TMI Blog2004 (3) TMI 54X X X X Extracts X X X X X X X X Extracts X X X X ..... ome-tax Act, 1961 (hereinafter referred to as "the Act"), the Income-tax Appellate Tribunal, by means of its order dated September 15,1994, has referred the questions of law mentioned hereinbelow as arising out of the order dated August 24,1993, made in I.T.A. No.791/ Bang of 1987 by it. The questions are: "1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the engineering fees received/receivable by the assessee was in the nature of fees for technical services in accordance with the definition of 'fees for technical services' as given in clause (4) of article VIIIA of the amended Double Taxation Avoidance Agreement between the Republic of India and the Federal Republic of Germany? 2. Whether, on the facts and in the circumstances of the case, the Tribunal Was right in holding that the engineering fees received/receivable by the assessee could also be considered as falling within the definition of 'fees for technical services' even in terms of the provisions of section 9(1)(vii) of the Income-tax. Act, 1961, and that the restrictive clause in Explanation 2 to the said clause (vii) of section 9(1) of the Income-tax Act would no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see was not having any permanent establishment in India, there is no taxable liability on the part of the assessee in India in accordance with article III read with article VIIIA(5) bf the amended DTA agreement between the two countries. It was further contended on behalf of the assessee that since the no objection certificate was also granted by the Income-tax Officer, Vishakapatnam, for deduction of tax in respect of remittances of the engineering fees without deduction, the assessee is not liable to pay the tax. However, the Assessing Officer, on consideration of the contentions of the assessee in detail, negatived all the contentions raised by the assessee by means of his order dated November 28, 1986, a copy of which has been produced as annexure A to this reference. The Assessing Officer found that since the German Bank was working merely as an agent of the Indian resident MECON/RINL, the payment although made in Germany, would be considered to have been made by the Indian party and would therefore be squarely covered by the deeming provisions of clause (6) of article VIIIA of the amended DTA Agreement. He further held that the exemption claimed was not applicable to the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e engineering fees, as stipulated in the agreement really represented the engineering fees only and therefore such fees paid were in accordance with article VIIIA of the amended DTA Agreement entered into between the two countries and also in terms of section 9(1)(vii) read with Explanation 2 given to the said section. The Tribunal also negatived the contention of the assessee that the payments were covered under article III of the amended DTA Agreement and as such were exempt from tax. On this, the Tribunal held that article VIIIA of the amended DTA Agreement being specifically applicable for royalty and fees for technical services, it would prevail over article III dealing with business profits in cases where the payment is, clearly of the nature of fees for technical services. The Tribunal also negatived the contention of the assessee that the payments were assessable only on accrual basis and the payments accrued during the relevant assessment year alone was liable for tax. The Tribunal, relying upon the decision of the Madras High Court in the case of CIT v. Standard Triumph Motor Co. Ltd. [1979] 119 ITR 573 and the decision of the Supreme Court in the case of Standard Triumph ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the purpose of assembly of the project undertaken by the assessee and therefore the services rendered for the purpose of running of the unit cannot be considered as technical services. According to him "drawings" are goods and part of the other plant and therefore there is no technical service rendered by the assessee. Sri Sarangan also submitted that if the Agreement exempts the assessee and the Act does not, the Agreement will prevail; and if on the other hand the Act is beneficial to the assessee as against the stipulations in the amended DTA agreement, the Act applies and not the amended DTA Agreement. It is also his submission that if there is no liability under section 9(1)(vi) or (vii), the assessee cannot be made liable by reading the amended DTA Agreement only. He pointed out that the approach of the Tribunal that since there are two agreements entered into between the parties, it cannot look into the nature of the agreement, is erroneous in law. He further contended that the drawings and designs supplied by the assessee were only a portion of the entire project and therefore the same should be treated as "plant and machinery". In substance, it is his contention that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is useful to refer to the relevant provisions of the Act and the provisions in the amended DTA Agreement entered into between the two countries. Sub-section (2) of section 5 of the Act sets out the income of a non-resident. The said provision reads: "5. Scope of total income. - (1) . . . (2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which-, (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year. Explanation 1. -Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India. Explanation 2. -For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day of April 1976, and approved by the Central Government. Explanation 1. - For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date. Explanation 2. - For the purposes of this clause, 'fees for technical services' means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head 'Salaries'." Chapter IX of the Act provides for double taxation relief. Section 90 of the Act confers power on the Central Government to enter into any agreement with the Government of any countr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which it is a permanent establishment. (3) In the determination of the profits of a permanent establishment, there shall be allowed as deductions, expenses which are incurred for the purposes of the business of the permanent establishment including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere, and according to the domestic law of the contracting State in which the permanent establishment is situated. (4) In so far as it has been customary in a contracting State to determine the profits to be attributed to a permanent establishment on the basis of an apportionment of the total profits of the enterprise to its various parts, nothing in paragraph (2) shall preclude that contracting State from determining the profits to be taxed by such an apportionment as may be customary; the method of apportionment adopted shall, however, be such that the result shall be in accordance with the principles contained in this article. (5) No profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee. Therefore, when sub-section (2) of section 90 of the Act itself specifically provides that between the stipulations provided in the amended DTA Agreement and the Act, the provisions of the Act, to the extent they are more beneficial to the assessee, should apply, as rightly pointed out by the Tribunal, if the provisions of the amended DTA Agreement are more beneficial to the assessee, the same have to prevail over the provisions of the Act. Our view is also supported by the decision of Calcutta High Court in the case of Davy Ashmore India Ltd. [1991] 190 ITR 626 wherein the court of the judgment has observed thus: "In determining the liability of a non-resident company, if there is any Agreement for Avoidance of Double Taxation entered into under section 90 of the Income-tax Act, 1961, the said agreement must prevail over the provisions of the Income-tax Act; otherwise, there was no point in entering into any agreement for avoidance of double taxation. When ever any specific arrangement or agreement has been made regarding the taxability of any income under the Agreement for Avoidance of Double Taxation, such arrangement or agreement will necessarily prevail over the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y represented the "engineering fees" only and therefore, such fees, in accordance with article VIIIA of amended DTA Agreement must be considered as payments made for technical services. Thus, the Tribunal affirmed the finding recorded by the Commissioner (Appeals) and the Assessing Officer. We do not find any error in the said conclusion reached by the Tribunal. It is necessary to point out that the return filed by the assessee shows that the assessee itself has shown it as "engineering fees". The Tribunal negatived the contention of the assessee that the engineering fees paid should be treated as plant and machinery as the drawings and designs were prepared outside India and delivered outside India. In our view, the decision in the case of Scientific Engineering House Pvt. Ltd. [1986] 157 ITR 86 (SC) relied upon by Sri Sarangan is of no assistance to him. In that decision, the Supreme Court, on interpretation of relevant terms in the two agreements, and more particularly clauses 3 and 6 of the agreement which came up for consideration, took the view that the payments made were really for rendition of documentation services which was the main service to be rendered by the foreign c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n and drawing also could be in the nature of technical services. Supply of design and drawing cannot, in all circumstances, be treated as cost of plant and machinery. In a matter where installation of sophisticated machinery or where the manufacturing process is involved through the machinery, in that case, the supply of necessary designs and drawings, which would enable the working of the machinery, in our view, can be considered as technical services rendered. Just as information or advice tendered by a lawyer either could be oral or writing, in our view, supply of technical services in the nature of printed documents by way of design, chart or drawing and depending upon the nature of the services rendered, can be treated as "technical service". Ultimately, the question is how the parties have understood with regard to the nature and purpose for which the payment is made. In the instant case, as rightly concluded by the Tribunal and the subordinate authorities, the engineering fees paid have to be understood as "payment made for technical services". The decisions in the case of Associated Cement Companies Ltd. [2001] 124 STC 59(SC); Parasrampuria Synthetics Ltd. [2002] 125 STC 25 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed duty and also levied penalty. The Supreme Court while considering the question that the goods imported by the assessee in the form of drawings, designs and plans for transfer of technology for the purpose of setting up a plant to manufacture polyester, polyester filament yarn and polyester staple fibre were not goods covered by serial No.10 of the notification but were covered under item No.15 of the notification, took the view that the goods imported have none of the characteristics of a book known in common trade parlance and they fall within the definition of a "plant". In our view, the observation made by the court for the purpose of considering the question whether the printed drawings, designs and plans imported would attract customs duty, is of no assistance to Sri Sarangan to support his contention that the drawings, designs and charts, in the present case also would fall within the meaning of plant and machinery. The decision in the case of Klayman Porcelains Ltd. [1998] 229 ITR 735 (AP) relied upon by Sri Sarangan is also of no assistance to him. In the said case, the question that came up for consideration was, with regard to the nature of "royalty". While consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of; and the supply of a diagram and other details to enable the buyer to operate the machines; and also to assure the buyer, that the machines will perform to the specification required by the buyer, such supply should be considered as only incidental to the performance of the total contract which includes design, manufacture and supply of the machinery and the price paid by the assessee to the supplier in such circumstances should be treated only as a total contract price which covers all the stages involving supply of machinery from the stage of designing to the stage of commissioning. In that background the court took the view that no licence of any patent is involved and "sub-clause (vi) and also (vii) of section 9(1) of the Act" could have no application as the design was only preliminary to the manufacture and integrally connected therewith. In the case of Energomach Exports [1998] 232 ITR 448 (Karn), the question that came up for consideration before this court was whether rendering of services for erection of the machinery sold by the assessee-company to the Karnataka Power Corporation and making the machinery function by deputing engineers and offering technical service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l that the "engineering fees" paid were for technical services as contemplated under section 9(1)(vii) of the Act. In our view, the provision contained in clause (6) of article VIIIA of the amended DTA Agreement entered into between the two countries, is similar to the provisions contained in section 9(1)(vii) of the Act. No doubt, it is true that the restrictive clause as found in Explanation 2 given to section 9(1)(vii) of the Act does not appear in the definition as found in the amended DTA Agreement entered into between the two countries. However, it is necessary to point out, as rightly found by the Tribunal, the restrictive clause given to Explanation 2 of section 9(1)(vii) of the Act cannot be considered to apply to the facts of the present case, inasmuch as the assessee cannot be considered to have taken any project for construction or assembly in India. It is only payments made for any construction, assembly or like project undertaken by the assessee, which are excluded from the purview of income received by way of fees for technical services as set out in section 9(1)(vii) of the Act. It is true, as contended by Sri Sarangan, that if the provisions contained in the taxing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ced by us earlier, the Tribunal has negatived the claim of the assessee that the payment made to the assessee by MECON should be construed towards the plant and machinery supplied by it on the ground that undisputedly there is a separate provision made in the agreement for making payment by MECON to the assessee towards cost of plant and machinery. The Tribunal also has not accepted the plea that a separate provision for payment towards plant and machinery and for engineering services was made in the agreement only for the sake of convenience. In this connection, it is useful to refer to the observation made by the Tribunal at paragraph 8 of the order, which reads: "8. The other contention of the assessee that the payments under consideration represented supplemental payments towards cost of the plant and machinery supplied by it may also be examined by us now. It is an admitted fact that there is a separate provision for making of payment by the Indian company to the assessee towards such cost of plant and machinery. The representative of the assessee has merely stated that for the sake of convenience only the supplemental payment for that purpose was stipulated as engineering f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liable to tax on the ground that the payment was covered under article III of the amended DTA Agreement. We do not find any error in the said conclusion reached by the Tribunal on this aspect of the matter. As rightly pointed out by the Tribunal, when there is a special provision dealing with a special type of income, such a provision should be understood as excluding a general provision dealing with income accruing or arising out of the business connection. In our view, since section 9(1)(vii) of the Act comprehends income by way of fees received for technical services rendered as a result of business connection or otherwise, it is not possible to apply the provisions of section 9(1)(i) of the Act merely because the said section stood excluded as a result of the provision. In our view, we are also supported by the decision of the Madras High Court in the case of CIT v. Copes Vulcan Inc. [1987] 167 ITR 884; [1987] 30 Taxmann 549. In the said decision it is observed as follows: "When there is a special provision dealing with a special type of income, such a provision could exclude a general provision dealing with income accruing or arising out of any business connection. Since se ..... X X X X Extracts X X X X X X X X Extracts X X X X
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