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TMI Blog1990 (8) TMI 191X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the Government of India, Ministry of Chemicals and Fertilisers vide letter dated23rd July, 1984. According to the terms of agreement, the assessee was required to make payment of-Yen 30,24,000 being supervision charges and a further sum of Yen 25,00,000 towards engineering and management fee vide clause 4.1(a) and (b) of the agreement. The payments were to be made on completion of the work. Before remittance of money no objection certificate from assessing officer was required for opening letter of credit for remittance of Japanese Yen equivalent to Yen 55,24,000. While applying for the issue of no objection certificate the assessee claimed before the Assessing Officer that no tax was required to be paid in respect of sum of Yen 25,00,000 because the said sum represented fee for services rendered outsideIndia. Such payment, according to the assessee, was governed by clause(k) of Article X of the Agreement for the Avoidance of Double Taxation entered into betweenIndiaandJapan. The Assessing Officer, however, held that tax was payable on the entire amount on the basis of his order dated13th February, 1985as under :--- "NO. ITC : CC: IX/84-85/181 Office of the Income Tax Off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so by way of preparing the necessary details, etc. 5. The learned Departmental representative strongly supported the orders passed by the CIT (Appeals) and submitted that on reading the sub-clauses (e) , (j) and (k) of Article X it can be said that no exemption in respect of the alleged services having been rendered in foreign country is ever envisaged or contemplated because the actual services were required to be rendered at Kota in India. Even if it is assumed for the sake of argument that some services were rendered inJapanyet the same was in connection with the work to be carried out inIndiaand therefore, no part of the remuneration was tax free. The claim is not in accordance with intention of the agreement. Besides, the Assessing Officer has not accepted the factum of any services having been rendered in japan. 6. On considering the rival submissions and the material before us two issues arise. They are : (1) Whether remuneration payable in respect of services rendered outsideIndiais required to be treated as tax free inIndia. (2) If yes, whether it can be said that any services were rendered inJapanfor which the payment is made. Further even if any services are rend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... where separate payments were made in respect of distinct services rendered inIndiaas well as in foreign country. In our opinion, we are entirely in agreement with the learned Counsel for the assessee that fees paid are required to be treated as income in respective States where services are rendered. In fact such has to be the intention behind the double taxation agreement between the two countries. Therefore, if it can be established that the payment is in respect of services rendered in Japan, the same is required to be taken as non-taxable in India. The difficulty may arise in a situation where it is not possible to demarcate the areas and distinguish the types of services rendered. But in this case such difficulty is not found because the assessee's case is that the payment is made in respect of preparatory work carried out inJapanas also the management fees, i.e., fees in respect of managing the whole contract by personnel sitting inJapan. 8. Coming to the second issue regarding factum of services we find from the evidences laid before us that the work did -entail services to be rendered inJapan. On going through the agreement itself we find that the payments are required t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the samples of material were required to be sent toJapanand the same was required to be tested and approved inJapanand it was done. This again establishes the services rendered inJapan. Approval dated23rd July, 1984issued by the Ministry of Chemicals also records two different payments in respect of two different types of services. 9.2 We have, therefore, no hesitation in holding that the services were rendered inJapanwhich are termed as engineering and management fees. There is no dispute raised on the basis that such services cannot be qualified as eligible services in the context of language used in clause (k) of Article X. We would, therefore, hold that payment of Yen 25 lakhs is not liable to taxation inIndia. 10. To the extent as above, the appellate order is modified. 11. The Assessing Officer is directed to pass appropriate order so as to give effect to our above decision. 12. In the result, the appeal is allowed. Per Judicial Member --- Detailed order prepared by my learned brother has carefully been gone through, but it is regretted that the conclusion arrived at could not be concurred with. The facts have already been incorporated in the order and it is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... EMBER ORDER Per Shri Ch. G. Krishnamurthy, President --- This appeal filed by M/s D.C.M. limited relating to the assessment year 1984-85 ended in a difference of opinion between the Members, who heard this appeal. Unfortunately for me the Members could not spell out what exactly was the difference of opinion between them. In the absence of an agreement on the point of difference of opinion, both the Members have stated their points of view first in regard to the difference of opinion and then the reasons for their conclusions. According to the learned Accountant Member the point of difference of opinion was : "Whether on the facts and circumstances of the case, an amount of Indian Rupees equivalent to Japanese Yen 2,50,000 is required to be treated as income liable to tax inIndia?" But the learned Judicial Member stated the point of difference of opinion to be : "Whether on the facts and in the circumstances of the case inclusion of Japanese Yen 2,50,000 is legally tenable or not ?" 2. Thus my first task is to settle the point of difference of opinion before I go to "press my opinion on the point of difference of opinion. I have carefully examined the points of differe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nistry of Chemicals and Fertilisers vide letter dated23rd July, 1984. In connection with the above repair work some preparations had to be done, like designing, calculations, etc., by the foreign party inJapan, for which it was agreed to pay 25 lakhs Yen describing it as "Engineering and management fees". In addition to the above for the actual carrying out of the above repair work at factory site atKota, the foreign company M/s Kobe Steel Ltd.,Tokyoarranged to send two engineers from another company called M/s Alpha Kogyo,Japan. For these services a sum of Japanese Yen 35,94,267 was agreed to be paid. Thus a total sum of Japanese Yen 60,94,267 net of Indian taxes was agreed to be paid in respect of which the tax component was to be borne by the assessee company. For the purpose of remittance to the foreign party, a no objection certificate was required by the Reserve Bank ofIndiafrom the Income-tax Officer having jurisdiction over the assessee company. The concerned Income-tax Officer was requested by the assessee company to issue a no objection certificate for the remittance of Japanese Yen of 60,94,267 to the foreign party. In making the request the assessee company pointed out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntenable. The main ground that prevailed with the Commissioner (A) was that since two technicians were deputed to manage the work in India and as there was no provision for payment of overtime charges and as there was no evidence to show that as per the agreement any part of the work was to be done in Japan, it could not be held that the work in respect of Engineering and Management was done only outside India. A certificate obtained from the foreign company dated27-9-1984was produced to show that design and calculations for foundation repairs were all carried out inJapan. The Commissioner (A) did not attach much significance to this certificate as proving the assessee's case on the view that this work could be carried out only after inspection of the site inIndiaand in any case the work in that connection constituted an insignificant part of the total work. 6. Against this order, an appeal was filed before the Tribunal. The learned Accountant Member after going through the agreement, the certificate and other evidence came to the conclusion that the work in respect of Engineering and Management was done only outside India, i.e., in Japan and therefore the fees referable to that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch the fees payable inIndiawill have to be taxed inIndia. That was how the learned Judicial Member concluded against the assessee's contention and disagreed with the view expressed by the learned Accountant Member. 7. I have heard the learned counsel for the assessee Shri O.P. Vaish and also the learned Departmental Representative Shri Rajiv Bakshi and perused the relevant documents and agreements. I came to the conclusion that having regard to the nature of the work and the sequence of events, the work relating to the engineering and management could not have been done in India although execution of the work had to be done only in India. In my view the confusion arose because the repair work has to be done inIndia. What was perhaps missed was that the engineering aspect and the designing had to be meticulously undertaken before the repair work is executed and this part of the work was all done in Japan by M/s Alpha Kogyo, Japan, with whom M/s Kobe Steel Ltd., Japan entered into an agreement. While the assessee company entered into agreement with Ks Kobe Steel Ltd., for carrying out the repair work, M/s Kobe Steel Ltd., in its turn entered into a further agreement with M/s Alpha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia. Linking the payment with the submission of the invoice to afford as proof of the situs of the performance of work is in this context not proper, for, the terms of agreement between M/s Alpha Kogyo and M/s Kobe Steel Ltd. provided that the payment of fees for engineering and management shall have to be paid only after the furnishing of completion statement against invoice, which means that the execution of the work was done in India, over which there was no dispute and that is not to be related to the work that was necessary, namely, planning, etc., to execute the work in India. The learned Judicial Member laid emphasis on this fact of furnishing of invoices and payment to arrive at his conclusion that the work in respect of engineering and management was also done inIndia. Since this document does not prove that aspect at all, except the mode and time of payment, the mode and time of payment agreed upon between the parties, should not have been inferred as proof of the situs of performance of services in respect of engineering not decisive. The assessee claimed that engineering and management work was done inJapanand only in respect of that it claimed exemption from tax by in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r dated22-9-1984written by Ks Alpha Kogyo to the General Manager of the assessee company stating that : "For repair of Compressor Foundation, the Engineering Management fee being charged is towards the design calculations, etc., done at our office inJapanprior to undertake the repair work at your site. These design calculations included calculation of foundation load for designing the HASP (Sole Pads) and other strength calculations for the Epoxy resin used indigenously. Keeping the different specifications of Indian material to be used in view, different recipe was prepared and repair procedure altered accordingly." This clearly clinches the issue as to where the work in relation to engineering and management was done. This clearly shows that the work was done only inJapan. Therefore the argument that the fee was deliberately split up with a view to gain an advantage from taxation inIndiadoes not appear logical and sound. Further the approval given by the Government of India is for the fees payable separately for engineering and supervision. The relevant portion of the Government's approval is reproduced below : "(1) A lump sum payment not exceeding 5,524,000 Yen (Yen five ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d22-2-1984, which the assessee company had accepted. 9. It is an undisputed fact that but for the application of clause (k) of Article X of the agreement of Avoidance of Double Taxation, the said sum in question would be taxable in India under section 9(1)(vii) Explanation 2 read with section 115A of the Income-tax Act, 1961. Clause (k) of Article X provides :--- "Fees for technical services payable to an enterprise shall be treated as income from sources within theContractingStatein which are rendered the services for which such fees are paid." It is to locate theContractingStatein which the technical services are rendered that the entire exercise has been undertaken because the fee for technical services payable to such an enterprise will be treated as income from sources within thatContractingState. The if fee is payable for services rendered inJapan, that portion of the fee for technical services could not be treated as income from sources withinIndiaunder this agreement. The evidence brought on record, the sequence of events and other relevant material do lead one to the conclusion that other than the planning for the work, namely, engineering, etc., the other work was o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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