1987 (12) TMI 312 - AT - Income Tax

Summary

Issues Involved:
1. Whether the fees paid by BHEL to Sulzer Brothers Ltd. for technical services are taxable under section 9(1)(vii) of the Income-tax Act, 1961.
2. Applicability of the proviso to section 9(1)(vii) regarding agreements made before April 1, 1976.
3. Whether the fees can be taxed under section 5(2)(b) or section 9(1)(i) if not taxable under section 9(1)(vii).

Issue-wise Detailed Analysis:

1. Taxability under Section 9(1)(vii):
The primary issue was whether the fees paid by BHEL to Sulzer Brothers Ltd. for technical services were taxable under section 9(1)(vii) of the Income-tax Act, 1961. The assessee argued that the fees were exempt under the proviso to section 9(1)(vii) as the agreement was made before April 1, 1976, and approved by the Central Government.

2. Applicability of the Proviso to Section 9(1)(vii):
The assessee contended that the payments were made in pursuance of an agreement dated January 29, 1976, which was approved by the Central Government before April 1, 1976. The agreement included a clause (Article 1.6) stipulating that Sulzer would provide technical services upon request by BHEL. The approval for the release of foreign exchange and the rates for special engineering services were obtained subsequently, but the obligation to render services emanated from the original agreement. The Tribunal noted that the proviso to section 9(1)(vii) exempts fees for technical services payable in pursuance of an agreement made before April 1, 1976, and approved by the Central Government. The Tribunal, relying on the decision in Bharat Heavy Electricals Ltd. v. ITO and the Gujarat High Court's ruling in Meteor Satellite Ltd. v. ITO, concluded that the fees were not taxable under section 9(1)(vii).

3. Alternative Grounds for Taxability:
The Department argued that if the fees were not taxable under section 9(1)(vii), they should be taxed under section 5(2)(b) or section 9(1)(i). The Tribunal referred to the Madras High Court's decision in CIT v. Copes Vulcan Inc., which held that income by way of fees for technical services should be considered under section 9(1)(vii) and not under section 9(1)(i). The Tribunal also noted that section 115A and section 44D would not apply if the proviso to section 9(1)(vii) applied.

Dissenting Opinion:
The Accountant Member dissented, arguing that the approval for the deputation of technicians and the terms of payment were obtained after April 1, 1976, and thus the proviso to section 9(1)(vii) did not apply. The Accountant Member relied on the specific approval required for deputation of technicians, which was granted after April 1, 1976.

Third Member's Decision:
The Third Member agreed with the Judicial Member, stating that the visits of the experts were in pursuance of the original agreement approved before April 1, 1976. The Third Member emphasized that the obligation to render services emanated from the collaboration agreement and that subsequent approvals for foreign exchange release did not constitute separate agreements. The Third Member concluded that the fees were exempt under the proviso to section 9(1)(vii).

Final Order:
In conformity with the majority opinion, the Tribunal annulled the assessments and allowed the appeals, holding that the fees received by Sulzer Brothers Ltd. for technical services were not taxable under section 9(1)(vii) due to the applicability of the proviso.