1988 (6) TMI 15 - HC - Income Tax

Indian High Court: Company must bear tax on foreign income, even if not in contract

The High Court held that the Indian company, acting as an agent for a non-resident company, implicitly agreed to bear and pay the tax component on income ... Liability To Tax, Non-resident Issues:1. Whether the Income-tax Appellate Tribunal was justified in holding that the question of assessing the tax perquisite in the hands of the Indian company as the agent of the non-resident company would not ariseRs.2. How should the income earned by the foreign company in India be determinedRs.3. Whether the tax component should be added to the actual amount remitted to the foreign company to calculate the total income earned by the foreign company in IndiaRs.4. Whether the clause in the contract between the parties implies that the assessee undertook the liability to pay tax on the income earned by the foreign company in IndiaRs.5. Whether the method of grossing up should be adopted to calculate the total income earned by the foreign company in IndiaRs.Analysis:1. The judgment pertains to a case where the Income-tax Appellate Tribunal was questioned on the assessment of tax perquisite in the hands of an Indian company acting as an agent for a non-resident company. The Tribunal held that the Indian company did not undertake the liability to pay tax, and thus, the question of assessing the tax perquisite did not arise. However, the High Court disagreed with this conclusion, stating that the Indian company had implicitly agreed to bear and pay the tax component on the income remitted to the foreign company. The Court held that the tax component should be added to the actual amount remitted to calculate the total income earned by the foreign company in India, thereby directing the Income-tax Officer to value the perquisite by including the tax component.2. The Court analyzed the clause in the contract between the parties, which stated that the assessee would remit amounts to the foreign company 'without any deductions for taxes or otherwise.' This clause contradicted Section 195 of the Income-tax Act, which requires tax deduction at source for payments to non-residents. The Court deliberated on whether the income earned by the foreign company should be determined by grossing up the amount by adding the tax component or considering the actual amount remitted as the total income and collecting tax from the agent on that amount.3. Referring to previous judgments, the Court emphasized that statutory obligations cannot be contracted out of, and when the Indian company agreed to remit amounts without deductions, it implied an undertaking to pay taxes on the income earned by the foreign company. The Court held that the absence of specific clauses mentioning tax liability assumption did not negate this obligation and that the proper course was to gross up the figure by adding the tax component to the actual amount remitted.4. The Court also addressed the method of grossing up, stating that the authorities should adopt the method accepted in a previous case to avoid further controversy. Ultimately, the Court answered the question in favor of the Revenue and against the assessee, directing the adoption of the grossing up method to calculate the total income earned by the foreign company in India.