DODSAL PVT LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) WHETHER , on the facts and in the circumstances of the case, the Tribunal was right in holding that the amounts paid by the assessee to M/s Mannesmann Export AG, Dusseldorf, West Germany, (Non resident), for the period from 1st Oct., 1976, to 23rd March, 1977, did not get merged in the purchase price on the exercise by the assessee of the option to purchase ?

(2.) THE assessee M/s Dodsal (P) Ltd., Bombay, entered into a lease agreement on 16th Aug., 1976, with a West German company (hereinafter referred to as "Non resident"). The lease was to commence w.e.f. 1st Oct., 1976. On the same day i.e., 16th Aug., 1976, the non resident also entered into a sale agreement with the assessee. Both the agreements were executed in Singapore. Under the lease, a minimum guarantee period of 18 months was fixed. In the lease, it was stipulated that the lease will terminate when the equipment was returned by the assessee to the non resident in Singapore. According to the agreement, the assessee was required to pay, in advance, US $ 10.80 lakhs within 1 month of the signing of the agreement and thereafter to pay monthly lease charges of US $ 1.80 lakhs. The payment schedule is quoted at p. 24 of the paper book. As stated above, on 16th Aug., 1976, the parties concluded one more agreement, which was a sale/option agreement under which the assessee could exercise the option to purchase the machinery and equipment on or before 31st March, 1977. Under that agreement it was stipulated that in the event of the assessee exercising the option to buy the equipment, the price payable by the assessee to the non resident will be US $ 36 lakhs, less 90 per cent of the accrued lease charges. The assessee bought the entire machinery and equipment vide invoices dt. 23rd Sept., 1976, to 12th April, 1977. The first instalment of remittance of US $ 9.92 lakhs was sent by the assessee to the non resident with the approval of RBI dt. 18th Sept., 1976. The second permission for remittance of US $ 4.48 lakhs was given by RBI on 6th June, 1977, with the condition that future remittance shall be subject to deduction of income tax. However, before remittance of the second amount of US $ 4.48 lakhs on 6th June, 1977, the assessee gave notice of intention to buy the machinery and equipment from the non resident under the option agreement. Accordingly, the option came to be exercised by the assessee on 23rd March, 1977, i.e., prior to the remittance of the amount of US $ 4.48 lakhs. On 17th March, 1977, the assessee moved the Chief Controller of Imports & Exports for waiver of the condition of re export on payment of full import duty. The condition of re export was waived by the Chief Controller of Imports & Exports vide order dt. 15th Dec., 1977. By letter dt. 24th Nov., 1977, the non resident ultimately agreed to take the option price at US $ 32.38 lakhs by way of sale price instead of US $ 36 lakhs. On 30th Nov., 1977, the assessee requested for NOC for remittance to the non resident, of an amount of US $ 17.98 lakhs, without deduction of tax (US $ 32.38 lakhs being the sale/option price minus remittance already made of US $ 14.40.). This application for remittance of US $ 17.98 lakhs was rejected on the ground that the lease charges payable by the assessee to the non resident on account of the lease of machinery and equipment on and from 15th Sept., 1976, upto 28th March, 1977, when the option was exercised, constituted income, which accrued to the non resident in India and, therefore, the non resident was taxable in India in respect of that income. Ultimately, on 3rd April, 1978, the ITO passed an order under S. 195(2) in which it has been held that income had accrued to the non resident in India upto 28th March, 1977, when the option was exercised by the assessee and, therefore, upto that date, the income arising from lease rent was taxable. That the agreement for avoidance of double taxation between India and West Germany did not save the rental income from taxation. Accordingly, the assessee was directed to deduct the tax at the appropriate rate of 12.5 per cent on each remittance including on the amount of US $ 14.40 lakhs. The ITO, however, made it clear that the order was a provisional order and it was subject to modification at any time. The ITO further stated that the order was being passed without prejudice to the assessment being made directly on the assessee as the agent of the non resident.

(3.) BEING aggrieved by the order of the ITO under S. 195(2), the assessee preferred appeals before CIT(A). The appellate authority came to the conclusion that the two agreements dt. 16th Aug., 1976, should be read together. The appellate authority came to the conclusion that the assessee was not liable for deduction of tax at source from US $ 32.38 lakhs as the said amount represented the price of the equipment purchased by the assessee from the non resident as per the sale contract dt. 16th Aug., 1976, which was saved from taxation under the Double Tax Avoidance Agreement between India and West Germany. Being aggrieved by the order of the ITO under S. 163(1)(c), the assessee had also preferred appeals to CIT(A). Those appeals were also decided by the CIT(A) in favour of the assessee for the asst. year 1977 78, and for the asst. year 1978 79. In this connection, the appellate authority found that in the regular substantive assessment proceedings, the Department had allowed the assessee to capitalize the entire cost at US $ 32.38 lakhs and had allowed depreciation/investment allowance claimed by the assessee at appropriate rates under the Act. The Department had allowed the deduction in the relevant assessment years accordingly. In the light of the above facts, the appellate authority concluded that acquisition of the equipments by the assessee from the non resident was on principle to principal basis. That, no rental income had accrued to the non resident. Therefore, S. 163(1)(c) had no application.