AI Drafter 
TaxTMI 
TaxTMI 
1995 (8) TMI 98
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....vision of erection, etc., for mechanical equipment and ETC for supervision of erection, etc., for electrical equipment. 3. Under another agreement dated 15-11-1983, for setting up one complete unit of 4-strand Wire Rod Mill (hereinafter referred to as WRM contract), between RINL and SMM Schloemann-Siemag Aktiengesellschaft (hereinafter referred to as SMS) with SMS as the Prime Contractor and three Indian contractors, viz., MECON, Bharat Heavy Electricals Ltd. (BHEL) and Engineering Projects (India) Ltd. (hereinafter referred to as EPIL), GFA was appointed as one of the foreign major sub-contractors for technical assistance through supervision of erection, etc., for the mechanical equipment and for technical assistance through supervision during manufacture of Indian equipment including overall co-ordination of activities. 4. Clause 1.5 of Schedule-1 of the LMMM agreement, dealing with supervision during manufacture of Indian equipment, reads as under:- " 1.5.1 The Contractor shall depute his and/or Confirming Party's/foreign Major Sub-Contractors' engineers/experts for carrying out inspection of the Equipment and Materials, supervision during its manufacture and test and t....
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.... what has been mentioned above, the Contractor shall give a rebate @ DM 785/FF 1800 per man-day in the case of foreign experts and Rs. 650 per man-day in the case of Indian experts for each man day of foreign/Indian experts are not utilised. " The contract further guarantees : " 1.10.3 The obligations of the experts so deputed by the Contractor, the Confirming Party and Major Sub-contractors for supervision of erection, commissioning and performance guarantee tests shall be in accordance with Article 19 of the Purchaser's General Conditions of Contract. " " 1.10.5 If some of the experts deputed for supervision of erection, commissioning and performance guarantee tests are required by the Purchaser beyond the Contract period, the Contractor shall provide such services in accordance with the terms and the rates to be agreed upon between the Purchaser and the Contractor. The Contractor together with the Confirming Party shall also ensure that the Major Sub-contractors provide such services whenever necessary in accordance with the terms and rates to be mutually agreed upon. " Schedule-.2 to the agreement provides for the contract price and clause 2.1.2 which deals with GFA....
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....M Four Million Six Guarantee Tests including Hundred Twenty Two Reimbursements. Thousand only)" " 2.3.2 The lump sum prices indicated at Schedule-2, para 2.1 for supervision of erection, commissioning and performance guarantee tests are firm and shall not be subject to variation whatsoever till end December 1986. If such work has to be done beyond December 1986 for reasons solely attributable to the Purchaser, the lump sum price indicated at Schedule-2 para 2.1 shall be reviewed to arrive at a mutually acceptable sum. " Schedule-5 provides for the terms of payment. Clause 5 of the Schedule reads as under : " 5. Subject to any deduction from the Contract Price as per Article 27 of the Purchaser's General Conditions of Contract and as per Schedule 4, para 4.5, the Contractor shall be entitl....
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....hedule 9.12, against presentation of original shipping documents (as defined under 5.1.2.3 below)/warehouse receipt duly authenticated to the financing bank, but not later than 4 weeks from the date of shipment or storage, as the case may be. The documents for payment shall be presented to the financing bank within 15 days from the date of Bill of Lading or warehouse receipt. 5.1.1.4 5% (Five per cent) of the value of the above services shall be paid on Preliminary Acceptance, as per Article 22 of the Purchaser's General Conditions of Contract, at the latest, however, 37 months after payment as per 5.1.1.1 above, against submission of a Bank Guarantee for equivalent amount valid till final acceptance test, ie., for a period of 6 months which will be extended in case the final Acceptance is delayed due to reasons attributable to the Contractor. If, however, preliminary Acceptance is delayed due to reasons for which Contractor is responsible (however, Purchaser's default will not be an excuse for Contractor's delay) the above payment will be released only against Preliminary Acceptance. 5.1.2 Mechanical Equipment, commissioning spares, spares for two years operation and mainten....
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....s according to services rendered in that particular month and issue of corresponding invoices collaterally with the payments as per 5.3.3.3 below as direct payment (free foreign exchange) against an irrevocable Letter of Credit for equivalent amount allowing partial withdrawal, to be established in favour of ETC by State Bank of India, within 30 days after signing of the Contract. This payment shall be made against invoices and attendance certificate issued by the Purchaser. Should a confirmation of such Letter of Credit through ETC's Banker be required by ETC then the bank charges for such confirmation will be borne by ETC. 5.3.3.3 85% (Eighty-five per cent) value of the above services as monthly payments according to services rendered in that particular month against invoices and issue of corresponding attendance certificate by the Purchaser. " Schedule 6 provides for terms and conditions for deputation of experts. Clause 6 thereof reads as under :- " 6. Terms & Conditions for Deputation of Experts: 6.1 The experts deputed by the Contractor in accordance with Schedule 1 para 1.10 shall have working knowledge in English language. The Contractor shall ensure that the ex....
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.... held in paragraph 4 of his order as under : " The assessee's main objection is that the proceedings initiated u/s 148 originally for taxing the 10% down payment were dropped by the Department not because it was received as advance or the income in respect thereof has not accrued but because the said income was found to be exempt from tax under the provisions of the then existing Agreement for Avoidance of Double Taxation, is not acceptable to me for the main reason that when the 10% down payment was proposed to be taxed originally, such action was dropped by the Department giving due consideration to the assessee's claim that these payments represented only an advance. As such, these payments should be taxed in the year in which the invoices for the full amount were raised showing the deduction of 10% down payment as advance in the relevant invoices. The present contention of the assessee that the 10% down payment cannot be regarded as advances is not correct in view of the fact that the invoice clearly indicates the period, the payment, the deduction towards advance paid and the balance payable. The invoice is very clear about the time of accrual, the place of accrual and the ....
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....service after receipt of the direct 'down payment', RINL could have invoked the Bank Guarantee to compensate itself for the payment made by it. But, there is no provision in the agreements to the effect that RINL had any lien on the direct down payment made by it or that the appellant's right of enjoyment over the payments received was a contingent one. Besides, the direct 'down payment' was calculated at a percentage of the entire contract price and not with reference to an intermittent stage of implementation of the contract. Therefore, the direct down payment would be finally adjusted only against the very final invoice to be presented by the appellant on completion of contractual obligations. It would be illogical to assume, in the absence of any provision to that effect in the respective agreements, that with progressive discharge of the contractual obligations, the appellant acquired increasing right of enjoyment over the initial payment. Not only that the appellant had a right to receive the direct 'down payment', it had in fact received that payment, and those receipts were at its disposal and control. Therefore, both on accrual as well as receipt basis, the direct down pay....
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....0%) arose simultaneous with rendering of services, RINL's liability to pay also arose simultaneously, but it could make payment within 30 days of presentation of the invoices by the appellant. The period of working, as mentioned in the Invoice No. 113/2351 dt. 18-5-1987 (paragraph-12 above) relates to the AY 1987-88. Although that invoice has been presented during the accounting period relevant to the AY 1988-89, the appellant's right to receive the invoiced amount arose during the accounting period relevant to the AY 1987-88. However, it has not been contended before me that the receipts submitted for taxation are more than the taxable receipts for the year. I would, therefore, direct the Assessing Officer to determine the tax liability of the appellant on the basis of actual receipts during the year. " Following the aforesaid order in the case of GFA for asst. year 1988-89, the CIT (Appeals) has also accepted the contention of the assessee for assessment of 90% of the billed amount in the appeals filed by ETC for asst. years 1988-89 to 1991-92. The Revenue is in appeal for all these years and in the case of both the assessees. 9. The learned counsel of the assessee, Sri S.E....
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....f AADT apply. The invoices have been raised by the assessee from year to year for the entire amount of consideration for rendering technical services to the assessee. The services are on man-month basis. They were undisputedly rendered in the years under consideration and, therefore, it would not be correct to say that the income pertaining to the years under consideration is only 90% and the 10% down payment received by the assessee was income for asst. years 1983-84 to 1984-85. The term "down payment", according to him, does not mean that the income accrued to the assessee in those years. It was an advance payment for the services to be rendered by the assessee and it culminates into income on fulfilment of the agreement, i.e., rendering of the services. He referred to the decision of the Supreme Court in the cases of Keshav Mills Ltd. v. CIT [1953] 23 ITR 230 and ED. Sassoon & Co. Ltd. v. CIT [1954] 26 ITR 27, and the Madras High Court in the case of Indo Foreign Traders (P.) Ltd. v. CIT [1987] 166 ITR 308. 12. The learned departmental representative further submitted that in so far as the appeals for asst. years 1986-87, 1987-88 and 1988-89 in the case of GFA are concerned, ....
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.... have heard the parties and considered their rival submissions. There is no dispute in these appeals that 90% of the gross amount of the invoices raised by the assessee in these years was income of the assessee and was in the nature of fees for technical services within the meaning of sec. 9(1)(vi) of the Act read with the Explanation 2 thereto as also under the provisions of AADT with West Germany, and was rightly taxed in the respective years. There is also no dispute that the services on man-days basis were rendered in these years and the bills were raised for the period of and on rendering such services. The question in dispute is for the assessability of the balance 10% which was given as a reduction in the invoice amount as the amount to that extent had already been paid at the time of signing of the two agreements. If, therefore, that amount was the income of the year in which it was received as a "down payment" as claimed by the assessee, it could not be brought to tax in the year in which the rebate was given, i. e., the year of actual rendering of services. It would in that case amount to double taxation and the mere fact that it was not or could not be assessed because o....
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....-sec. (2) of sec. 5, is received or is deemed to be received in India in such year by or on behalf of such person, i.e., the non-resident. The assessee received 10% as "down payment", not in India, but outside India through a bank in West Germany, as per the stipulation in Schedule 5 of the respective agreements (see clause 5 in the case of LMMM agreement extracted above, and similar clauses in WRM agreement). Therefore, there was no receipt in India and consequently no income receipt under this clause. Clause (b) of sub-sec. (2) of sec. 5 provides inclusion of income, in the total income, which accrues or arises or is deemed to accrue to arise to the assessee in India during such year. What is accrual or arisen and when an income accrues or arises is not defined in the Act. However, an income deemed to accrue or arise is provided in sec. 9 of the Act. 17. An income is said to accrue or arise when a right to income is acquired by an assessee or comes into existence and vests in the assessee. An income to which an assessee has no right cannot be said to have accrued to him. Two propositions appear to have been laid down by the Courts in regard to income accruing or arising. One i....
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....that the assessee must have contributed to its accruing or arising by rendering services or otherwise but he must have created a debt in his favour. A debt must have come into existence and he must have acquired a right to receive the payment. Unless and until his contribution or parenthood is effective in bringing into existence a debt or a right to receive the payment or in other words a debitum in praesenti, solvendum in futuro it cannot be said that any income has accrued to him. The mere expression 'earned' in the sense of rendering the services, etc., by itself is of no avail. " That was a case where the services were rendered earlier and, therefore, though the income was earned, it was held not to have accrued unless a right to receive that income came into existence by the finalisation of accounts. The present is a reverse case where the amount of consideration was received before the services were rendered. The later event happened earlier. 19. A right to receive a particular sum under the agreement alone would not be sufficient unless the right has accrued by rendering of services and not by promising for the services to be rendered. An assessee earns the income ....
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....y paid to the assessee a sum of Rs.43,078 in the accounting year 1957-58 and varying sums in later years. The Madras High Court held that as the compensation payable was linked to the turnover of the drug company in each year and the right to receive the money itself depended upon such turnover, the compensation payable could not be considered to be in the nature of liquidated damages for breach of contract. The right to receive compensation, therefore, arose only as and when the drug company effected sales and that would only be in the relevant years when the sales were effected and, consequently, the income arose to the assessee only during the year in which the sales were effected by the drug company. 22. Was the receipt of "down payment" in the cases under consideration a receipt of income to the assessee ? In other words, was it the first receipt, though in West Germany, after its accrual? No services were rendered by the assessees at that stage. Therefore, as aforesaid, it was nothing but a receipt of advance payment. That is precisely the reason for giving a credit of 10% in every bill. The entire invoiced amount accrued to the assessees when the services were rendered an....
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....nbsp; 634 50061 Feinrin Amount ....
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....bsp; (5%) " It thus clearly indicates that the fees for technical services-charged by the assessee were on man-days basis and accrued on the rendering of the services by the assessees' experts. It is true that 10% deduction was shown in the invoices to arrive at the net amount payable, but it cannot be denied that it could also be for the reason that the payment relating thereto had been received by the assessee for which the services were rendered in those years (during September 1984 to November 1984 in this particular bill). Furnishing of a guarantee of 5% of the billed amount is also an indication of this position and the existence of indemnity clause also supports this view. It is thus a case of a sort of executory contract whereunder the rights and obligations of the parties are determined on the basis of fulfilment of respective part of their obligations. Right to income accrue....