9911796707
TMI Blog1995 (7) TMI 123X X X X Extracts X X X X X X X X Extracts X X X X ..... Engineering Consultants (India) Ltd. Thereinafter referred to as MECON is the main contractor. In the first contract, SMS was given the overall responsibility with regard to the entire work referred to in the scope, whereas in the second contract, the overall responsibility was to be jointly shared by SMS on one hand and MECON on the other. The first contract is dated 15-11-1983 whereas the second contract is dated 9-2-1993. 3. The assessee received various amounts under the contracts for - (i) equipment and commissioning spares ; (ii) design and engineering fees including reimbursement of expenditure and fees for training services ; (iii) supply of spares for two years of operation and maintenance. There is no dispute insofar as the taxability of the receipts for supply of equipment and spares is concerned. The dispute, however, is with regard to the taxability of the receipt of design and engineering fees and fees for imparting training abroad. The assessee's stand has been that the receipt by the assessee was not taxable as the receipts for the services rendered abroad formed part of the commercial profits of the assessee, that though separate payments were stipulated for s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on with the setting up of the plant, the stipulations in the agreement for separate payment towards Engineering Fees clearly indicated that the same did not form an integral part of the payment for supply of equipment. According to him, the supply of documentation, designs, instructions, etc., as engineering services were not integrated with supply of machinery insofar as these technical informations were to be applied independently by Visakhapatnam Steel Project for erection of the plant with the collaboration of different Indian and foreign contractors. The agreements used the word " fees " for rendering of engineering services and " price " for the supply of equipment. In the absence of any special circumstances, the terms used in the agreements would be correct indicators of the nature of receipt. He also held that under the Double Taxation Agreement as applicable with effect from 1-4-1984, receipts in connection with delivery of engineering services outside India would be liable to be taxed under section 9(1)(vii) when they were in the nature of 'royalty' or 'fees' for which specified rate of tax was provided in such agreements. In the assessment year 1983-84, the assessee had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant. " He then adverted to determining as to whether the receipts by the assessee were in the nature of fees for technical services and held that the payments were fees for technical services as per the definition under the Double Taxation Agreement, but they cannot be assessed as fees for technical services under the Income-tax Act because of the definition of the said expression under the Income-tax Act in Explanation 2 to section 9(1)(vii) by use of the words viz., " but does not include consideration any construction, assembling, mining or like project undertaken by the recipient. " In this connection, he accepted the contention of the assessee that when the liability to tax is restricted under the provisions of either the Income-tax Act or the Double Taxation Agreement, the provisions more favourable to the assessee have to be applied. According to him, if the object of Double Taxation Agreement was to include what is excluded in the Income-tax Act, there should have been an express provision in the Double Taxation Agreement to that effect. 5. The CIT(Appeals), by following the decision of the Andhra Pradesh High Court in the case of CIT v. Hindustan Shipyard Ltd. [1977] 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing within the exclusionary clause contained in the last part of the said Explanation. 7. As regards the fees for training services, he held that the same were taxable as fees for technical services. The training services abroad were clearly in the nature of technical services to V.S.P. so that the personnel were well-equipped to run the plants after their commissioning and the related lumpsum payments were 'fees' within the meaning of Article VIII-A(4) of the Double Taxation Agreement read with section 9(1)(vii) of the Income-tax Act. He, therefore, upheld the action of the Income-tax Officer for assessment years 1985-86 and 1986-87 bringing the same to tax. 8. Both the assessee and the Revenue are in appeal. The Revenue's appeals are against the finding of the CIT(Appeals) that the engineering fees for technical services were not taxable and the assessee's appeals are against the assessment of fees for training under section 9(1)(vii) of the Income-tax Act for assessment year 1985-86 and 1986-87. The following common grounds are raised by the Revenue in its appeals :- " (1) On the facts and circumstances of the case, the amounts payable to the German Company viz., SMS Schloema ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contention. (iii) The amount cannot be considered as Fee for Technical Services within the meaning of clause (vii) of sub-section (1) of section 9, as the Explanation to the said clause though includes in the definition, the provision of services of technical or other personnel, does not cover training of personnel. Arranging for training of personnel of the Indian Purchaser at different plants outside India does not constitute services of managerial, technical or consultancy nature. (iv) Just as the cost of documentation relating to the plant by way of drawings, designs, etc., is considered to be constituting the cost of the Plant as was held by the Hyderabad Bench of the Income-tax Appellate Tribunal in the case of Klayman Porcelains Ltd. v. ITO [1984] 8 ITD 265, since without documentation the machinery can neither be erected nor operated, so also the price paid for training of the Purchaser's personnel outside India constitutes the cost of Plant, since without the said training the Plant can neither be operated nor maintained by the Purchaser. For the above and such other grounds that may be urged at the time of hearing, the appellant prays that relief as claimed above be g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be treated as a matter of chance. The definition having been framed by the taxation experts of the two countries, it has to be presumed that the non-inclusion of the exclusionary clause was a conscious and deliberate one. In the circumstances, the only conclusion that can be inferred is that fees for technical services had been consciously defined in the AADT and the exclusionary clause had been consciously omitted. As a logical corollary, it must also be stated that the definition of fees for technical services as provided in the AADT must be seen as an express provision to the contrary vis-a-vis the exclusionary clause in section 9(1)(vii). Hence, the so-called harmoneous construction attempted by the CIT(Appeals) was an act of unauthorised superimposition which cannot be accepted. (6) It is seen that what prompted the CIT(Appeals) to speak of harmoneous construction is a submission made by the assessee that between the AADT on the one hand and the provisions of the statue on the other, whichever is beneficial to the assessee will have to be adopted. No doubt, the submission thus made is correct in principle. In fact, subsequently, the provisions of section 90 have been amende ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 2 to section 9(1)(vii), still the same would not ipso facto make the consideration for such services non-taxable. Section 9(1)(vii) merely defines fees for technical services. If something is not includible in this definition, the same could at the most be treated as payment other than fees for technical services. There is nothing in section 9(1)(vii) to warrant the conclusion that such other payments are necessarily non-taxable. It is not known as to on what basis the CIT(Appeals) arrived at such a conclusion. Obviously he has ignored the very many other provisions in the statement which deal with the taxability of remittances made to foreign concerns. He has also ignored, and very unfortunately so, the CBDT Circular No. 202 wherein it had been clarified that the profits derived from the excluded services (ie., services falling within the exclusionary clause) will have to be taxed as per the regular provisions of the Act. In its circular, the Board had explained the rationale for inserting the exclusionary clause in section 9(1)(vii). To quote, " Such consideration has been excluded from the definition on the ground that such activities virtually amount to carrying on business i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elaborately discussed and differed from the order of his predecessor-in-office which is the subject-matter of the present appeal. 10. The learned counsel of the assessee, on the other hand, supported the order of the CIT(Appeals) and submitted that because of the later part of the decision in Explanation 2 to section 9(1)(vii), the receipts would not be assessable as fees for technical services and, therefore, the question of application of double taxation agreement would not arise. Alternatively, he submitted that the receipt by the assessee was not a fee but was a price for equipment purchased in the shape of know-how, manuals, etc., which can appropriately be stated as " mechanical Equipment ". It was a sort of purchase of an industrial asset of which property passes outside India and, therefore, it cannot be, taxed in India. He further submitted that the case of the assessee would not fall under Explanation 2 section 9(1)(vii) even on the ground that the services were not rendered independently but they related to the supply of the equipment. Alternatively, he submitted that the consideration was received for a " like project " undertaken by the assessee within the meaning of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear 1986-87. In the preamble of this agreement, the assessee had stated that it had a licence from Morgan Construction Co., USA, and was in full possession of the latest know-how and agreed with V.S.P. to make available the benefits of the licence in the Wire Rod Mill proposed to be installed by V.S.P. As per the agreement, the assessee was to prepare the plant design and engineering and supply of plant, spares and various services was to be made by various concerns both foreign and Indian as stated in the agreement. The assessee had undertaken an overall responsibility of all the obligations. 12. For the sake of convenience, we reproduce the various clauses of the agreement. The preamble to the agreement reads as follows :- " Whereas the Purchaser proposes to establish a 4-strand Wire Rod Mill complete with furnace, and electrical equipment (hereinafter referred to as 'Plant') as a part of the integrated steel plant being established at Visakhapatnam for producing wire rods as specified in this Agreement. And Whereas the Prime Contractor has stated to the Purchaser that they are the licensee of Morgan Construction Company of USA and are in full possession of the latest Morgan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Any default/deficiency in the execution of this Agreement for supply and supervision will not be considered as an excuse for claiming extra amount by the Indian Contractor Mechanical in the erection Contractor and vice versa and default/deficiency in the execution of erection Contract should not be a ground for claiming extra amount by the Contractors under this Agreement. Similarly, any default/deficiency in the execution of the separate Agreement between the Purchaser and Stein Heurtey (as described in Article 2.2 hereunder) for supply and supervision will not be considered as an excuse for claiming extra amount by the Indian Contractor Mechanical in the erection Contract and the Prime Contractor under his overall responsibility shall ensure that no claims are made by Stein Heurtey in their separate Agreement with the Purchaser arising out of any default/deficiency in the execution of the erection Contract by Indian Contractor Mechanical as well as in the execution of this Agreement. Further, improper execution of erection work by the Indian Contractor Mechanical will not form an excuse for the Prime Contractor for insufficient performance of the guaranteed figures. While the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... indigenous Equipment, the Indian Contractors shall appoint their Indian Major Sub-Contractors with the prior approval of the Prime Contractor and the Purchaser. Approval of the Purchaser is subject to the provisions of Article 6 of the General Conditions of Contract. List (Panel) of such Indian Major Sub-Contractors shall be furnished to the Purchaser. The decision of the Purchaser regarding designating any Sub-Contractor as Indian Major Sub-Contractors shall be final and binding and the Purchaser will not be unreasonable in this regard. Article 3 Notwithstanding the Supply of indigenous Equipment including commissioning spares, tools and tackle, operating supplies, spares required for operation and maintenance, directly by the Indian Contractors to the Purchaser's Site/Railway siding, the Prime Contractor shall remain wholly liable to perform, fulfil and discharge all the obligations and responsibilities under this Agreement for the design, manufacture, delivery of the Plant, workmanship and the satisfactory performance in all respects as well as the overall coordination of the integrated supply and of all obligations under this Agreement (excluding erection) and the same shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g excerpts from the Schedules are relevant : " Schedule- 1, 1.0 Scope of work :-- In consideration of the payments to be made by the Purchaser, the Contractors shall be responsible for and perform the following : 1.1 Design and Engineering : 1.1.1 Design and Engineering for one complete Wire Rod Mill together with their auxiliaries more fully described in the Contract Specifications hereinafter referred to as the 'Plant' with the supply of both indigenous as well as imported Equipment, so as to make the Plant complete in all respects in accordance with Article 7 of the Purchaser's General Conditions of Contract having a guaranteed capacity to produce, inspect and handle 6,00,000 tons of finished wire rods as per the specified product mix set out in Schedule-8 hereto in specified hours as set out in the Contract Specifications hereto at 1.4 million tonnes liquid steel stage of Visakhapatnam Steel Project with an in built capacity as more fully described in the Contract Specifications. In order to ensure the adequacy of handling facilities the Purchaser will make available to the Prime Contractor the details of cranes foreseen by the Purchaser and the Prime Contractor will furnis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctrics shall be carried out by them without any additional charges to the Purchaser. However, any modification/additional facilities required for the layout area/equipments not covered under the Indian Contractor Electrics' scope will be taken care of by the Purchaser. 1.2 Supply of Plant 1.2.1 The Prime Contractor and the Foreign Major Sub-Contractor Electrics and Stein Heurtey shall supply all the imported Equipment as specified in the Contract Specifications, on for FOB Ports of Shipment basis within the time stipulated in Schedule-3, para 3.2.1. 1.2.2 The details of imported Equipment to be supplied under this Agreement are mentioned in Annexure II and Annexure III hereto. 1.2.3 The Indian Contractors shall supply to the Purchaser the indigenous Equipment including the necessary foundation bolts and special inserts on for Visakhapatnam Steel Project Railway siding basis in case of despatches by rail or FOR Plant Site/Stores basis in case of despatches by road within the time stipulated in Schedule-3, para 3.2.2. The Contractors shall also be responsible for the workmanship, quality, delivery and performance of Equipment supplied by their Sub-Contractors. The details of ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e receipt of 2,59,55,000 DM out of which receipts in assessment year 1985-86 are 1,05,64,399 DM and in assessment year 1986-87 77,73,873 DM. The other dispute is with regard to training services receipt of the aggregate amount of 29,42,000 DM out of which the receipts in assessment year 1985-86 are 11,97,474 DM and in assessment year 1986-87 8,81,168 DM. In this agreement, the main contractor is MECON and the assessee is the confirming party. The Preamble to this agreement reads as under : " Whereas the Purchaser proposes to establish a Light and Medium Merchant Mill (hereinafter referred to as 'Plant'), as a part of the integrated steel plant being established at Visakhapatnam for producing rounds, rebars, angles, channels, tees, etc. And Whereas the Contractor has entered into a know-how Licence Agreement dated 22-2-1981 with Confirming Party for obtaining and has obtained the technical know-how and knowledge owned or possessed by SMS relating to Light and Medium Merchant type of rolling mills along with related auxiliary equipment for such rolling mills, And Whereas the Contractor has assured the Purchaser that the Plant to be designed and supplied by the Contractor to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Plant') with the supply of both indigenous as well as imported Equipment, so as to make the Plant complete in all respects in accordance with Article 7 of the Purchaser's General Conditions of Contract having a guaranteed designed and engineered capacity to produce, inspect, transfer and stack 710,000 tonnes of finished Light and Medium Merchant Products as per the specified product mix set out in Schedule 8 hereto and similarly produce, inspect, transfer and stack 798,000 tonnes of 125 X 125 mm billets for Wire Rod Mill and for sale in specified hours as set out in the Contract Specification at 3.4 million tonnes liquid steel stage of Visakhapatnam Steel Project as more fully described in the Contract Specifications. In order to ensure the adequacy of the handling facilities the purchaser will make available to the Contractor the details of cranes foreseen by the Purchaser and the Contractor will furnish his requests of crane capacity, types, lifting tackles, etc., sufficiently well in time for the Purchaser to install the cranes and provide tackles, etc., in line with Contractor's such requests. 1.1.1.1 The Contractor taking into account the requirements of the Purchaser has fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 The Contractor shall arrange for training abroad of the Purchaser's personnel to the extent of 347 man-months (including 92 man-months in Steel Plants) for design, operation and maintenance of Plant as per details at Annexure XII hereto. 1.4-2 The Contractor shall give a detailed training programme for every Purchaser's trainee well in advance of his arrival at the place of training. The training programme can be changed by mutual agreement of the parties hereto depending on the requirements. The Contractor shall supply all training manuals, (one reproducible wherever available and five copies), instructions and other connected literature in six copies to the Purchaser in English language. In addition, each trainee shall also receive a copy of such training manual, instructions and other connected literature. The Contractor shall also arrange for a technical orientation course to be imparted in English language to the Purchaser's trainees and arrange for necessary English speaking personnel to explain the operation, maintenance and design features to the Purchaser's trainees. 1.4-3 The training services referred to in para 1.4.2 hereinabove shall be arranged by the Contractor t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is set out below. All the payments payable in respective currencies are on FOB Port of Shipment or FOR Visakhapatnam Railway Sidings/FOT site basis. 2.1.1 Mechanical Equipment and Services (SMS scope of work) Contract Prices 2.1.1-1 Equipment and Commissioning Spares : Equipment & Commissioning Spares DM 95,757,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p; (b) Training Services Done Abroad (190 man-months) DM 2,942,000 (DM Two Million Nine Hundred Forty Two &nb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gineering. 2. Equipment General layout drawings : This shows the plan of each equipment indicating co-ordinates and tie up dimensions. This is submitted for approval to ensure equipment meets the parameters specified in the contract. After approval, this becomes the basis for the party to go ahead with the manufacturing of equipment. 3. Flow diagrams and system schematics : This shows the schemes of hydraulic lubrication and water systems. This is submitted for approval to meet parameters of contract. After approval the party goes ahead with manufacture/selection of equipment. 4. Piping drawings : This shows the requirement of compressed air, nitrogen, steam, gas, etc., by the party for operation of the plant. This requirement has to be met by VSP. 5. Electrical drawings : Single line drawings, general arrangement drawings for electrical equipment, interlocking and sequence control drawings, etc., are submitted for approval prior to manufacture of electrical equipment. Based on this, VSP will have to meet the power requirement for running the plant. 6. Civil foundation drawings : These drawings show the requirement of foundation for each equipment. VSP has to construct th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... work to be undertaken by the Prime Contractor as stated hereunder. The Erection of the complete Plant shall be undertaken by the nominated erection Contractor (Indian Contractor Mechanical) for which the Purchaser will enter into a separate Contract with the Indian Contractor Mechanical based on the offers available. Similarly, para 1.10.1 in LMM agreement specifically states that " the erection of the Plant shall be the responsibility of the Purchaser " (i.e., VSP) and the assessee and other parties are to depute their experts to supervise the erection, commissioning and conducting of performance guarantee tests, etc. The CIT(Appeals) himself states this in para 21 of his order in the following words :-- " The most significant fact in this regard is noted in Para 3 of Article 1 of W.R.M. Contract that the erection of the Plant was excluded from the Contract Agreement as also from the scope of work undertaken by S.M.S. In L.M.M.M. contract, there was clear stipulation in Para 10 of Schedule I that erection was the responsibility of V.S.P. with export advice and supervision provided through deputation of personnel belonging to other contracting parties. . . . " It is, therefore, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pervision and design and engineering services are directly and intimately connected with the erection of the plant and machinery and, therefore, it should be treated as a kind of consideration for a " like project " under Explanation 2 to section 9(1)(vii). Here also, we do not find any merit in the contention of the assessee. The term " like project " has to be understood in the light of the preceding words " construction, assembly, mining ", that is, by following the principle of ejusdem generis, if the consideration for erection and commissioning can be, and as we have held it is, for doing these activities by the recipient of the consideration himself, the consideration for a like project has also to be likewise done and undertaken by the recipient thereof. When supervisory services cannot form part of construction, assembly or mining, the same has to be excluded from the term " like project " as well. A like project has to be a project done by the assessee and not mere supervision thereof. Supervision alone cannot be termed as a " project " falling in the family of terms " construction, assembly and mining ". We, therefore, do not find any merit in the contention of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the Indian company's use, that the Indian company was not interested in the designs, etc., and had to pay for them as part of the cost of construction of the kiln, that it had no intention to exploit the technical data even for construction of another kiln for itself, leave alone for others, and that the Indian company's consistent and repeated argument that the designs were not acceptable of being understood by its engineers, much less of being used by them for exploitation of the drawings, could not be ignored altogether. The impugned receipt, therefore, it was held, did not come under clause (i) of Explanation 2 to section 9(1)(vi) relating to transfer of assets or clause (ii) relating to imparting of information or clause (iii) relating to use of any patent, etc. It was further held that the Revenue's attempt to show that it might be 'imparting of any information concerning technical, industrial, commercial or scientific knowledge, expertise or skill' under clause (iv) or rendering of service in connection with aforementioned articles under clause (vi), must also fall as the Indian company was not interested in the information and had not paid for any information as such. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact that the services were incidental to and were connected with the supply of the equipment. This case of Hindustan Shipyard Ltd. also is of no help to the assessee. 22. The fact that the design and engineering services rendered by the assessee would form part of plant in the hands of the purchaser in view of the decision of the Supreme Court in the case of Scientific Engg. House (P.) Ltd. and in the case of Challapalli Sugars Ltd. would not, in our opinion, take the receipt by the assessee out of the purview of section 9(1)(vii). It may be a capital disbursement insofar as the purchaser is concerned, but that does not necessarily mean that it would be a capital receipt in the hands of the recipient or a receipt for the supply of a capital asset. The assessee entered services to the VSP by preparing the design and rendering engineering services to enable the latter to set up the two mills in India under its supervision by importing equipment and spares not only from the assessee but from many others as well. These services, insofar as the assessee is concerned, are in the nature of technical services and the receipt of consideration therefor would, in our opinion, be chargeable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bar Mill in Germany and in the SMS workshop. The practical training Schedule gives break-down lists of the number of trainees, nature of important jobs and the period, i.e., man-months in each job. There is, however, a clause regarding list of exclusions which contains that certain costs are not included in the price received by SMS. These are travelling, boarding, lodging, salary, insurance and other incidentals so far as personal benefits of the trainees in Germany are concerned. It was also mentioned that in case such services are provided by SMS at the specific request of the purchaser, these will be separately charged to latter. After going through these details, I am satisfied that the payments towards training services would be clearly liable to tax as " fees for technical services " being lumpsum consideration for rendering appropriate technical training to the personnel of VSP not in connection with the construction of the Steel Plant Project in India but for its operation and running even after the projects were set up. The reliance on the decision in 22 ITD 87 would not be appropriate as the payments would neither be treated as reimbursement of actual expenses for impart ..... X X X X Extracts X X X X X X X X Extracts X X X X
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