TMI Blog2008 (3) TMI 408X X X X Extracts X X X X X X X X Extracts X X X X ..... ndian defence services, Coast Guard and Border Security Force. 4. M/s Rosobornexport State Corporation is sole State intermediary agency for research and military exports in Russia. It is associated with major arms deliveries within the framework of Russia's military technical co-operation with foreign countries. It is known to be among the world's most prominent defence industries with a highly skilled work force and time tested traditions in advanced military science and technology. 5. The assessee, Aircraft Research and Design Center (ARDC) has entered into a contract on 29th June, 2005 with M/s Rosobornexport for carrying out R D (development, manufacture and testing of the AL-551 engine for Indian HJT-36 trainer aircraft). The terms and conditions of the contract were notified by a written agreement entered into by Federal State Unitary Enterprise 'Rosobornexport', Russia on the one hand and Hindustan Aeronautics Ltd., through ARDC, Bangalore, Republic of India on the other hand on 29th June, 2005. 6. The said contract is annexed with: 1. Agreed technical requirement 2. Obligation of the work schedule 3. List of materials to be temporarily imported to Russia 4. L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of AL-551 aircraft engine without the written consent of the customer, is attached to the supply of AL-551 aircraft engine, and not independent of the same and, hence, constitutes part of the supply of goods. The consideration therefore does not constitute fee for technical services. (iv) The CIT(A) failed in appreciating the true purport of art. 21 of the contract. While art. 21.1 demarcates the intellectual property right of the supplier, art. 21.2 provides for intellectual property right of the customer and places an embargo on the right of the supplier. Article 21 prohibits the customer from re-producing the material or documentation developed under the contract without the supplier's consent and grants permission to copy or to reproduce the same only after signing a separate corresponding licensing contract. (v) The CIT(A) erred in his conclusion that art. 21.2 of the contract in its simplest and clearest meaning, aims at provision of technical services by the supplier. This conclusion is opposed to the very terms and tenor of the agreement. (vi) The CIT(A) erred in distinguishing the various decisions cited by the assessee in support of the aforesaid contention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... requirement of the assessee. The assessee contended that the design applied was not intended to enable him to commence the manufacture of the engine by copying such design. The case of the assessee was that the income accrued to the foreign company from the contract with the assessee was for the sale of engines, and services rendered in this regard formed part arid parcel of the contract of sale. The assessee further challenged that since engines were supplied in Russia, no part of income accrued or arose or deemed to accrue to foreign company in India. The assessee placed the following judicial pronouncements before the AO to substantiate its case: (1) CIT vs. Klayman Porcelains Ltd. (1998) 229 ITR 735 (AP); (2) Dy. CIT vs. Taikisha Ltd. (1995) 52 TTJ (Del) 594; (3) Horizontal Drilling International S.A. In re (1999) 152 CTR (AAR) 401 (1999) 237 ITR 142 (AAR); (4) CIT vs. Neyveli Lignite Corporation Ltd. (2000) 162 CTR (Mad) 206 : (2000) 243 ITR 459 (Mad); (5) CIT vs. Sundwiger EMFG Co. (2003) 183 CTR (AP) 434 : (2003) 262 ITR 110 (AP). 11. The AO, by following arts. 21.1 and 21.2 of the contract entered between the assessee and the foreign company, concluded that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the contract in respect of AL-551, emphasized transfer of technical know-how to the assessee. The AO also relied on two media news to conclude that the assessee was going ahead in the process of production of AL-551 engine. In the result, the AO concluded that the services rendered under the composite contract by the foreign company M/s Rosoboronexport fall in the category of technical services and so the consideration paid was fee for technical services. 13. Being aggrieved by the order of the AO, the assessee preferred an appeal to first appellate authority. The learned CIT(A) by upholding the view of AO, dismissed the appeal filed by the assessee. 14. Being aggrieved by the learned CIT(A), the assessee is before us with the above referred appeal. 15. We have heard both the parties and verified the documents in detail. Shri K.R. Shekar represented the assessee and N.S. Raghavendra represented the Department. 16. The learned Authorised Representative reiterated the same contention laid before the AO and before the learned CIT(A). The learned Authorised Representative submitted that HAL undertakes various activities in the areas of design, development, manufacture and m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in the development of airframe and so it wanted only 3 prototype engines, with documentation to assist operation effectively and to independent dimension of the engines. The present contract entered between the assessee and M/s Rosoboronexport does not allow commercial production of the same engine in India by the assessee. The Authorised Representative reiterated that the reference in art. 21.2 that all the intellectual rights developed independently before or during the execution of the contract, in manufacturing AL-551 would remain with assessee is primarily to consider modification and fitments developed independently by HAL. Concluding the arguments, the learned Authorised Representative stated that the payment made to Rosoboronexport is not for rendering any technical services but in respect of purchase of the prototype engines. Moreover, said engine was manufactured in Russia and finished product was to be brought to India. Hence no part of the income accrues or arises to the foreign company in India. So, there is no tax required to be deducted under s. 195 of the Act by the assessee. 19. We have also heard the learned Department Representative in detail. The learned De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... develop 3 engines as per the requirement mentioned in Annex. 1. Since each engine may be unique, it may have its own designs, intellectual property, technical know-how etc. So naturally, they may go with the product, i.e., engine. Article 13 of the contract speaks the remedies available to the assessee in case of any inconsistency in respect of the material delivered or its documentation. Intention behind this clause very well denotes that material to be supplied is prominent. "Article 21.3 says that the customer shall not directly copy or reproduce the material and documentation developed under the present contract without the supplier's consent. The customer can copy or reproduce the material and documentation developed under the present contract after signing the corresponding licence contract on the terms stipulated in it". 23. So, the assessee cannot copy or reproduce the material and documentation without supplier's consent. If it so wants, another corresponding licence contract has to be executed. We are concerned with the present contract. The engine was meant for the Indian trainer HJT-36 owned and developed by the assessee itself, which makes it clear that it was an o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head 'Salaries'." 26, According to the learned Authorised Representative 'fee for technical services' means nothing but consideration for rendering any technical services alone. He also placed before us a ruling of Hon'ble Supreme Court in the case of Indian Chambers of Commerce to substantiate the meaning of the word 'for'. According to him 'for' means for the purpose of and connotes and with reference to which anything is done. We, after going through the Expln. 2 to s. 9(1)(vii), are of the view that payment made for 3 prototype engines including its invention, specimen and scientific technical research, and know-how cannot be construed as if for technical services. We, by following the literal rule of interpretation, view that payment should be made for technical services alone to deem the income accrued in the country. 27. The Hon'ble Supreme Court in the case of Padmasundara Rao (Decd.) Ors. vs. State of Tamil Nadu Ors. (2002) 176 CTR (SC) 104 : (2002) 255 ITR 147 (SC) held as under: "A statute is the edict of the legislature. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purposes of treating its consideration as fee for technical services under Expln. 2 to s. 9(1)(vii). 31. The contract entered with M/s Rosoboronexport was for three prototype AL-551 engines for the Indian trainer HJT-36, developed by the assessee. So, it is obvious that the transaction was an outright purchase as any other equipment or product. On the other hand. if there was an element of rendering any technical know-how, the purpose would have been served by one unit of AL-551 engine. 32. In order to see whether the payment made by the assessee to the foreign company, M/s Rosoboronexport would amount to fee for technical services, we would like to see that what was the requirement of the assessee under the present contract. From the entire reading of the contract, it is seen that the requirement of the assessee was only 3 prototype engines AL-551. Why the assessee wanted the 3 engines was to be tested in its HJT-36 aircraft. The subject of the contract has been brought out in art. 21 of the contract. On reading art. 21, one cannot see that the requirement of the assessee was the technical know-how of the engine from M/s Rosoboronexport to reproduce or copy or to develop the s ..... 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