w w w . L a w y e r S e r v i c e s . i n

MAX MUELLER BHAVAN v/s Director of Income-tax (International Taxation)

    A.A.R. NO. 597 OF 2002

    Decided On, 31 May 2004

    At, Authority For Advance Rulings Income Tax New Delhi


    Present for the Department Mr. S.M.J.Abidi, Addl. CIT, Range02 New Delhi Present for the Applicant Mr. Mukesh Malik, C.A.

Judgment Text

Justice Syed Shah Mohammed Quadri


The applicant, a non-resident taxable entity, seeks, in this application under section 245Q(1) of the Income-tax Act (for short ?the Act?), advance ruling on the following questions:

1. Whether under Income Tax Act institute is liable to deduct tax at source from payments made to honorary Teachers.

2. If answer to above is yes, then under which section.

2. The Goethe Institute Germany is a society registered in Munich Germany. In 1968 the applicant, Max Mueller Bhawan, was set up as a Cultural Institute in India as a branch of the said society which is under the control of the Govt.of Federal Republic of Germany. One of its functions is to teach German language in which preliminary and advance courses are being conducted by full time teachers. From April 1, 2003 the applicant has proposed to engage honorary part time teachers on contract basis to take classes in German Language during a semester and for that purpose a panel of teachers is maintained. Teachers are drawn from the panel for each semester on payment of honorarium at varying rates, a few of them are within and the other exceed the existing taxable limit. The applicant claims that the part time teachers engaged for each semester are not its employees and as no salary is paid to them, no tax is required to be deducted under section 192 of the Act; Tax cannot be deducted under section 194J of the Act, submits the applicant, because teaching is not included in the definition of ?professional services? in the Explanation to section 194J of the Act.

3. The jurisdictional Commissioner, in his comments, states that the applicant is promoting German language in India; it prescribes the syllabus, fixes the number of sessions and the strength of the class. The teachers including the part time teachers are under total control of the applicant. The applicant has the power to appoint teachers, to review their performance, to extend their term of engagement or to remove them from the employment. They are part timers and are free to accept other assignments; under the agreement they would not have the status of a full-fledged employees and would not get such benefits as are available to regular employees but these facts do not change the nature of relationship between the applicant and the teachers as the employer and the employees. The payment of honorarium to them is in the nature of salaries, therefore, under Section 192 of the Act tax is liable to be deducted from the amounts payable to the part time teachers by the applicant.

4. Mr. Mukesh Malik, who represented the applicant, argued that the scheme of Tax deducted at source had no application to the part time teachers of German language as no relationship of employer and employee existed and the teachers would not also fall within the definition of professional services in section 194J of the Act. Mr. Abidi, Addl. Commissioner appearing for the department, submitted that the honorarium paid to the part time teachers was nothing but salary and relation of employer and employee existed between the applicant and the teachers, therefore, section 192 would apply.

5. The short question that falls for consideration is whether on the facts and in the circumstances of the case there exists the relationship of employer and employee between the applicant and the part time teachers.

6. The issue is no longer res integra. There is plethora of case law on the point. In the context it will be useful to bear in mind the distinction between a contract of service and a contract for service. In the former case the relationship of master and servant would exist whereas in the latter such a relationship would not be present. The test which is often applied to determine existence of such relationship is, whether the master has the authority to order or require what is to be done or whether he has authority not only to order/require what is to be done but also how it should be done. The distinguishing features between a servant and an independent contractor is of great significance. In Shivnandan Sharma v.Punjab National Bank [Air 1955 S.C.404], the Supreme Court highlighted the distinction between servant and independent contractor thus, ?The distinction between a servant and an independent contractor has been the subject-matter of a large volume of case-law from which the text-book writers on torts have attempted to lay down some general tests. For example, in Pollock?s Law on Torts, the distinction has thus been brought out:

?A master is one who not only prescribes to the workman the end of his work, but directs or at any moment may direct the means also, or, as it has been put, ? retains the power of controlling the work?, a servant is a person subject to the command of his master as to the manner in which he shall do his work??

An independent contractor is one who undertakes to produce a given result but so that in the actual execution of the work he is not under the order or control of the person for whom he does it, and may use his own discretion in things not specified beforehand???.

Clerk & Lindsell on Torts (Edn.11) at p. 135 have adopted the description of an independent contractor given by Pollock as quoted above.

In Edn. 11 of Salmond?s Treatise on the Law of Torts, the same distinction has been clearly indicated in the following passage at p. 98:

?What then, is the test of this distinction between a servant and an independent contractor? The test is the existence of a right of control over the agent in respect of the manner in which his work is to be done. A servant is an agent who works under the supervision and direction of his employer; an independent contractor is one who is his own master. A servant is a person engaged to obey his employer?s orders from time to time; an independent contractor is a person engaged to do certain work, but to exercise his own discretion as to the mode and time of doing it ? he is bound by his contract, but not by his employer?s orders.?

In Chandi Prasad Singh v. State of U.P.[AIR 1956 SC 149], the Hon?ble Supreme Court pointed out, ?The distinction between the two (servant and agent) is thus stated in Halsbury?s Laws of England Volume 22, page 113, para 192.

?A servant acts under the direct control and supervision of the master, and is bound to conform to all reasonable orders given to him in the course of his work??.. An agent though bound to exercise his authority in accordance with all lawful instructions which may be given to him from time to time by his principal, is not subject in its exercise to the direct control or supervision of the principal.?

7. The test to ascertain whether relationship of employer and employee exists between the parties is laid down by the Hon?ble Supreme Court in Dharangadhra Chemical Works Ltd. v.State of Saurashtra and others [AIR 1957 S.C. 264]. The Court was considering the question, who could be a workman within the meaning of section 2s, of Industrial Disputes Act, 1947. Speaking for the bench of four learned Judges,Bhagwati J observed,

?The prima facie test for the determination of relationship between master and servant is the existence of the right in the master to supervise and control the work done by the servant not only in the matter of directing what work the servant is to do but also the manner in which he shall do his work. The nature or extent of control which is requisite to establish the relationship of employer and employee must necessarily vary from business to business and is by its very nature incapable of precise definition. The correct method of approach, therefore, would be to consider whether having regard to the nature of the work there was due control and supervision by the employer. A person can be a workman even though he is paid not per day but by the job. The fact that Rules regarding hours of work, etc., applicable to other workmen may not be conveniently applied to them and the nature as well as the manner and method of their work would be such as cannot be regulated by any direction given by the Industrial Tribunal, is no deterrent against holding the persons to be workmen within the meaning of the definition if they fulfil its requirement?.

8. Mr. Abidi, Addl. Commissioner, relied upon the judgment of the Supreme Court in the case of Ram Prasad v. Commissioner of Income-tax [86 ITR 122]. In that case, the question that arose for consideration of the Supreme Court was as to whether the Managing Director of the company was its servant or agent. The moot point was whether certain sum was taxable as salary in his hands under section 7 of the Income-tax Act, 1922 or whether it was business income under section 10 of the said Act. Interpreting the Article of the Association of the Company and the agreement with the director, it was held that the sum in question was payable to the assessee as salary and was chargeable under Section 7 of the Act. It was opined that for ascertaining whether a person is a servant or agent, a rough and ready test was, whether under the terms of his employment employer would exercise a supervisory control in respect of the work entrusted to him. The following observation of the Supreme Court is apposite:

?A servant acts under the direct control and supervision of his master. An agent, on the other hand, in the exercise of his work is not subject to the direct control or supervision of the principal, though he is bound to exercise his authority in accordance with all lawful orders and instructions which may be given to him from time to time by his principal. But this test is not universal in its application and does not determine in every case, having regard to the nature of employment, that he is a servant?.

9. From the above discussion, it is clear that in the case of contract of service, the employer not only orders/requires what is to be done but also directs as to how it shall be done, whereas in contract for service, the master can only require as to what is to be done.

10. Now adverting to the facts of the case, it is clear from the narration of the facts that the applicant has prescribed syllabus, fixed the terms of semesters in which German Language would be taught, it reviews the work of the part time teachers. It is true that in the proposed agreement for the first semester and for the subsequent semester the teacher is described as a part time casual honorary teacher; it is also stated that he would be paid honorarium for the semester. Further it is clarified that the agreement does not create a relationship of employer and employee. The terms of the agreement fixing the teaching period, duration of each period for imparting lessons in Language German by the part time teachers; fixing the responsibility for completion of assignment to the satisfaction of the applicant; the requirement of the teacher being punctual and regular in his duty and undertaking not to be absent without permission of the applicant, all these factors point to the fact of control of the applicant both in regard to the work to be done and the manner in which it should be done. However the agreement gives liberty to the teacher to work for any places, institute or company during the tenure of the agreement and it clarifies that the teacher shall not have the status of an employee nor shall be entitled to avail benefits of the regular employees of the applicant, but in our considered views these terms will not mitilate against the relationship of Master and servant between the applicant and the teacher, once the aforementioned test is satisfied.

11. Chapter 17 of the Act embodies provisions for collection and recovery of tax by various methods like deduction at source, collection at source, advance payment of tax, collection and recovery. Section 192 which is contained in the said chapter enjoins deduction of tax at source (referred to in this ruling as TDS) in case of income of the payee being chargeable under the head ?salaries?. Sub-section (1) of section 192 enjoins that any person responsible for paying any income chargeable under the head ?salaries? shall, at the time of payment, deduct income-tax on the amount payable at the average rate of income-tax computed on the basis of the rates in force in the financial year in which the payment is made, on the estimated income of the assessee under this head for that financial year. Where a person is employed simultaneously under more than one employer, sub-section (2) of section 192 is attracted. It provides that where during the financial year, an assessee is employed simultaneously under more than one employer, or where he has held successively employments under more than one employer, he has to furnish particulars to the person responsible for m

Please Login To View The Full Judgment!

aking payment being one of the said employer at the choice of the employee, such details of income under the head, ?salaries? due or received by him from other employer/employers; and the tax deducted at source therefrom in the prescribed form and thereupon the employer to whom the aforesaid particulars are furnished shall take into account the detail so furnished for the purposes of making deduction as postulated in sub-section (1) thereof. 12. It may be noted that the mere fact that part time teachers are entitled to work simultaneously while working with the applicant with more than one employer would not ipso-facto lead to the conclusion that they are also working at other places. If, however, they are working at different places they shall be bound to furnish particulars and the applicant shall, having regard to such particulars, have to deduct tax under sub-section (2). If no particulars are furnished as postulated under sub-section (2), the applicant shall have to deduct tax from out of the amount of honorarium payable by it to the part time teachers under sub-section (1). 13. For the aforementioned reasons, we rule on question No.1 that the applicant is obliged to deduct tax at source from payment of honorarium to the honorary part timed teachers and on question No.2 that the tax is deductible under section 192 of the Act. Pronounced by this Authority on the 31st day of May, 2004.