TaxTMI 
TaxTMI 
1987 (10) TMI 98
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....ned an income of Rs. 2,13,237 as the income of the assessment year 1982-83. But the IAC (Asstt.) proceeding on the basis of taxable receipt of Rs. 31,76,373 raised it to Rs. 25,33,718. 2. The main controversy in this appeal is what was the trading or taxable receipt of the appellant company. The Indian Company claimed that it was only 5 per cent of the gross or total expenditure incurred by it on behalf of the English Company. The appellant company contended that it was doing liaison work for the English Company for which it got remunerated by the payment of additional 5 per cent of the actual operating cost incurred in connection with the liaison work. The IAC (Asstt.) ignoring the finding of the earlier years, held that his trading or taxable receipt was the full amount of remittance consisting of actual operating cost plus addition 5 per cent for remuneration due to the appellant company for services rendered by it to the English Company. According to the IAC (Asstt.) the agreement defined 'service fee' as 'shall mean the annual fee payable by Rolls Royce Ltd., the English Company to the Rolls Royce India Ltd., the Indian Company, calculated and payable in accordance with cla....
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....der the provisions of the Act cannot also arise. The legal principle laid down in Tattersall's case has been followed in many Indian cases, a list of which is given below : (i) Addl. CIT v. Netal Krishana Sahgals (P.) Ltd. [1983] 141 ITR 681 (Delhi). (ii) Bengal & Assam Investors Ltd. v. CIT [1983] 142 ITR 156 (Cal.). (iii) Lal Chand Gopal Das v. CIT [1963] 146 ITR 355 (All.). (iv) CIT v. A. V. M. Ltd. [1984] 48 ITR 324 (Mad.). 3. Even if there were some instances where expenditure was first incurred by us and thereafter reimbursed by Rolls-Royce Limited, U. K., such reimbursement of expenses cannot also be regarded as income against which claim for expenses might arise. This principle is well settled by the decision of the House of Lords in Owen v. Pook (Inspector of Taxes) [1969] 74 ITR 147. The Calcutta High Court has also held likewise in CIT v. Dunlop Rubber Co. Ltd. [1983] 142 ITR 493. The point made in this regard in the earlier note is, however, not relevant as, in fact, there has not indeed been any reimbursement of revenue expenses during the relevant previous year. All revenue expenses incurred by us during the year ending31 December 1981were, in fact, met....
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....he appellant company as brought out in the preamble above. It was emphasised by him that the main object in bringing into existence the RR India, the appellant company, was only to sub-serve and fulfil the need of the English Company for ensuring market support and availing commercial information. The agreement defined the obligation of RR India in clause (2), reproduced below : "Duties of RR India RR India will carry out the following duties to such extent as Rolls-Royce may require from time to time : (i) To obtain and report to Rolls-Royce on a regular basis such marketing information as in considered to be relevant to Rolls-Royce's interests. (ii) To disseminate such marketing and commercial information relating to Rolls-Royce may require. (iii) To provide administrative and secretarial assistance locally for the Service Representatives deployed in the Territory. (iv) To provide a liaison service between Rolls-Royce and relevant department of the Government of India and other customers of Rolls-Royce in the Territory in all matters of supply of products and services. (v) To monitor the effectiveness of Rolls-Royce's commercial advisers and to report regular....
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....spect of liaison services provided by RRI in the territories of India, Bangladesh, Nepal, Sri Lanka, and Bhutan is 5 per cent of the total expenses of RRI (including depreciation) incurred on behalf of RR in connection with the provision of the said services, the entire expenditure incurred on this account by RRI being reimbursed by RR and it has always been so intended between the parties hereto and always so understood." In light of the aforesaid it was asserted by Mr. R. Ganesan, that there was no possibility of treating the 105 per cent of the expenditure-the actual operating cost plus 5 per cent of the remuneration as the taxable receipt of the appellant company. The learned counsel referred to a string of judicial pronouncements to support the aforesaid plea that the receipt of the company should be limited to only 5 per cent of the expenditure which was its remuneration and not the 105 per cent of the gross expenditure consisting of both actual operating cost and 5 per cent thereof as the remuneration which were fully reimbursed by the English Company. 9. Learned Departmental Representative on the other hand made out, inter alia, two pleas-Firstly, the judicial pronoun....
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....eed of the latter. This conclusion is not defeated by a consideration of the fact that the two agreements-the one made on1-7-1979and the other on20-5-1980, were entered into by the two companies as principal to principal. Even a consideration of the engagement of the premises, occupies by the Indian Company and its personnel under contractual agreements between the Indian Company and the personnel cannot overshadow the paramount truth that the Indian Company as brought out on the preamble was created only to carry out the task appointed by the English Company. The English Company had brought the Indian Company into existence to sub-serve its need of a company doing liaison work inIndiaand surrounding countries for it. The Indian Company had no independent activity, no other business except and apart from the liaison work for the English Company. This conclusion is not only based on a consideration of the preamble but also the permission of the Reserve Bank ofIndiato allow the company to take a liaison office inIndia. The Reserve Bank ofIndiain its letter dated26-9-1979agreed to allow the Indian Company to establish a liaison office subject to the following stipulations : "We adv....
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....only disentitled the Indian Company to represent inIndiaas the agent of the English Company and bind and saddle the English company with liability under an agreement entered into by the Indian Company acting on its own and not under the authority and command of the English company. Clause (4) aimed at limiting the poser of the Indian Company to represent and to represent and saddle the English Company with liability. Otherwise it us not possible to think of it as an independent unit doing its business on its own irrespective of its agreement with the English Company. Its very existence as has been asserted by Mr. R. Ganesan was rooted in the need of the English Company to derive benefit from the liaison work inIndiaand surrounding countries performed by the Indian Company and we may add who would do no other trading or business. It could not under the inhibition placed by the permission accorded by the Reserve Bank ofIndiaundertake any liaison work for any one else. The English Company had not only undertaken to meet the full cost of expenditure incurred by the appellant company for carrying out its appointed task of doing the liaison work but also had met the cost of setting up a ....
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....ndian Company from which the expenditure incurred by it on behalf of the English Company was to be deducted to arrive at the taxable profit and not by limiting the taxable receipt to 5 per cent remuneration paid by the English Company to the Indian Company under the agreement. Need we emphasise that settlement prescribed under clause (5) was not only to make advance payments but also to clear up the liability for expenditure by reimbursement of the expenditure. The English Company reimbursed every penny of the expenditure incurred by the appellant company. No one on these facts could hold that the Indian Company, a mere agent, was liable for the profit resulting from the transactions entered into by the agents on behalf of the principal which the latter refrains from repudiating. There is no instance when the English Company repudiated the liability for undertaking the expenditure by the Indian Company. A consideration of the remuneration payable to the Indian Company also rules out the possibility of taking the Expenditure incurred by the Indian Company on behalf of the English Company as its own expenditure. If the Indian Company was incurring the expenditure on its own where was....
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....rne by Rolls-Royce plc and is charged to the profit and loss account in Rolls-Royce plc's books of account. 2. All monies advanced by Rolls-Royce plc to Rolls-Royce India Limited are for the purposes of defraying operational costs. Any unexpanded advances held by Rolls-Royce India Limited are refundable to Rolls-Royce plc and are recorded as recoverable from Rolls-Royce India Limited in the books of account of Rolls-Royce plc." What is the true purport of the agreement is to be found out not only from interpretation of the terms but also the way in which the two parties to the agreement had understood the purport of the various stipulations of the agreement. It is the surest way to find out the true intention of the parties underlying the stipulations and provisions in the two agreements. It is not generally the case but there are occasions when the draftsman is not able to clothe the intention in suitable and proper language. Therefore, it becomes necessary to make out the true intention from the conduct and understanding of the parties as to what they had agreed to mean by from a certain stipulation inserted in the agreement. There is no room for doubt that taking into acco....
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....er, it was not a case of novation which we are faced with. It was a case of clarifying the intention of the parties which they felt was obscure in the language of clause (5). No offence could be possibly taken to the memorandum on the ground that it was an afterthought. It was not. Memorandum had been executed long before the IAC had started making the assessment for the year in issue overruling the finding of his predecessor incorporated in the assessment for the preceding year 1980-81. 14. Therefore, whatever way we took at the issue, whether from the object for realising which the appellant Indian Company had been created or from the nature of its duties or obligations imposed under the agreement or from the limitations placed on its authority to represent the English Company or by the limitations placed on the activity of the Indian Company by the agreement as well as the permission of the Reserve Bank of India to enable it to set up a liaison office in New Delhi or from the consideration that the cost of setting up of liaison office was met by the English Company in full or from the interpretation of the two agreements or from the understanding of the respective parties abo....
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.... "(A) To carry on business as manufacturers, builders, designers, repairs and owners of aero-engines, motor cars and carriages, cabs, omnibuses, wagons, carts, cycles, ships, boats, and other marine vessels, aeroplanes, airships, and all other land, sea, or air carriages and conveyances, in whatsoever manner and by whatsoever powers the same may be propelled or driven, and to buy, sell, let out on hire, or act as factor or agent for the purchase or sale of, or otherwise deal in aero-engines, motor cars and motor vehicles and boats of every description, aeroplanes, airships, and every kind of aircraft and component parts, fittings and accessories of all kinds for the same, and all articles and things used in the manufacture, maintenance and working thereof. (B) To carry on business as engineers, machinists, smiths, fitters, electricians, brass-founders, iron-founders, tube-makers, metalworkers, wiredrawers, rope-makers, rubber or rubber substitute manufacturers, oil-refiners, automobile store; garage and aerodrome keepers, storers, and suppliers of and dealers in petrol, paraffin, oils and other fluids, generators and distributors of electricity and suppliers of motive power of a....
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....r weeks..3.3 Clause 2 spelled out the duties of RRI and reads as below : "2. Duties of RR India RR India will carry out the following duties to such extent as Rolls-Royce may require from time to time (i) To obtain and report to Rolls-Royce on a regular basis such marketing information as is considered to be relevant to Rolls-Royce's interests. (ii) To disseminate such marketing and commercial information relating to Rolls-Royce's products as Rolls-Royce may require. (iii) To provide administrative and secretarial assistance locally for the Service Representatives deployed in the Territory. (iv) To provide a liaison service between Rolls-Royce and relevant departments of the Government of India and other customers of Rolls-Royce in the Territory in all matters of supply of products and services. (v) To monitor the effectiveness of Rolls-Royce's commercial advisers and report regularly thereon. (vi) To look after Rolls-Royce visitors inIndiaand arrangements for stay and itinerary. 3.4 Clause 3 provided for the establishment of the offices of RRI and is extracted here as follows : "Offices of RR India (a) RR India shall as soon as practicable establishme....
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.... end of the said AP 3, AP 6, AP 9, or AP 13 (as the case may be) together with the total of advance payments made to date during that Year of Account. (iii) Following verifications of each such quarterly statement Rolls-Royce will calculate the amount by which the Service Fee has been overpaid or underpaid and Rolls-Royce or RR India (as the case may be) will promptly make an adjusting payment to rectify such overpayment or underpayment" 3.7 Clause 6 pertained to the reimbursement of initial setting up costs and read as follows : "Setting up Costs All costs and expenses incurred by RR India (as authorised by Rolls-Royce prior to commitment either specifically or generally) in establishing a liaison office in New Delhi or otherwise in setting up operations shall be reimbursed by Rolls-Royce in full in Sterling in the UK as soon as practicable after such costs and expenses are incurred but in any event within eight weeks from date they are incurred and notified to Rolls-Royce." 4. On20-5-1980, a supplemental agreement was entered into between RR and RRI which purported to "reiterate and clarify the position with regard to the remuneration payable under the Formation Ag....
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....change Regulation Act, 1973. (vi) The liaison office inIndiawill furnish to us (in duplicate on a yearly basis) the following particulars/documents : (a) A certificate from the auditors to the effect that during the year no income was earned by/or accrued to the liaison office inIndia. (b) Details of remittances received from abroad duly supported by bank certificates. (c) Certified copy of the audited final accounts of the liaison office inIndia. (d) Annual report of the work done by the liaison office in India, stating therein the detail of activities taken up/services rendered in India and also actual export/import, if any, effected during the period in respect of which the office had rendered liaison services. 3. We further advise that maintenance of an account in the name of your Head Office in the books of the liaison office inIndiawill require prior permission of the Reserve Bank." 6.1 In accordance with the above permission the assessee opened a liaison office inIndia, and for that purpose, it leased out suitable building and also engaged staff. Total expenditure incurred during the accounting period under consideration on the maintenance of the staff a....
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....asis of which the figure of pound 14,014 has been worked out has not been placed on record. Some insight into the fact that there is such an account, whether called as trading account or otherwise, is had form Note 2 to the accounts which states, inter alia, as below : "The Profit before taxation is stated after charging :. 1981 1980 Pound Pound Depreciation 7,495 5,000 Audit fees and expenses 1,611 &n....
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....nbsp; ------ 10,137 Add : Depreciation charged : 7,495 ------ 17,632 Converted to Indian currency @ Rs. 100=pound 5,782  ....
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....bsp; expenses incurred by the assessee in carrying on its business 2,02,743 To Audit fees and expenses 1,611 By Service fee &nbs....
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....Account itself, appearing at page 17. Obviously this is not the correct factual position. I am unable to understand and appreciate this action on the part of the assessee and its counsel. As substantial part of the assessee's argument was based on this factually incorrect assumption, the attempt at presenting a wrong picture of the accounts is, prima facie, regrettable. 7. Having noted the facts of the case, as above, let me note the submissions of the assessee. They were as below : "(i) That the expenses in question were incurred by RRI on behalf of RR who reimbursed them to the assessee in full. The assessee got neither a farthing more nor a farthing less than the expenditure actually incurred by the assessee on behalf of RR. (ii) That the assessee's only income was service commission computed at the rate of 5 per cent on the total expenses incurred and the assessee's accounts were made out on this basis. In support of it, reliance was placed on the copy of the P & L A/c filed at page 17 of the paper book and on the agreement dated 20-5-1986, which according to the assessee, clarified the position as above is beyond any shadow of doubt. Attention was also invited to the ....
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...., that clause 4 of the agreement dated 1-7-1979 made this position absolutely clear, that therefore, it will be wrong in law to say that RRI was acting as agent of RR and acting for and on behalf of it; that RRI was acting on its own to carry out its contractual duties listed in clause 2 of the Agreement, that the expenditure of RR was the income of RRI, that both of them were of revenue nature, that what was received under clause 5 of the Agreement was the service fee for rendering contractual services, that this fee was paid in advance, that the advance in question was of the service fee and not de hors that, therefore its nature was that of service fees, and not of loan or advance on account, that, even though Agreements dated 1-7-1979 and 20-5-1980 should be read together it has not to be forgotten that the latter agreement was not in substitution of the original agreement, but only in explanation and clarification of it, that it, in no way, affected or changed the character of the receipts of RRI from RR; they were trading receipts to begin with and they continued to be so even under the Agreement dated 20-5-1980, that the expenses incurred by RRI were its expenses, the employ....
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....n. If the parties have chosen to conceal by a device the legal relation, it is open to the taxing authorities to unravel the device and to determine the true character of the relationship. But the legal effect of a transaction cannot be displaced by probing into the 'substance of the transaction'. This principle applies alike to cases in which the legal relation is recorded in a formal document, and to cases where it has to be gathered from evidence-oral and documentary-and conduct of the parties to the transaction." In view of the above settled law, the true nature of relationship between the assessee and RR has to be determined after examining the documents and record and their conduct. 11.1 The first thing that strikes one on perusal of the facts of this case is the corporate character of both RR and RRI. May be that RR is the holding company and RRI is it subsidiary but, for that reason, their separate entities are not lost. RRI is an independent judicial entity, having its own Memorandum, assets and business machinery. It entered into agreement with RR on1-7-1979in pursuance of its own object clause and to pursue its own business, which, to begin with, consisted of provi....
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....le object as per the Agreement was to sub-serve and cause benefit to RR. It is a vital distinction, and prima facie the parties, attached importance to it and so it has been written into the contract itself by the contracting parties, and it will be wrong to ignore it, while construing their true relationship. 11.3 To enable RRI to set up its office in India and to assemble its operational set up, RR was to reimburse the expense incurred by RRI "in full in sterling in the U. K. as soon as practicable after such costs and expenses are incurred...." (clause 6 of the Agreement). For the services to be rendered by RRI to RR, the latter was to give to the former "Service Fee". This term has been defined in clause 1 of the Agreement to "mean the annual fee payable by RR to RRI calculated and payable in accordance with clause 5 hereof". Sub-clause (a) of clause 5 provided the basis for calculating the service fee. According to it, "The service fee shall be calculated for each year of account at a fixed rate of 105 per cent of the Actual Operating Costs, incurred during the year of account to which the service fee relates". It is clear from the aforesaid wordings that the basis of calcu....
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....ng costs. The cost incurred is of RRI. Even the Agreement dated20-5-1980say so. The entire operations of RRI inIndiaare, no doubt, for the benefit of RR. One may, therefore, loosely say that RRI is acting inIndiaon behalf of RR, but there is clause 4 to remind one that "on behalf of" can never mean in the above context, "as agent of RR"; it can only mean for the benefit of RR. 11.4 It is possible that the contracting parties might have been advised that clarification as above was necessary to bring the reality into sharper focus, as the commercial profit of the assessee will be only 5 per cent but, as it did not purport to change the original agreement, and meant only "to reiterate and clarify the position" as it already existed, and as in fact also it did so, it will not in my opinion, be correct to say that the quality of the payment of 105 per cent visualized under the contract underwent any change as a result of the agreement dated 20-5-1980. Earlier also 105 per cent of the actual operating costs were to be paid; later also, the same amount is to be paid. Its bifurcation into two parts is only with a view to emphasise that the RRI's net surplus will be 5 per cent of actual ....
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....sty of facts. All the three cases, referred to in para 7.2 supra and relied upon by the assessee are irrelevant in view of the above factual situation. 11.7 The accounts of the assessee have also been maintained on the above basis, as noted above. All the receipts under clause 5 of the Agreement are credited to the Operating or Trading account and all the expenses incurred are debited to the said account. On ground also, it is the assessee which engages its employees, which hires out its accommodation, and pays salaries and rents, etc. The respective agreements for hiring the employees and leasing the accommodation have been admittedly entered into by the assessee on its own and not on behalf of RR. The offices set up inIndiaare of the assessee and so are the employees. It is, again, the assessee which approached the Reserve Bank ofIndiafor permission to set up its office inIndia, and the RBI accorded its permission to the assessee "to your establishing a liaison office atNew Delhi". (See page 187 of the paper book). In the face of these hard facts, it is impossible to accept the proposition that the expenses incurred by the assessee inIndiawere not its expenses. It paid salary ....
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....purpose of sec. 40(c)(iii) and the reimbursement of the salary being of the revenue nature was to be credited separately. On these facts, it was held by their lordships that the ITO's stand was wrong and that the gross amount before making adjustments could not be considered in considering the amount coming within the purview of section 40(c)(iii). The above facts have prima facie, no similarity with the facts of the present case. Here, the assessee's employees are not working on deputation, so to say with RR and RR is not paying anything to those employees for the services rendered by them to RR. The employees are rendering services to RRI and it is RRI, which is paying them. The employees have no direct/indirect relationship with RR or its work. RR is the client of RRI and RRI's employees discharge their duties to RRI, when they provide contracts-for services to RRI's client. There can, therefore, be no question of the reimbursement of the salary of the salary of the employees of RRI by RR, for the employees of RRI have not been deputed, to it for rendering services to it. RR pays to RRI for the services rendered, and merely because the compassion of such payment is related to th....
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....-1980. This entire payment is termed as "Service Fee" by the definition clause. Agreement dated 20-5-1980 clarifies that the above provision in the original agreement in fact meant that (i) the entire expenditure incurred in connection with the provision of the services stated in clause 2 of the agreement incurred by RRI will be reimbursed to it by RR, and (ii) that 5 per cent of the above will be paid in addition. Even according to the latter agreement the payment in questions for the services rendered by RRI to RR in terms of the Agreement dated1-7-1979and not de hors it. It is one of the businesses of the assessee to render such services. It is in the course of carrying on of such business, and the rendering so services that the payment is made by RR to RRI. This basic character of the payment cannot be camouflaged under any subtlety of legal drafting-it is the amount, which has been earned by RRI by dint of rendering of the services to RR in terms of clause 2 of the Agreement, and the amount so earned would be its trading receipt coming to it directly as a result of its carrying on its business. It is the endeavour of every businessman to earn so much as will reimburse it its c....
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....esearch was for the benefit of all concerned including the head office and thus subsidiary concerns. It was for sharing of the expenses of the research which was utilized the subsidiaries as well as the Head Office organization that the payments were made... the very fact that the technical date were jointly obtained and the expenses were shared together indicates the tit would not be treated a income." 14.4. The above narration shows (i) That the non-resident company was not doing the business of doing research work with a view to sell its results. (ii) That it was an in house R & D effort and it was doing research jointly for itself and its subsidiaries, which all owned the fruits of research. (iii) That subsidiaries shared all expenses of this joint effort and did not purchase the information. (iv) That the expensed incurred by the non-resident were far more than it realized from its subsidiaries and there was no profit element in such realizations form the subsidiaries. In the context of these facts, it was held that the receipts were by way of recoupment of joint expenses incurred by teahouses on its won and the "subsidiaries" behalf and were not income. 14.5....
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....ablishment charges, office advertising, salaries and wages not exceeding Rs. 600,000 per year less the salary and expanses of the Liaison Officer. The question of determination was whether the reimbursement of the above expenses was trading receipt of the assessee. It was held by the Hon'ble Supreme Court that the payments were made by the Government to the assessee to assist it in carrying on its business and for the services it was rendering to the Government by doing so. They were not of a benevolent nature and constituted trading receipts. In the present case also, this is precisely what has happened. The payments have been made in the present case, as per the assessee's submission in the form of reimbursement of expenses (if this plea of the assessee be accepted for arguments sake) for rendering services in terms of the contract dated 1-7-1979 read with that dated 20-5-1980, and, therefore, they will even on this concessional hypothesis, constitute business receipts in terms of the ration of the above case. 17. In the end, I sum up the above discussion by holding- "(i) That the assessee has a separate and independent entity form that of RR, and that the Agreement dated.1....
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....ation of arguments addressed to me both for and against the views expressed by the Members and then express my opinion. I shall take the facts from the order of the learned accountant Members, not that there is any difference in the facts narrated by both the Members but it is nor convenient to taken them form the order of the learned Accountant Member. 2. The assessee is a non-resident company being 100 per cent subsidiary of another non-resident company, namely, Rolls-Royce. For short, they will be referred to as RRI for the non-resident Indian Company and RR for the non-resident holding company. RRI was incorporated on 20th of February, 1979. In sub-clauses (A) to (D) of clause 3 of the Memorandum of Association the objects of the RRI were set out. They are : (A) To carry on business as manufacturer, builders, designers repairers and owners of aero-engines, motor cars and carriages, cabs, omnibuses, wagons, carts, cycles, ships, boats, and other marine vessels, aeroplanes, airships, and all other land, sea or air carriages and conveyances, in whatsoever manner and by whatsoever powers the same may be propelled or driven, and to buy, sell, let out on hire, or act as factor ....
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....ement defined the terms agreed upon between RRI and RR. They are : "(a) 'Service Support Obligations' shall mean obligations of Rolls-Royce under contract or otherwise to provide technical and after sales service to customers and licensees of Engine Products. (b) 'Service Fee' shall mean the annual fee payable by Rolls-Royce to RR India calculated and payable in accordance with Cause 5 hereof. (c) 'Actual Operating Costs' shall mean the total of revenue expenditure incurred by RR India in performing its obligations pursuant to this agreement in the UK Indian and elsewhere. (d) 'Budgeted Operating Costs' shall mean the RR India budget fore case to Actual Operating Costs. (e) 'AP' shall mean a Rolls-Royce accounting period of normally four weeks." 5. Clause 2 provided for the duties of the RRI as : RR Indian will carry out the following duties to such extent as Roll-Royce may required from time to time : (i) To obtain and report to Rolls-Royce on a regular basis such marketing information as is considered to be relevant to Rolls-Royce's interests. (ii) To disseminate such marketing and commercial information relating to Rolls-Royce's products as Rolls-Royce....
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....uring the Year of account to which the Service Fee relates. (b) Payment of the service Fee shall be made by way of advance payments by Rolls-Royce to RR India each AP with quarterly adjustments in following manner : (i) Each of such advance payments shall be calculated at a fixed rate of 105 per cent of the Budgeted Operating Costs for the AP to which the particular advance payments relates and shall be payable by Rolls-Royce to RR India at the beginning of each AP (or part thereof) commencing with effect from 1st June, 1979. (ii) Within ten weeks of the close of the last business day of AP 3, AP 6, AP 9 & AP 13 in each Year of Account RR India will submit to Rolls-Royce a statement showing the actual Operating Costs incurred up to the end of the said Ap 3, AP 6, AP 9, or AP 13 (as the case may be) together with the total of advance payments made to date during that year of Account. (iii) Following verification of each such quarterly statement Rolls-Royce will calculate the amount by which the services Fees has been overpaid or underpaid and Rolls-Royce or RR India (as the case may be) will promptly make an adjusting payment to rectify such overpayment or under payment.....
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....roposed liaison work and would not undertake any other activity of trading commercial or industrial nature, nor enter into any business contracts in its own name without the prior permission of the Reserve Bank of India; that it would charge no commission or fee or any other remuneration for the lesson activities rendered by RRI in India; that the entire expenses of the liaison office in India would be met exclusively out of the funds received from abroad through normal banking channels; that the liasion office in India should not borrow or lend any money from or to any person in India without prior permission. It also stipulated that the liaison office in India should not acquire, hold or dispose of any property in India without the prior permission of the Reserve Bank of India under section 31 of the Foreign Exchange Regulation Act, 1973; that the liaison office in India would furnish every year a certificate from the auditors to the effect that during the year no income was earned by or accruing to the liaison office in India, along with details of remittances received from abroad duly supported by the bank certificates. A certified copy of the audited final accounts by the liai....
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....law be regarded as the expenditure incurred by the assessee-company RRI. The revenue's point was that the expenditure incurred by RRI in India though on behalf of RR and though reimbursed by RR in full yet it constituted the expenditure of the assessee-company in India for the purpose of earning income and when that was the expenditure of the assessee-company in India, the allowance of expenditure to compute the income for the purpose of the Income-tax Act should be as per the provisions of the Income-tax Act and if the Income-tax act had placed any prohibits or restrictions on the allowance of that expenditure, those prohibitions or restrictions should be given full effect to, and only then the expenditure eligible to be allowed as permissible expenditure should be allowed. Since, the entire expenditure was reimbursed the amount received towards reimbursement was in the course of business carried on by the assessee-company and, therefore, constituted its trading receipt. Thus, the receipts including the commissions received and form those gross receipts, only the permissible expenditure under the Income-tax Act should be allowed and the balance should be taken as income. It is in ....
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.... the income as stated earlier. It may be noted here that the revenue accepted this position as explained by the assessee in respect of the earlier two assessment years but this was the only year where a departure was made to tax the remittances received by the assessee by way of reimbursement. The assessee having failed in appeal before the CIT (A) preferred a further appeal before the Income-tax Appellate Tribunal. 15. The learned Judicial Member expressed his assent to the view canvassed on behalf of the assessee by holding that only the commission received by the assessee-company constituted the income of the assessee and not the receipts received by way of reimbursement of expenditure. The learned Accountant Member expressed a dissent with the view expressed on behalf of the assessee and assented with the view of the revenue stating that the reimbursement of expenditure and the amount received by way of remittances constituted trading receipts of the assessee. 16. Before I go to the reasons that prevailed with my learned brothers to come to their respective conclusions, I may have to notice what prevailed with the CIT (A) in declining to accept the claim of the assessee. ....
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....is view is right or wrong, as I have mentioned earlier, is the bone of contention, in this appeal. 18. The learned Judicial Member held that the view taken by the learned CIT (A) was incorrect. After referring to the relevant passages of the agreement, objects in memorandum of association and the arguments of the learned counsel for the assessee and the D. R. the learned Judicial Member held that the service fee received by the assessee was not 105 per cent of the actual operating cost incurred during the year of account but it was only 5 per cent. He held that RR had brought RRI into existence to subserve its needs of perform liaison work in India and surrounding countries to promote the sales of its manufactured goods; that the RRI had no independent existence or activity; that this fact was borne out not only by the preamble to the agreement but also by the permission granted by the Reserve Bank of India whereby the Reserve Bank of India had specifically restrained RRI form carrying on any business of whatever kind other than performing the liaison work as mentioned in the agreement, a copy of which was filed before it. He held that on a careful consideration of agreement ent....
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.... agreement was originally entered into on1-7-1979. The purport of agreement of20-5-1980was only to clarify the situation and to clear the doubts not to bring about a change as was supposed by he authorities. In this context, he mad reference to section 62 of the Indian Contract Act, which provided for addition, subtraction, alteration, waiver or a recession of an agreement before a contract was breached. He held that the agreement dated 20-5-1980 could not be taken as an so as to circumvent a situation created by the proceedings initiated by the IAC (A) because IAC (A) initiated proceedings for this assessment year long after the agreement was entered into on 20-5-1980 and the assessments for the earlier years were completed on the basis of these agreements. He, therefore, vacated the order passed by the IAC (Asst.) and directed him to take the remuneration of 5 per cent of the actual operating cost as the taxable receipt of the assessee-company and proceed to make the assessment accordingly. On other grounds no finding was recorded as assessment was set aside. 19. The learned Accountant Member, however, took a different stand. After exhaustively referring to the material placed....
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....re incurred by the assessee was not of its own. Thus, the agreement of20-5-1980, according to him, did not bring about any change in the method, manner and nature of remunerating the assessee-company. Since, the complexion of the arrangement had not changed, he did not agree with the view expressed by the revenue that agreement of20-5-1980had brought about a change in the complexion of the earlier agreement. Advance payments towards full reimbursement of expenditure, according to him, was only a convenient system devised to facilitate accounting and payments and that by itself did not advance the assessee's case. As the actual should be known only at the den of the year of accounting, this system had to be devised. Even so, the method and manner of remunerating the assessee-company had not undergone any change. He also drew support for his view that the expenditure incurred was that of RRI and not that of RR, from the use of the expression in the agreement "total of revenue expenditure incurred by RRI for performing its obligation". The "revenue expenditure incurred by RRI" according to the learned Accountant Member, meant that the expenditure was incurred by RRI as its own and not....
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....ourt according to the learned Accountant Member, held in this case that receipt on account of the reimbursement of revenue expenditure is revenue receipt. He also relied upon another judgment of the Supreme Court in the case of Bengal Textiles Association. 20. Now, it is my task and endeavour to find out whose view is just, correct and according to law on the facts, if not close to it. I do not have to reproduce here the arguments addressed to me by both the learned counsel for the assessee and the departmental representative because they emphasised, reiterated their respective stands taken up before the authorities below as well as before my learned Brothers. My first task is to resolve the raging controversy as to how RRI rendered services to RR and in what capacity ? To answer this question, one has necessarily to go to the agreement, which is on pages 42 to 49 of the paper book. I have already extracted above the relevant clauses form the order of the learned Accountant Member. RR, whose registered office was at London was selling engine products to Ireland and other markets throughout the world using commercial information and marketing support derived from various sources.....
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....legal independent existence was not factually independent. The entire control of it vested with RR. RRI was operating in theterritoryofIndia,Bangladesh,Sri LankaandBhutan, where RR had sold its products and incurred service support obligations, that is, to provide technical and after-sales service to customers. This is essentially highly technical service to be provided by RR under the agreement it entered into. For this purpose, RRI on which this responsibility was cast has to engage competent and technical qualified men. But when we look at the salaries paid to employees, RRI engaged two persons, both of whom were directed to be employed by RR. This is the information ascertained during the course of hearing before me because of the observation of the learned accountant Member that the employees of the assessee-company RRI were paid huge salaries and they were engaged by RRI. I do not have to refer to the duties that they include obtaining and reporting to RR on a regular basis the marketing information as is considered relevant to RR's interest, to provide administrative and secretarial assistance for the service representatives deployed in the territory assigned to RRI and to p....
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....red by RRI. Since, RRI has no independent existence and since, it has not been permitted by the Reserve Bank ofIndiato perform any other activities than to purely and simply acting as liaison office of RR, it has no purpose to incur any expenditure of the nature now incurred by RR. This background has to be borne in mind to decide this issue. RR having put up RRI as its shadow has to necessarily meet its expenditure and, therefore, it has to show the entire expenditure in its accounts and also provide resources to RRI to meet the expenditure by way of periodical advances depending upon the requirements as projected to it by way of budgets by RRI and RR. The agreements entered into on1-7-1979and clarificatory agreement entered into on20-5-1980have to be read and understood and appreciated in this background. So understood, I am of the view that the expenditure incurred by RRI cannot be said to be the expenditure incurred by it on its own behalf. The agreement of20-5-1980entered into with a view to provide clarification cannot be interpreted in a manner otherwise than as how the parties to it understood it. Therefore, in my opinion, it is not very appropriate to substitute the expres....
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....ng costs, it did not, in my opinion, mean that RRI is receiving 105 per cent as its trading receipts. Of this 100 per cent cost was towards the reimbursement of expenses and the balance of 5 per cent was only towards service fee. The expression 105 per cent to the actual operating costs incurred is not like weighted receipt like the weighted deduction u/s 35 of the Income-tax Act. The same thing could have been expressed in a manner as to show that 100 per cent was to go towards expenses and the balance of 5 per cent only would be the service fee. Instead of mentioning that the actual expenditure incurred by RRI would be reimbursed in full, the agreement said in a manner of expression that the service fee would be 105 per cent of the actual operating costs. That the actual operating costs were going to be reimbursed to RRI becomes clear from the reading of sub-clause of clause 5. Sub-clause (ii) of sub-clause (b) of clause 5 provided that within 10 weeks of the close of the last business day, RRI will submit to RR a statement showing the actual operating costs incurred up to that day together with the total advance payments made up to that day. Thus, sub clause (iii) provided that ....
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.... provisions of the Ordinance issued, under which the cess was collected and found that the cess was collected in terms of the rubber exported and the distribution has to be made among the planters in a manner as to provide them compensation for the expenditure incurred. It is not necessary for me to reproduce here all the clauses of the Ordinance there. The Supreme Court noticed that the finding of the Tribunal in that case was that those expenses were based upon the production and not the actual expenses shown as having been incurred by the assessee. The Tribunal has also found that it was not a reimbursement of expenditure outlaid. The Supreme Court approved this finding an held eventually that the amounts made out of the funds earmarked for the assessee on the basis of rubber produced by them were paid against the expenditure incurred by them for maintaining the rubber plantation and producing the rubber. It would, thus, be seen that the expenditure incurred by the assessee was her own expenditure and the reimbursement made not to the full extent but partly, was, held to be revenue receipt. Therefore, the primary fact to be established before a reimbursement of expenditure can b....
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....itted). This shows that the expenditure must be incurred by the assessee first on its own. So, too is the provisions made by section 40 which puts a prohibition on the allowance of expenditure in computing the income chargeable under the head "Profits and gains of business or profession". Again, section 40A(2)(a) states that "Where the assessee incurs any expenditure in respect of which"-which again applies only when the assessee incurred an expenditure on its own and claimed it as a deduction in computing the income is only then the ITO's power to make a disallowance out of it will arise and the said basic jurisdictional fact to vest him with the power of disallowance is the incurring of the expenditure by the assessee and claiming it as a deduction. Here, the assessee claimed that it never incurred any expenditure on its own and never incurred any part of the expenditure as a deduction. It is the Income-tax Officer, who is forcing upon the assessee that some expenditure was incurred by him or must be deemed to have claimed some expenditure and, therefore, a portion of it would be disallowing by applying the restrictive provisions of the Income-tax Act all because the assessee-com....
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....itious one but only clarificatory of the earlier agreement and did not bring any change, it should have been held that the fee of the assessee-RRI was only 5 per cent and not 105 per cent. Furthermore, the letter of 20th October, 1986 which was available on the record clearly provides that the expenditure incurred by RRI in India and in the U. K. is borne by RR and the moneys advance by RR were for the purpose of defraying operational costs. What is more important in this letter is the explanation that the unexpanded advance, if any, held by RRI were held in trust by RRI for and on behalf of RR and in this state of affairs it cannot be said that the expenditure incurred by RRI was on its own and not on behalf of RR. 24. The learned departmental representative did not advance any particular argument before me during the course of the hearing except to strongly defend the view taken by the learned Accountant Member. The learned Accountant Member proceeded on the assumption that expenditure incurred by RRI was its own and, therefore, the reimbursement of it was trading receipt and, therefore, when the income is to be computed for the purpose of the Income-tax Act, the entire 105 pe....
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....eived will offset the expenditure leaving the income unaffected either by way of addition or diminution. But if the expenditure incurred is claimed and allowed as a deduction and reimbursement of such expenditure is excluded, then that will give a distorted picture of income because the receipts, which are clearly of income nature, are being excluded. The present case to my mind is not the one where expenditure was incurred by the assessee-RRI claiming it as expenditure but at the same time claiming the reimbursement to be excluded. The assessee is claiming that expenditure spent by it was not its own, nor incurred by it for its business purpose. The expenditure was that it was required to spend, and the reimbursement it got should, therefore, be excluded. This, I think is fair and justified. As rightly pointed out by the learned Judicial Member, the assessee-company RRI did not incur any expenditure in the true sense of the expression "incur" but it spent the money belonging to RR for the business purpose of RR, as its agent. Therefore, it was to hold out as an agent of RR. But the reservation in clause 4 of the agreement became necessary for, RR, did not want to entangle itself b....