying Liability to          Deduct Tax:          "Any   person   having  in  accordance   with   the          provisions  of  Sections 195 and 200  deducted  and          paid  tax  in respect of any sum  chargeable  under          this  Act,  other  than interest,  who  denies  his          liability to make such deduction, may appeal to the          Deputy  Commissioner (Appeals) or, as the case  may          be,  the Commissioner (Appeals) to be declared  not          liable to make such deduction."      It was argued by Mr.Manchanda that under  Section 248 a person  could deny his liability to make such deduction  but there was no power to determine the quantum and to say as to what  extent the said remittance will be taxed.  We find  no force in the above contention.  Section 248 makes a  mention of  Sections 195 and 200 and it does not speak of  the  sub- clauses of Sec. 195 either (1) or (2). When once  an  appeal has been preferred to the A.A.C. on the matter of  liability of  the company to deduct taxes, the A.A.C. is  well  within his competence to pass an order on the quantum also.  In our opinion the A.A.C. was also competent to pass an order  with regard  to  quantum when once he is seized  of  the  matter. Under  Section  248 a person having deducted  and  paid  tax under  Section  195  may appeal to the  A.A.C.  denying  his liability to make such deduction and for a declaration  that he  is  not  liable  to make such  deduction.   It  is  thus difficult  for us to accept the arguments that total  denial may enable an appeal to be filed but not a part denial  with reference  to part of the payment subjected to deduction  of tax.   The right of appeal given under Section 248 is  clear and we cannot accept the view sought to be propounded by Mr. Manchanda that such a right is restricted and the A.A.C. was not competent to fix the quantum or to revise the proportion of the amount chargeable under the provisions of the Act  as determined  by the Income Tax Officer. Sec. 251 of  the  Act provides   with  the  powers  of  the  Deputy   Commissioner (Appeals)   or,  as  the  case  may  be,  the   Commissioner (Appeals).  Clause (c) of Sub-Sec. (1) of Sec. 251 reads  as under:           "Sec. 251(1)(c):          "In  any other case, he may pass such orders in the          appeal as he thinks fit".                                                        125 The  above  provision  gives full  power  to  the  Appellate authority  to  pass such orders in the appeal as  he  thinks fit.   There is no controversy before us that  appeal  could

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lie before A.A.C. under Sec. 248 of the Act.  We are thus in agreement  with  the view taken by the High  Court  and  the Income Tax Appellate Tribunal.  The appeal thus fails and is dismissed  with no order as to costs as nobody has  appeared on behalf of the respondent. R.P.                                    Appeal dismissed.                                                        126