AI Drafter 
TaxTMI 
TaxTMI 
1995 (12) TMI 93
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 2. Non-deduction of tax on foreign commission 39,26,347 3. Short deduction on payment to foreign employees 1,86,954 4. Interest payable under section 201(1A) 7,33,765 ". 3. While deducting the tax at source from the salaries paid by the assessee to its employees, it has not taken into account conveyance allowance, medical reimbursement, and leave travel allowance paid by the assessee to its employees. As regards the conveyance allowance, it was the claim of the assessee that the amount incurred by the employees for coming to their office and going back would qualify for exemption under section 10(14) of the Income-tax Act. The Assessing Officer, observing that as per the provisions of section 10(14) of the Act, any allowance necessarily and exclusively incurred in the performance of duties of an office or employment or profit would only qualify for exemption, held that since the amount incurred by the employees was for the purpose of coming to their office from residences and for going ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ills and supporting vouchers/evidence in view of the magnitude of the task. This explanation of the assessee did not find favour with the Assessing Officer. He observed that section 10(5) of the Act clearly stipulated that the portion of the amount that had been actually incurred by an employee would only qualify for exemption under the Act. He further observed that in order to ascertain the veracity of the claim, one has to verify the tickets/receipts in support of the expenditure incurred towards the journey. He accordingly held that the amounts disbursed by way of L.T.A. which had been excluded from the purview of taxable salary were to be subjected to tax, and as such tax should have been deducted at source in respect thereof. On appeal, the CIT(A), considering the provisions of section 10(5), wherein the emphasis was on the amount of expenditure actually incurred for the purposes of such travel, confirmed the view taken by the Assessing Officer. 6. Aggrieved by the orders of the lower authorities with regard to short deduction of tax under the head 'salaries', assessee came up in appeal on that aspect. 7. Reiterating the contentions urged before the lower authorities, th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e to its employees, are in the sort of allowances having no bearing on the actual spending of the same by the employees, and as such they do not qualify for exemption under the Act. 9. We have considered the rival submissions and perused the orders of the lower authorities and other papers filed before us. As regards the conveyance allowance, we find from the orders of the lower authorities and other material papers filed before us that assessee has been making payment of conveyance allowance to its employees in fixed sums, with no bearing on the actual expenditure incurred by them, and the same has been paid basically to enable the employees to perform the journeys to come to the work-place and to go back to their residences. It has been the contention of the assessee right from the beginning that the conveyance allowance paid to employees for coming to office from residence and returning thereto does qualify for exemption under section 10(14) of the Income-tax Act. Provisions of section 10(14) read as follows--- " (i) any such special allowance or benefit, not being in the nature of a perquisite within the meaning of clause (2) of section 17, specifically granted to meet ex....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the policy of the assessee-company, as detailed in its letter dated 15-5-1995 reads as follows--- " A. MEDICAL ALLOWANCE : The company adopts the policy of paying. Medical Allowance for all employees and is restricted to Rs. 2,400 per annum prior to 1994-95 all the employees of the company were eligible to draw one months Gross salary towards Medical Allowance and is less than Rs. 10,000 (A set of Appointment letters are enclosed). The LTA and Medical Allowance paid to the four levels are- LTA (Rs. Ps.) Medical Allowance (Rs. Ps.) Level I - General Manager &nbs....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es made by it is exempt under proviso v to section 17(2) and the Leave Travel Allowance paid by it is exempt under section 10(5) of the Act. 11. Dealing with the reimbursement of medical expenses, the proviso to section 17(2) in so far as it is relevant for our purpose, reads as follows--- " Provided that nothing in this clause shall apply to---- (i) ..... (iv) ..... (v) any sum paid by the employer in respect of any expenditure actually incurred by the employee on his medical treatment or treatment of any member of his family (other than the treatment referred to in clauses (i) to (ii); so however, that sum does not exceed ten thousand rupees in the previous year ......" As per the above proviso, it is only the expenditure that is actually incurred by the employee on medical treatment, that does not come within the purview of taxable perquisites under section 17. In the instant case, reimbursement of medical expenses is in the sort of an allowance, which has been claimed by the employees by filing the self-declarations even which are bereft of material particulars and the same has been made by the assessee without verifying the correctness of those self-declarations....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mmission. The Assessing Officer noticed that the assessee company had paid foreign commissions to various persons and while making such payments, no tax was deducted at source. He noted that the assessee had paid foreign commission amounts by way of foreign currency drafts and the assessee had admitted that these drafts had been sent by post or through couriers from Hyderabad itself, where the registered office of the assessee is situated. Taking note of the following factors, the Assessing Officer concluded that the foreign commission payments were received by the payees in India only--- (i) The foreign currency drafts were obtained in India; (ii) These drafts were sent either by post or through couriers. These drafts were posted in Hyderabad or handed over to the couriers in Hyderabad, i.e. within the territory of India; (iii) There was an implied request on the part of the payee to send the amounts by post. Under such circumstances, the post office/courier could be considered as an agent of the payee. He accordingly, placing reliance on the decisions of the Supreme Court in CIT v. Ogale Glass Works Ltd. [1954] 25 ITR 529 and in Shri Jagdish Mills Ltd. v. CIT [1959] 3....
X X X X Extracts X X X X
X X X X Extracts X X X X
....plied request has to be inferred from the facts and circumstances of the case. Distinguishing the other decisions relied upon by the assessee, the CIT(A) upheld the view taken by the Assessing Officer that the foreign commission payments were received or deemed to have been received in India in terms of section 5(2)(a) of the Act, and as such payments were exigible to tax and consequently the assessee-company had the liability to deduct tax at source. Aggrieved by this decision of the CIT(A), assessee came up in appeal before us. 15. The learned counsel for the assessee reiterating the contentions urged before the lower authorities submitted that the Commission payments were made outside India, since no income was received or deemed to be received in India; that no income accrued or arose or was deemed to accrue or arise in India; and that no part of the commission paid could be said to be a "sum chargeable under the provisions of this Act". Inviting our attention to the copies of the agreements with the four recipients of the foreign commission from the assessee, viz. APC Pharmaceuticals, Astas Ltd., Mika Enterprises and MED Export copies of which are filed at pages 110 to 124 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ntended that there was no express or implied request from the agents to the effect that the post office or the courier, as the case may be construed as their agent for the purpose of making commission payments. Besides relying mainly on the decisions of the Madhya Pradesh High Court in CIT v. Kalyanmal Mills Tent Factory [1981] 132 ITR 115; of the Supreme Court in Patney & Co.'s case and of the Gujarat High Court in Dhrangadhra Trading Co. (P) Ltd. v. CIT [1966] 60 ITR 674, the learned counsel for the assessee has also cited and filed copies of the following decisions among the above, for our ready reference, in the paper-book filed before us--- (a) Ogale Works Ltd.'s case (b) Jagdish Mills Ltd.'s case (c) Petlad Turkey Red Dye Works Co. Ltd.'s case (d) Kathiawar Coal Distributing Co.'s case (e) CIT v. New Jehangir Vakil Mills Ltd. [1960] 39 ITR 427 (Bom.) (f) Hira Mills Ltd.'s case (g) Indian Aluminium Co. Ltd. v. CIT [1983] 140 ITR 114 (Cal.) (h) Dalmia Dadri Cement Ltd. v. CIT [1974] 94 ITR 303 (Bom.) (i) ESI Corpn. v. Md. Ismail Sahil AIR 1960 Mad. 64 (j) Thurappa Devenappa v. Umedmalji [1923] 25 Bom. LR 604 He thus, concluded that the post offi....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... made in India, so as to make the assessee liable to deduct the tax at source in respect of those commission payments. 18. In Ogale Glass Works Ltd.'s case, the assessee, a non-resident company carrying on business of manufacturing certain articles in the State of Audh, secured some contracts for the supply of the articles to the Government of India. The contract provided that "unless otherwise agreed between the parties, payment for the delivery of the stores will be made on submission of bills in the prescribed form in accordance with instructions given in the acceptance of tender by cheque on a Government Treasury in India or on a branch of the Reserve Bank of India or the Imperial Bank of India transacting Government business". The assessee submitted the bill in the prescribed form and wrote on it as follows--- "Kindly remit the amount by a cheque in our favour on any bank in Bombay." The assessee received cheques drawn on the Bombay Branch of the Reserve Bank of India along with a memo containing an acknowledgement form which was thus expressed : " The undersigned has the honour to acknowledge cheque No. dated for Rs. in payment of the bills noted in the first colu....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... in this case, the parties must have intended that the cheques should be sent by post which was the usual and normal agency for transmission of such articles; and there was necessarily imported an implied request by the company to send the cheques by post from Delhi thus constituting the post office its agent for the purposes of receiving those payments; the Appellate Tribunal was, therefore, right in its conclusion that the amounts of the cheques were received in British India and as such were liable to be taxed under section 4(1)(a) of the Income-tax Act. Where no express words are used requesting that the cheque be sent by post and the matter rests merely in the stipulation that the payment is made by cheque and if there is nothing more, the position in law is that the post office would not become the agent of the addressee and the mere posting of the cheque would not operate as delivery of the cheque to the addressee so as to pass the title in the cheques to the addressee. Where, however, on the facts and circumstances of the case, an implied request by the creditor to send the cheque by post can be spelt out, the post office would be constituted the agent of the addressee for ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ment by cheque, and from the mere fact that a large part of the sale proceeds were received by the assessee by means of cheques and hundis sent by British Indian buyers through post, it cannot be inferred that there was any implied request by the assessee to remit the sale proceeds by sending cheques and hundis through post, and something more would be necessary before the court can be called upon to draw such an inference. 21. Similarly, in the case of Kathiawar Coal Distributing Co., wherein the assessee which had its place of business in Saurashtra, procured orders for the supply of coal from various mills in Part-A states and forwarded them to the Deputy Coal Controller in Calcutta, and in turn received commission for its services from the mills in Part-A states, the Bombay High Court, dealing with the question as to the place of payment, the Bombay High Court held that the assessee received the commission for services rendered by it, viz. obtaining orders from the mills and getting the necessary quota from the Controller; every item of the services which the assessee rendered was rendered in Saurashtra; that the fact that the quotas and the orders were issued to the collier....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... In the case of Patney & Co., the Supreme Court held that in the case of payment by cheque sent by post the determination of the place of payment would depend upon the agreement between the parties or the course of conduct of the parties. If it is shown that the creditor authorised the debtor either expressly or impliedly to send the cheque by post the property in the cheque passes to the creditor soon as it is posted. If there is an express request by the creditor that the amount be paid by cheque to be sent by post and it is so sent the payment will be taken to be at the place where the cheque is posted. 25. Similarly, in the case of Indian Aluminium Co. Ltd. the Calcutta High Court considering a question whether the fees received by the Canadian company accrued or arose in India, held that under the agreement, the service had actually been done by the non-resident company in Canada itself; that the know-how was not applied under their guidance when such services were done; that there was also no business connection in India; and as such in the absence of anything in the agreement to show that the Canadian company had asked for the payment to be sent by post, the post office ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....est by the payee to effect payment in a particular manner, viz. by cheque or draft sent through postal channel or through courier. Only in the event such a request is found to have been made by the payee, either by the very terms of the agreement or by his subsequent conduct that the post office or courier would be the agent of the payee. Where no express words are used requesting the cheque to be sent by post and the matter rests merely in the stipulation that the payment be made by cheque and there is nothing more, the post office would not become the agent of the addressee and mere posting of the cheque would not operate as delivery of the cheque to the addressee. Where however, on the facts and circumstances of the case, an implied request by the creditor to send the cheque by post can be spelt out, the post office would be constituted the agent of the addressee for the purposes of receiving such payment. As held by the Gujarat High Court in Petlad Turkey Red Dye Works Co. Ltd. the principle laid down by the Supreme Court in Ogale Glass Works Ltd.'s case is a general principle and applies as much to payment by hundi as to payment by cheque, and the request, which would constitu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rs ...... Further, the very factum that such payments through drafts here received and acted upon by the agents would only show that such payments were in conformity with the general business usage prevalent in international business transactions ....... the principle enunciated in Sri Jagdish Mills case would squarely apply to the facts of this case as an implied request has to be inferred from the facts and circumstances of this case." As already noted above, merely because the foreign agents have not refused to receive or conditionally received the cheques, etc. sent by the assessee in a particular manner or through a particular channel, viz. postal or courier, etc., it cannot be implied that the assessee adopted such a channel for remittance at the request of those agents. Mere acceptance and non-refusal of the payments made by the assessee by those agents would not amount to an implied request by them, and there has to be something more than such an acceptance by the agents, to infer such an implied request by them for remittance through a particular channel. As held by the Bombay High Court in the case of Dalmia Dadri Cement Ltd., where a receipt is sought to be assessed as i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....reign agent in India, and the said commission receipt of the foreign agent can be said to have arisen in India, and thus making it liable to tax in India. However, we find from the tabulation furnished by the assessee before us, indicating 'Mode of Payment of Commission' to various agents, that the said request of the foreign agent, APC Pharmaceuticals has not been acted upon, and the remittance of the commission has not been made in accordance with the request of the said foreign agent. The relevant columns of the said tabulation insofar as it relates to APC Pharmaceuticals, reads as follows--- ---------------------------------------------------------------------------------- Name of the Agent Draft issuing bank Draft Drawn on ---------------------------------------------------------------------------------- APC Pharmaceuticals Canara Bank, Hyderabad The Bank of New York, &nbs....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uest of the said foreign agent. Since those banks merely issued drafts to the assessee, for passing on the same to the foreign agent, they cannot be the agents of APC Pharmaceuticals, since the Banks were not engaged for making any 'telegraphic transfer' payable at Hongkong, as desired by the said APC Pharmaceuticals by the terms of the agency agreement. In this view of the matter, since the Banks in India, which issued the drafts in respect of commission payments to M/s. APC Pharmaceuticals or the post office or the courier through which those drafts were remitted to the said foreign agent, cannot be the agents of M/s. APC Pharmaceuticals, those commission receipts in the hands of M/s. APC Pharmaceuticals, cannot be brought to tax in India, since they have neither accrued nor arose in India. Consequently, assessee was not liable to deduct any tax in respect of these commission payments made by it to M/s. APC Pharmaceuticals. 32. In this view of the matter, we set aside the order of the CIT(A) on the aspect of short deduction of tax at source with regard to commission payments made to foreign agents. 33. Now taking up the issue relating to short deduction of tax at source on ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....paid to non-resident employees at Moscow should not be brought to tax under section 195 was a new ground and should not be admitted in the light of Rule 46A of The I.T. Rules. The CIT(A), observing that there was a master-servant-relationship subsisting between the appellant company on the one hand and its employees on the other; that the employees were rendering services to the assessee-company and received the allowance as a compensation for such services rendered; and that there was no dispute on the point that the locus of the company is at Hyderabad, which is within the territory of India, held that since the services were rendered by the employees under consideration to the assessee-company having its locus in India, there was a deemed accrual or arising of income in India. Distinguishing the decisions cited by the assessee, he observed that section 192 for the purpose of deduction of tax at source, does not draw any line of distinction between payment of salary to a resident or a non-resident, and as such the Assessing Officer was correct in holding the assessee-company responsible for not deducting tax at source with regard to the amounts paid to its employees at Moscow. Ag....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e Department, and when questioned about non-deduction of tax with regard to special allowance, came up with the pleas regarding the very assessability of the incomes of those non-resident employees to tax in India, the lower authorities confined themselves to the question of allowability of exemption in respect of special allowance, mechanically rejecting the other contentions of the assessee relating to the very assessability of the income of those employees in India. The learned counsel for the assessee has filed before us copies of passports of those two employees based at Moscow, who are non-resident Indians, visiting India for less than a month and submitted that they being non-residents, no tax with regard to their salary is deductible in India. 37. Provisions of section 9(1) relevant for our purpose, dealing with Income deemed to accrue or arise in India' read as follows--- " 9(1) The following incomes shall be deemed to accrue or arise in India--- (i) ** ** ** (ii) income which falls under the head 'Salaries', if it is earned in India; Explanation : For the removal of doubts, it is hereby declared that incomes of the nature referred to in this clause for serv....