Holding

The appellate authority under section 248 is competent to determine the quantum of the sum chargeable and may pass such orders as he thinks fit under section 251(1)(c).

Summary

Wesman Engineering Co. (P) Ltd., a licensee, sought a certificate under s.195(2) of the Income Tax Act to remit payments to its foreign collaborators for royalties and cost of working drawings. The Income Tax Officer held the entire remittance taxable and directed 65% TDS. The assessee appealed, contending that the cost of drawings was not taxable, that the DTAA barred tax, and that the expense exceeded the royalty. The Appellate Assistant Commissioner (AAC) allowed 75% of the remittance as expense and taxed the remaining 25%, a decision challenged by the Revenue before the ITAT on the ground of jurisdiction to determine quantum. The ITAT and the Calcutta High Court held that the AAC had authority to decide quantum under s.248, a view affirmed by the Supreme Court, which held that s.248 coupled with s.251(1)(c) empowers the appellate authority to pass any order, including quantum determination. The appeal was dismissed.

Issues considered

Whether an order passed under section 195(2) of the Income Tax Act is appealable to the Appellate Assistant Commissioner under section 248.
Whether the appellate authority under section 248 has jurisdiction to determine the quantum of the sum chargeable for deduction under section 195.

Legislation cited

Income Tax Act, 1961s. 195, s. 248, s. 251(1)(c)

Subjects

Income TaxSection 195Section 248Appellate jurisdictionQuantum of taxDouble Taxation Avoidance AgreementTDSRoyaltyCost of working drawingsAppellate authority powers

Judgment

COMMISSIONER OF INCOME TAX, WEST BENGAL
v. A
WESMAN ENGG. CO. (P.) LTD.

JANUARY 24, 1991

[N.M. KASLIWAL AND K. RAMASWAMY, JJ.] B/

Income Tax Act, 1961: Sections 195, 248, 25 l(l)(c): Jurisdictio'n
of the appellate authority-Whether extends to determining quantum of
sum chargeable.

Section 195(2): Order passed by assessing authority-Whether C
appealable under section 248.

The respondent-assessee, a private limited company and a
licensee, under an agreement was required to pay to its foreign col-
laborators (licensors) certain amounts towards cost of working draw-
ings and royalty. It applied to the Income Tax Officer to grant the D
necessary certificate to enable it to approach the Reserve Bank of India
for remittance to its foreign collaborators. The Income Tax Officer held
that the remittance represented payment for supply of technical know-
how and for use of the trade name and manufacturing right of the
licensor company and that the said amount neither fell within the
exempted category nor did the agreement for avoidance of double taxa- E
tion apply to the case, and directed the assessee to deduct tax@ 65% op
the sum to be remitted. ·

The assessee did not dispute the assessability of the royalty, but
challenged in appeal, that since the whole of the sum towards the cost of
working drawings exceeded the remuneration, the same was not tax- F
able, and that the assessment was barred by the Double Taxation Avoi-
dance Agreement. The Appellate Asstt. Commissioner rejected the
Double Taxation Avoidance plea, but determined the cost of the work-
ing drawings at 75% and the net profit chargeable at 25% of the amount
to be remitted to the non-resident company.
G
The Revenue appealed before the Appellate Tribunal challenging
the jurisdiction of the appellate authority under s. 248 to determine the
quantum of income, and that the Appellate Asstt. Commissioner was
---' wrong in allowing expense~ @7S% of the remittance. The assessee rded
cross-objection. Holding that the Appellate Asstt. Commissioner could
pa55 an order re1;arding the quantum, that the amount fixed by him H

117
118 SUPREME COURT REPORTS [1991) 1 S.C.R.

could not be said to be unreasonable, and that the amount brought to ,•
A charge by the Income Tax Officer was not exempt under the Double ~.
Taxatio11 Avoidance Agreement, the Tribunal dismissed the Depart-
ment's appeal and partly allowed the assessee's cross-objection.

At the instance of the Revenue, the Tribunal referred the question
B to the High Court which was answered in favour of the assessee.

In the appeal by certificate to this Court, it was contended that: 'y-
the order passed by the lhcome Tax Officer under s. 195(2) was not
appealable to the Appellate Asstt. Commissioner under s. 248, and that the ~,~
appellate authority had no jurisdiction to deal with the quantum of the f

c sum chargeable under the provision of the Income Tax Act from which
the assessee was liable to deduct tax under s. 195.
,..,.
Dismissing the appeal, this Court,
"'("
HELD: 1.1 Once an appeal has been preferred to the Appellate
D Asstt. Commissioner under s. 248 of the Income Tax Act, 1961, on the
matter of liability of the company to deduc~ taxes, the appellate autho-
rity was well within its competance to pass an order on quantum also. [ 124D]

1.2 Section 251(1)(c) gives full power to the appellate authority to
pass such orders in the appeal as it thinks fit. [125A] ~
E
1.3 The right to appeal under s. 248 of the Income Tax Act is
clear and it cannot be said that such a right is restricted and the Appel-
late Asstt. Commissioner was not competent to fix the quantum or to
revise the p~oportion of the amount chargeable under the provisions of
the Act as determined by the Income Tax Officer. [124F)
-
F
2. The language of s. 248 of the Income Tax Act, 1961 is wide enough ~-
to cover any order passed under s. 195. The Appellate Asstt. Commis-
sioner was also competent to pass an order ~tl:t regard to quantum
when once he is seized of the matter. {123F; 124D]

G 3. Under s. 248 a person having deducted and paid tax under
s. 195 inay appeal to the Appellate Asstt. Commissioner denying his
liability to make such deduction and for a declaration that he is not
liable to make such deduction. '(124E]
>--
Meteor Satellite Ltd. v. Income Tax Officer Companies Circle IX,
H Ahmedabad, [1980] 121ITR311, held inapplicable.
C.I.T. v. WESMAN ENGG. CO. [KASLIWAL, J.] 119

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1535
A
(NT) of 1978.

From the Judgment and Order dated 10.2.1976 of the C~lcutta
High Court in Income Tax Reference No. 220 of 1969.

S.C. Manchanda, K.:P. Bhatnagar and Ms. A. Subhashini for the B
Appellant.

C.S.S. Rao for Jhe Respondent.
\.,,).
The Judgment of the Court was deliyered by
'
I

KASLIWAL, J. This appeal by grant of certificate under Section c
261 of the Income Tax Act, 1961 by High Court of Calcutta raises the
following question for consideration:

"Whether on the facts and circumstances of the case in an
appeal filed under Section 248 of the Income Tax Act, D
1961, the A.A.C. had jurisdiction to deal with the quantum
of the sum chargeable under the provision of the said Act
from which the assessee was liable to deduct tax under.
Section 195 tI:tereof?" ·

Brief facts of the case are that the respondent-assessee is a pri- E:
vate limited company incorporated in India. The assessee company

- carried on some business in collaboration with M/s. Wilhelm Rupp-
mann, Industrieofenbau, Stuttgart W, Gutenbergstr. By an agreement
entered on 1st January, 1963 it was agreed that the foreign colla-
borators would grant to the Indian company during the term:
F
(a) the exclusive right to manufacture the licensed equipment in
India.

(b) the exclusive right to sell the licensed equipment in India
under the "Wesman Ruppnan" such sale to be effected by the
agency agreed upon, · G

(c) permit licensees to export the licensed equiP,mentfreely out-
side India, except to countries where the licensors have similar
license-arrangements.

Clause 5 of the agreement provided for payment to the.licensees of the H
\.
following sums: ·
120 SUPREME COURT REPORTS [1991] 1 S.C.R.

(a) "A payment of 5 per cent towards the cost of detailed
A working drawings in terms of clause 3(b). The payment for --~
these drawings shall be admissible in those cases where new
drawings are supplied by the Licensors abroad i.e. from
their or their associates works design offices at Stuttgart or
elsewhere in Europe.
B
This payment shall not be admissible for minor modifica-
tion of drawings and designs which have already been
purchased from the Licensors and p,aid for by the Licensees
nor on repeat orders executed by the Licensees.

TP.is fee shall be calculated on the ex-factory selling price of
c the licensed products after deducting the value of imported
components used in the manufacture thereof, if any, pay-
ment for cost of drawings shall be arranged by the
Licensees against supply of individual furnance designs,
such payment being effected forthwith against delivery of
D drawings."

(b) "A royalty at 5 per cent (five) which will be su.bject to
Indian taxes on the annual net ex-factory sale value of each
licensed equipment manufactured by the Licensees shall be
payable to the Licensors. The value of imported com-
E ponents, if any, that may be used in the manufacture of the
Licensed equipment shall be deducted in computing the
ex-factory price of the licensed equipment for purpose of
payment of royalty. The payment has to be effected
together with the report referred to under Clause 6."
-
F 0 t Thef ass~ssment yeahr involve~din the case is h1964-65. In ~hde ~·
·· :
ma ter o remittance to t e non-res1 ent company, t e assessee v1 e -
applications dated June 4, 1964 and 18.8.64 requested the Income Tax
Officer to grant necessary certificate in order to enable them to
approach the Reserve Bank of India for remittance to their collabora-
tors. The said applications related to the invoice in regard to supply of
G drawings for manufacture ·of furnances in India in accordance with
their collaboration agreement. The Income Tax Officer placing
reliance on the terms of the agreement came to the conclusion that the ;>--
payments made by the applicant company to the non-resident col-
laborators in Germany could be grouped under the heads Royalties
and remuneration for labour or~ personal services. According to the
H Income Tax Officer neither the remittance fell within the exempted
C.I.T. v. WESMAN ENGG. CO. [KASLIWAL, J.) 121

category nor did the agreement for avoidance of double taxation bet-
ween India and the Federal German Republic apply to the facts of the A
.J. instant case. According to him, the payment of the remittances in
respect of which the applications had been made represented payment
for supP.lY of technical know-how and for use of tra4e name and
manufacturing right of the licensor company. He did not agree with
the submissions of the assessee company and disposed of the said B
applications vide order dated 5th September, 1964 under Sec. 195(2)
of the In.come Tax Act, 1961 directing the assessee company to deduct
tax@65% on the entire sum proposed to be remitted:

The assessee company preferred an appeal to the Appellate
Assistant Commissioner. It did not dispute the assessability of. the
royality@ 5% mentioned in Clause 5(b) of the agreement aforesaid. c
It, however, challenged that the whole of the sum of 5% specified in
clause 5(a) was not chargeable to income tax in India. In regard to the
same the assessee submitted that there was no liability to deduct tax in
terms of the order of the Income Tax Officer as, in its opinion, (a) the
services, if any, enumerated under clause 5(a) of the agreement were D
performed outside India and the payments were also being made out-
side India so that the amount paid was not chargeable to tax under the
Indian Statute, (b) there was a bar to assessment under the Income
Tax Act, 1961 in terms of an agreement for ilvoidance of Double
Taxation between India and the Federal German Republic referred to
above and (c) in the alternative, since the cost of the work drawings to E
the foreign collaborators exceeds the remuneration, the sam{;was not
taxable.

The Appellate Assistant Commissioner did not accept the first
two of the aforesaid contentions of the assessee. With regard to the
third contention, however, the Appellate Assistant Commissioner F
came to the conclusion that it would be reasonable to determine the
said cost by estimate which he did at 75 per cent of the amount paid to
the non-resident. In his opinion the net profit chargeable to tax was
accordingly 25% of the amount paid.

The department filed an appeal against the aforesaid order of the G
Appellate Assistant Commissioner and the assessee filed a cross objec-
tion, before the Income Tax Appellate Tribunal. Both the departmen-
.....,. tal appeal and the assessee's cross objections were heard together and
decided by a consolidated order of the Tribunal. The departmental
representative made two submissions. The first was that the A.A.C.
was wrong in holding that the quantum of income could be determined H
1-

122 SUPREME COURT REPORTS [1991] 1 S.C.R.

in an appeal under Section 248. The second was that the A.A.C. was
A wrong in allowing expenses at 75% of the remittance. The first point of
the assessee's cross objection was covered by the first ground of the
departmental appeal mentioned above. The second point raised in the
assessee's cross objection was to the effect whether the payment for
the cost of drawings were exempt from the tax under the provisions of
B Double Taxation Avoidance Agreement or not. The Tribunal, taking
the points raised in the departmental appeal first, came to the conclu-
sion that it was. difficult to accept the argument that a total denial
enable an appeal to be filed but not a part denial with reference to part
of the payment subjected to deduction of tax. In the opinion of the
Tribunal the interpretation of Section 248 of the Income Tax Act as
given by the A.A.C was correct. According to the Tribunal the
c A.A.C. could pass an order regarding the quantum. The Tribunal held
that the same could not be said to be unreasonable. In the result the
departmental appeal was dismissed. In regard to the assessee's cross
objection, the Tribunal held that first part of the cross-objection had
already been dealt with in the appeal preferred by the departmental
D and to that extent the assessee's cross objection on the said issue
automatically succeeded. In regard to the second issue, the Tribunal
came to the conclusion that the amount brought to charge by the
Income Tax Officer was not exempt under the Double Taxation Avoi-
dance Agreement between India and the Federal Republic of
Germany vide Articles 3(1) and 16 of the Agreement. The assessee's
E .cross objection was thus, partly allowed.

At the instance of the Commissioner of Income Tax, West'
Bengal-I the Tribunal referred the above mentioned question for the
opinion of the High Court. The High Court followed its earlier Judg-
ment dated 12th August, 1970 in Income Tax Reference No. 31of1970
F (Commissioner of Income Tax West Bengal-I Calcutta v. M/s. Beni
Ltd., Calcutta) and answered the said question in the affirmative and
in favour of the assessee by order dated 10th February, 1976. The
_:r.--
department filed an. application for leave to appeal to the Supreme
Court and the ltigh Court -by order dated 8. 9. i979 certified it to be a
fit case for appeal to the Supreme Court under Section 261 of the
G Income Tax Act, 1976 and issued a certificate accordingly.

We have heard Mr. S.C. Manchanda, Sr. Advocate for the
appellant but nobo~y l!Ppeare<l: for the re~ponderit. The mg_h Court in
answering the reference placed reliance on its earlier Judgment da~ed
August 12, 1970 but the copy of the said Judgment has not been
sµpplied in the paper book as such we were derived to go thro~gh the
C.I.T. v. WESMAN ENGG. CO. [KASLIWAL, J.) 123

reasoning given by the High Court in answering the reference in the
A
I
:.!._
affirmative and in favour of the assessee.

It was contended by Mr. Manchanda that the order passed by the
Income Tax Officer under Sec. 195(2) of the Income Tax Act, 1961
(hereinafter referred to as the Act) was not appealable to A.A.C.
under Sec. 248 of the Act. His further contention was that the order B
passed by A.A.C. was totally without jurisdiction and the only remedy
available to the assessee was to file a writ petition to High Court under
Article 226 of the Constitution of India. In our opinion this question
does not arise before us nor such question was raised in the reference
before the High Court. The Commissioner of Income Tax only sought
to refer the following question for the opinion of the High Court:
c
"Whether, on the facts and circumstances of the case in
appeal filed under Section 248 Income Tax Act, 1961, the
Appellate Assistant Commissioner had jurisdiction to deal
with the quantum of the sum chargeable under the provi-
sion of the said Act from which the assessee was liable to D
deduct tax under Section 195 thereof?"

The above question does not contain the objection that no appeal was
maintainable under Section 248 of the Act against the order of the
Income Tax Officer passed under Section 195(2) of the Act. The High
Court was not called upon to decide any question of jurisdiction as E
sought to be raised by Mr. Manchanda before us nor the High Court

-
has granted any certificate in this regard. So far as the question refer-
red to the High Court is concerned, its language shows that there was
no controversy about the appeal filed under Sec. 248 of the Act and
the only question raised was whether the A.A.C. had jurisdiction to
deal with the quantum of the sum chargeable under the provisions of F
the said Act from which the assessee was liable to deduct tax under
Sec. 195 thereof. The argument thus raised by Mr. Manchanda before
us that Order under Sec. 195(2) was not appealable under Sec. 248 of
the Act, is nut available. Even otherwise the language of Sec. 248 of
the Act is wide enough to cover any order passed under Sec. 195 of the
Act. The case Meteor Satellite Ltd. v. Income Tax Officer, Companies G
Circle-IX, Ahmedabad, [1980] 121 ITR p. 311 cited in support of the
·above contention by Mr. Manchanda is of no relevance.

It was next contended by Mr. Manchanda that the A.A.C. was
·wrong in holding that the quantum o~ income could be determined in
an appeal under Section 248. It was also argued that the A.A.C. was H
124 SUPREME COURT REPORTS [1991] 1 S.C.R.

also wrong in allowing the expenses at 75% of the remittance. It would
A be proper to reprod1.Lce Section 248 of the Act which reads as under:

Section 248: Appeal by Person Denying Liabilitiy to
Deduct Tax:

B "Any person having in accordance with the provisions of
Sections 195 and 200 deducted and paid tax in respe~t of
any sum chargeable under this Act, other than interest,
who denies his liability to make such deduction, may
appeal to the Deputy Commissioner (Appeals) or, as the
r-
case may be, the Commissioner (Appeals) to be declared

...
'~ .,
not liabie to make such deduction." '
c
It was argued by Mr. Manchanda that under Section 248 a person
could deny his liability to make such deduction but there was no power
to determine the quantum and to say as to what extent the said remit-
tance will be taxed. We find no force in the above contention. Section ,.,
0 248 makes a mention of Sections 195 and 200 and it does not speak of.
the sub-clauses of Sec. 195 either (1) or (2). When once an appeal has
been preferred to the A.A.C. on the matter of liability of the company
to deduct taxes, the A.A.C. is well within his competence to pass an
order on the quantum also. In our opinion the A.A.C. was also com-
petent to pass an order with regard to _quantum when once he is seized
\

E of the matter. Under Section 248 a person having deducted and paid /"'--
tax under Section 195 may appeal to the A.A.C. denying his liability to

-
make such deduction and for a declaration that he is not liable to make
such deduction. It is thus difficult for us to accept the arguments that
I
I total denial may enable an appeal to be filed but not a part denial with
reference to part of the payment subjected to deduction of tax. The
F ri~ht of appeal given under Section 248 is clear and we cannot accept
tqe view sought to be propounded by Mr. Manchanda that such a right
is r:estricted and the A.A.C. was not competent to fix the quantum or
to revise the proportion of the amount chargeabl€? under the provisions
of the Act as determined by the Income Tax Officer. Sec. 251 of the
r
Act provides with the powers of the Deputy Commissioner (Appeals)
G or, as the case may be, the Commissioner (Appeals). Clause (c) of
Sub-Sec. ( 1) of Sec. 251 reads as under:

"Sec. 251(1)(c): )-
I
"In any other case, he may pass such orders in
H the appeal as he thinks fit."
C.I.T. v. WESMAN ENGG. CO. [KASLIWAL, J.] 125

The above provision _gives foll power to the Appellate authority to pass A
such orders in the appeal as he thinks fit. There is no controversy
before us th;it appeal could lie before A.A.C. under Sec. 248 of the
Act. We are thus in agreement with the view taken by the High Court
and the Income tax Appeilate Tribunal. The appeal thus fails and is
dismissed with no order as to costs as nobody has appeared on behalf
of the respondent.

R.·P. Appeal dismissed.

-~

....