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TMI Blog1993 (8) TMI 97X X X X Extracts X X X X X X X X Extracts X X X X ..... um Merchant Mill (LMM) at Vishakapatnam. The contract for this work was awarded to MECON, which entered into a number of subsequent contracts with various sub-contractors for performing the job. One of such contracts was between MECON and the assessee for the supply of electrical portions of the Merchant Mill. There was an agreement between VSP and MECON and another agreement between MECON and the assessee. The contract between VSP and MECON provided for direct payment by VSP to the foreign sub-contractors after certification and authorisation by MECON and such payments, according to the contract, were to be considered to be payments made to MECON made by VSP. According to the agreement between MECON and VSP, MECON was to make separate payments to the assessee in respect of : (i) Equipment and commissioning spares. (ii) Engineering fees including cost of importation of drawings. (iii) Training services done abroad. (iv) Spare parts. In the present appeals, we are concerned with the taxability of the fees paid by VSP/MECON to the assessee in German DM in the three different years. 3. Before the Assessing Officer, the representative of the assessee contended, firstly, that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s prepared by the assessee-company for which payments under consideration had been made would surely constitute "plant" for the purpose of Indian Income-tax Act. He, however, commented that the Supreme Court had not gone into the question as to whether the fees paid for the purchase of the drawings and designs in the case decided by it would come under the category of fees for technical services. The CIT (Appeals) referred to Explanation 2 to section 9(1)(vii) of the I.T. Act, 1961. He commented that in the present case, the assessee had undertaken the electrical contract for LMMM and in this connection, had prepared certain documents and drawings which were handed over to the Indian Company and for this the assessee had received consideration. He stated that since in accordance with the abovementioned Explanation 2 to section 9(1)(vii), any consideration received for rendering technical services will be fees for technical services, there could not be any doubt about the fact that the fees under consideration were received by the assessee by way of fees for technical services, although the technical documentation might constitute a "plant". He also took into consideration the argum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decided that no tax need be deducted at source from the remittances made to the assessee-company in view of the fact that the said remittances were not taxable in India. The said representative has drawn our attention to the amended provisions of the D.T.A. Agreement between India and West Germany as reported. It has been pointed out that under article XVI, clause (2)(b), the provisions of this D.T.A. Agreement would be applicable to assessability of income in India with effect from assessment year 1984-85. Our attention has also been drawn to article IX of this amended agreement under which a new article VIII has been inserted. It has also been argued by the representative of the assessee that if there be a conflict between the National Tax Law and the provisions of the Double Taxation Avoidance Agreement. then the Double Taxation Avoidance Agreement would prevail. 5.1 The representative of the assessee contends that the amounts under consideration have been treated by the Department, both at the original assessment stage as well as at the first appellate stage as fees for technical services. However, this view is not tenable for the following reasons : (i) The entire technica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds, thereby challenging the order of the CIT (Appeals) from various angles. At the stage of the representation of the case before us, however, the assessee's counsel mainly harped on the issue that the payments under consideration actually constituted supplemental payments for supply of electrical plant and machinery by the assessee to the Indian company and, hence, they should not be considered as taxable in India. The learned representative of the assessee admitted that there was a separate clause for actual payment of the cost of the plant and machinery under consideration. He, however, stated that for some reason or other, the provision for making separate payment called engineering fees was inserted in the agreement between the two parties and actually the so called engineering fees represented nothing but supplement to the cost of the plant and machinery. The drawings and documents are also stated to be pertaining to the plant and machinery only and not to the manufacturing process to be ensued by the assessee. Our attention has also been drawn in this connection to Explanation 2 to section 9(1)(vii) and specially to the last limb of this Explanation in accordance with which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ticle again, says that the term "fees for technical services" as used in the article means payment of any kind to any person other than payment to an employee of the person making the payments in consideration for services of a managerial, technical or consultancy nature including the provision of services of technical or other personnel. 7.2 Since, so far as the definition of "fees for technical services" is concerned, we have to be guided by the abovementioned article of the Double Taxation Avoidance Agreement only, we must come to the conclusion, that in the instant case, the payments having been made in consideration for services of a technical nature, the said payments have got to be considered as fees for technical services rendered by the assessee-company to the Indian concern. This definition is more or less in conformity with the Explanation 2 to section 9(1)(vii) of the I.T. Act, 1961. However, the restrictive clause as found in the said Explanation does not appear in the definition as found in the D.T.A. Agreement. In any case, the restrictive clause cannot be considered to apply to the present case inasmuch as the assessee cannot be considered to have undertaken any pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up without prejudice that the CIT (Appeals) ought to have accepted the contentions that the payment was assessable on the accrual basis and the payment accrued during the relevant year alone was liable for taxation. So far as the first contention as above is concerned, we are of the opinion that article VIIIA of the D.T.A. Agreement being specifically applicable to royalties and fees for technical services, shall prevail over article III dealing with the business profits, in a case like this where the payment is clearly of the nature of fees for technical services. The CIT (Appeals) has also answered this issue very nicely at para 18 of his impugned appellate order. We do not find any reason to differ with his reasonings or inference. The other issue relating to accrual of income during the relevant years has also been discussed by the CIT (Appeals) in detail at paras 23 and 24 of his appellate order. By relying on the decision of the Madras High Court in the case of CIT v. Standard Triumph Motor Co. Ltd. [1979] 119 ITR 572 he has come to the conclusion that the assessee has been offering the royalty and fees for technical services on receipt basis only and hence, there is no cas ..... X X X X Extracts X X X X X X X X Extracts X X X X
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