9911796707
TMI Blog1995 (7) TMI 123X X X X Extracts X X X X X X X X Extracts X X X X ..... and M/ s Metallurgical & 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 payme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... documentation in connection 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in erection of each plant. " 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. Hindust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rection of a project falling 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 C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TD 87 in support of above 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 rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such non-inclusion cannot 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 se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nary clause in Explanation 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... als), Visakhapatnam, has 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 assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 25,901 DM in assessment year 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 possess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on the offers available. 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 guara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facture and supply of the 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 ere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greement. " The following 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 Pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Indian Contractor Electrics 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-Contrac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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 Purchaser would be based on the technical know-how, knowledge and data owned or possessed by SMS and the detailed design and engineering of the Contractor for the Plant would also be in accordance with the aforesaid know-how from SMS. And Whereas the Contractor has stated that SMS in its capacity as the Confirming Party hereto and also in its capacity as the Major Sub-Contractor shall render plant design and engineering services, supervisory services, training services, etc., as agreed to by the Contractor in this Agreement with the Purchaser ; And Whereas both the Contractor and the Confirming Party have agreed to jointly fulfil the obligations as stated in this Agreement at such times as manner so as to ensure design, manufacture and delivery of Equipment as per the technological quality standards prescribed by SMS and as per the delivery schedule and provisions contained in this Agreement including supervision of erection, commissioning and consideration of performanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntly 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 furnished the Contract Specifications which have been accepted by the Purchaser. The Contract Specifications shall be treated as binding documents for the purpose of determining the scope of supply under this Agreement. If these Contract Specifications are incomplete or ambiguous in any respect, the relevant correspondence listed in Annexure 1 shall be binding on the Purchaser and the Contractor. Notwithstanding the aforesaid, the Contractor and Confirming Party shall remain liable for completeness of the design and engineering of the Plant. During the course of designing of the Plant, if the Contractor desires to make changes in nomenclature and quantity as well as to modify the design of certain Equipment with a view to improving the design/performance of certain units, the Contractor can do the same only with the prior approval of the Purchaser. Once these modifications are agreed upon by the Purchaser in writing they will become an integral part of the Contract. 1.1.1.2 Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 through the Foreign Major Sub-Contractors. The prices for such training services are mentioned at para 2.1 of Schedule 2. The travelling and living expenses of the Purchaser's trainees shall be borne by the Purchaser, The Contractor shall, however, assist in arranging medical insurance for such trainees. 1.5 Supervision during manufacture of Indian equipment 1.5.1 The Contractor shall depute his and/or Confirming Party's/foreign Major Sub-Contractors' engineers/experts for carrying out inspection of the Equipment and Materials, supervision during its manufacture and test and test runs as well as at the time of shop acceptance and pre-assemblies in respect of the Equipment to be manufactured by the Indian Sub-Contractors to satisfy himself and to ensure the qualitv of the indigenous Equipment being manufactured so that the overall production guarantee as well as the other obligations under this Contract are met by him. The number of such experts, their duration of stay in In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ............................." 14. In both the agreements, there is a Schedule-7 styled as " Purchaser's general conditions of contract ". Article 11 thereof enlists elaborately the details of the nature of drawings, lay-outs, business data, manuals, etc., to be submitted by the assessee for erection of different plants. The following brief description in this regard as prepared by the technical personnel of VSP was submitted by the assessee before the CIT(Appeals) : " Nature of drawings, data and documents submitted by foreign suppliers for LMM & WRM " 1. Overall general layout drawings : This shows the disposition of all equipment within the shop indicating co-ordination and tie up dimensions. This is submitted for approval so that the supplier can go ahead with further engineering. 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 hyd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the later part of the definition of the expression " fees for technical services " as the object of AADT was to avoid double taxation and not to bring a receipt to tax if it was not chargeable under the IT Act. On going through the various terms of the agreements, the provisions of the AADT and section 9(1)(vii) of the IT Act read with Explanation 2 thereunder, we are of the opinion that the finding of the CIT(Appeals) for deleting the receipt from the income of the assessee is not correct. 16. A close reading of the two agreements shows that the erection of plant is excluded from the purview of the assessee's scope of work. Para 3 of Art. 1 in WRN contract, extracted above, specifically states : " The erection of the Plant is excluded from this Agreement and from the scope of 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 Plan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or being excluded from the definition of " fees for technical services ", the receipt of consideration has to be for construction and assembly by the assessee itself and not for its supervision alone. Construction or assembly as such is to be undertaken by the assessee but not mere supervision thereof, under the agreement. The finding of the CIT(Appeals) to this extent is, therefore, not correct, factually as well as legally. We vacate the same. 18. Sri S.E. Dastur, learned counsel of the assessee, however, contended that the consideration for supervisory services, if considered as not for construction or assembly, could be taken to be a consideration for a " like project " appearing in Explanation 2 to section 9(1)(vii) after the words " construction, assembly, mining ". The supervision 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 word ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eas as well as Indian concerns enumerated in the two agreements. The supply follows the services and not vice versa as was the position in the case of Klayman Porcelains Ltd. a decision by the Hyderabad Bench of the ITAT, and Hindustan Shipyard Ltd.'s case a decision by the Andhra Pradesh High Court. 20. In the case of Klayman Porcelains Ltd., engineering data were held to constitute plant and, therefore, it was held that the supply of the same from abroad would have the same consequences as the supply of materials. It was a case where the Revenue attempted to bring to tax the payment received for the supply of engineering data as 'royalty' within the definition under section 9(1)(vii). The Tribunal held that all the documents related to the kiln which was specifically designed 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 unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreed to render certain limited services, the services were connected with the effective fulfilment of the contract of sale and were merely incidental to the contract and were usually included in all such contracts by way of guarantee of the efficient working of the products sold. In that case, the question with regard to application of section 9(1)(vi) was not a subject-matter of consideration. The assessment years involved were 1967-68 to 1970-71, i.e., before the introduction of clause (vii) of sub-section (1) of section 9 in the statute w.e.f. 1-6-1976. As we have already held, when a particular receipt of consideration satisfies the ingredients of the provisions of Explanalion 2 to section 9(1)(vii), it has to be treated as a fee for technical services irrespective of the 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 cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that ground. 24. In the assessee's appeals for assessment years 1985-86 and 1986-87, the only issue which remains for consideration is the nature of receipt for imparting training to the employees of VSP under the LMMM contract. The relevant clause is clause 1.4 of the agreement which has been extracted by us in paragraph 13 of this order. This is held to be a part of " fees for technical services " by the CIT(Appeals) by observing as under :-- " ...As noted earlier, the scope of work for SMS in this regard was to impart training for 190 man-months out of total 347 man-months. Under Annexure XII of the Contract Agreement, there were elaborate provisions regarding the tentative training programme under various jobs like mechanical and electrical operations of existing Merchant 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 incid ..... X X X X Extracts X X X X X X X X Extracts X X X X
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