R. Jayasimha Babu, J. - (1.) THE questions referred to us at the instance of the Revenue and the assessee, arising out of the assessment of the income of the assessee-company, for the assessment years 1980-81 and 1981-82 are : "1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the fee paid for supervision of erection of machinery did not constitute part of the sale price of the machinery and, therefore, was taxable in the hands of the assessee in the two assessment years 1980-81 and 1981-82 ? and
(2.) WHETHER the grossing up of the tax as worked out by the Tribunal is correct in law ?" 2. The first of these two questions has been referred to us at the instance of the assessee and the second question has been referred to us at the instance of the Revenue. As regards the first question, the Tribunal has found as a finding of fact that BHEL placed an order on October 14, 1975, on the foreign company. Cross Eraser for the supply of one numerically controlled (NC) deephole drilling machine with accessories and spares and the supplier was required to install the machinery. The machinery was supplied during the second half of 1977. The machinery supplied was damaged on account of the unforeseen collapse of the roof of the building, wherein it had been kept, awaiting erection. The foreign supplier was therefore requested to depute an engineer to assess the actual damage BHEL placed an order on August 28, 1979, for supervision of repair and commissioning of that machine by the engineer of the foreign company. The foreign supplier was asked to supervise the repair and erection of the machine. That contract provided for payment of US dollars 16,000 for eight weeks, which was subsequently amended on November 19, 1979, to US dollars 32,000 for sixteen weeks. The erection work was to be carried out by BHEL under the supervision of an engineer from the foreign company. Payments were made to that foreign company in January and April, 1980. The amount paid for the services so rendered was Rs. 1,30,400. That payment was made in the previous year relating to the assessment year 1980-81. A further payment of Rs. 1,31,248 was made in the subsequent year. The Assessing Officer held that the amounts paid under the contract entered into in the year 1979 were not part of the amounts payable under the original contract of the year 1975 and did not constitute part of the sale price of the machinery. The Assessing Officer further held that the amounts paid for the supervision of erection of machinery by the engineer of the foreign supplier had been paid for the services rendered in India and, therefore, were taxable. He thereafter grossed up that payment, as the tax liability was to be borne by the payer and determined that in order to enable the foreign supplier to receive the sum of Rs. 1,30,400 after tax the amount that will have to be paid was Rs. 2,17,330. He, therefore, levied the tax on Rs. 2,17,330. The assessment so made was confirmed by the Commissioner of Income-tax (Appeals). The Tribunal affirmed the views of the Assessing Officer and of the Commissioner of Income-tax (Appeals), that the payments made under the agreements of the year 1979 did not form part of the sale price of the equipment, which had been supplied pursuant to an order, which had been placed in the year 1975. We find no error in that finding of the Tribunal. When the machinery was purchased neither party contemplated the possibility of the roof of the building in which the machinery was kept, collapsing and causing damage. The work performed by the foreign supplier in relation to assessing the damage to the machinery was not part of the services, which it was required to render under the original purchase order. The amounts paid for securing the services of the foreign engineer, whose services had been obtained by the assessee for assessing the damage and thereafter for supervising the erection which took place after the expiry of the warranty period under the original purchase order, obviously did not form part of the sale price.
(3.) OUR answer to the question referred to us at the instance of the assessee, therefore, is that the Tribunal was right in holding that the fee paid for supervision of erection of machinery did not constitute part of the sale price of the machinery and was taxable in the hands of the assessee in the two assessment years 1980-81 and 1981-82. The Tribunal, however, disagreed with the manner in which the payment to the foreign technician was required to be computed. The Tribunal followed the decision of the Calcutta High Court in N. Sciandra v. CIT [1979J 118 ITR 675, wherein that court had noticed the decision of this court in CIT v. Mackintosh (I.G.) [1975] 99 ITR 419, wherein it was held that the amount paid by the employer as income-tax on the salary paid to the employee should be treated as part of the income of the employee and included in the computation of the income of the employee for levy of income-tax. The Calcutta High Court also noticed the decisions of the House of Lords in North British Railway Co. v. Scott [1922] 8 TC 332 ; Hartland v. Diggines [1926] 10 TC 247 ; IRC v. Cook [1945] 26 TC 489 and Ferguson v. IRC [1969] 74 ITR 536, in all of which the payments by the employers of the tax payable on the amounts paid to the recipients were treated as part of the income of the recipients and taxable in their hands. The decision of the Court of Appeal in the case of Jaworski v. Institution of Polish Engineers in Great Britain Ltd. [1950] 2 All ER 1191 and of the Mysore High Court in Tokyo Shibaura Electric Co. Ltd. v. CIT [1964] 52 ITR 283, wherein the principle of grossing up, i.e., determining the gross notional income required to be recorded by the payee to enable the payee to retain the amount received from the payer even after paying income-tax and making the payee liable for the balance of tax on such gross notional income after giving the amounts paid as income-tax was applied were distinguished. The Government of India had in this case permitted the payee BHEL to bear the tax liability on the payment to be made to the engineer of the foreign supplier. The tax liability borne by BHEL has to be deemed to be the payment made to the engineer of the foreign supplier for the purpose of computing that foreign national's income and the tax payable on that gross amount, viz., the amount actually paid to the foreign national plus the tax liability thereon has to be treated as his gross income. The Revenue is entitled to receive the amount of tax payable on that gross income of the foreign national. The Revenue is entitled to receive the amount of tax payable on that gross payment. As BHEL had already paid part of that amount the assessee is now required to pay the balance. The Tribunal has rightly adopted that method and has computed the tax payable by the assessee properly for the two assessment years. We approve of the same. ;