1992-VIL-156-ITAT-HYD

Equivalent Citation: ITD 042, 570, TTJ 044, 008,

Income Tax Appellate Tribunal HYDERABAD

Date: 30.04.1992

INCOME-TAX OFFICER.

Vs

NATIONAL MINERAL DEVELOPMENT CORPORATION LIMITED.

BENCH

Member(s)  : T. V. RAJAGOPALA RAO., O. ANANDARAM.

JUDGMENT

Per Shri T. V. Rajagopala Rao, Judicial Member --- These are two appeals filed by the Department against the orders of the Commissioner of Income-tax (Appeals) II, Hyderabad dated 16-7-1987.

2. The facts of the case leading to the present appeals are the following.

3. National Mineral Development Corporation entered into a contract dated 17-1-1975 with M/s Clouth Gummiwerke A. G. West Germany (hereinafter called NR) under which the NR agreed to supply 5400 Mtrs. of ST 4500 Steel Cord Conveyor Belt and splicing tools to Bailadila Deposit --- 5 Project. Copy of the Agreement between the National Mineral Development Corporation (NMDC for short) and NR was furnished at Page No. 1 Xerox copy of the same is furnished in the Paper Compilation filed before us. Under the terms of the said agreement the NR not only undertook to supply the conveyor belt and splicing tools but also undertook the erection and commissioning of the said conveyor belt at the Project site. The particulars of the conveyor belt which is to be supplied are furnished in Annexure-I to the contract and its FOB Value was 25,70,400 DM. Under Clause 11 of the said contract NMDC has to pay a consolidated sum of 1,07,000 DM towards erection, supervision and commissioning charges. Para 11-B of the contract, it is stated that the NR shall also provide supervision, splicing, erection and commissioning by sending their erection team. NMDC shall pay a consolidated amount of 1,07,000 DM towards supervision, erection and commissioning charges. Para 11D states about travelling expenses which the NMDC has to meet or the NR is required to meet with reference to the technical or supervisory staff sent by the NR for purposes of erection and commissioning the conveyor belt. Further, at para 12 of the contract it is stated that the NR gave assurance for the guaranteed life of the conveyor belt till it conveys 75 million tonnes or 5 years of operation whichever is earlier. Under Para 11D it is stated inter alia that the NMDC shall arrange to supply necessary equipment and tools other than those indicated in Annexure No. 11 for splicing and belt changing at site at their cost. There was an amendment to the agreement on 27-11-1985 and it was only with regard to the total number of days or mandays which the technical supervisory staff of the NR has to spend at the project site for filing and commissioning of the conveyor belt. It is stated that the erection and commissioning charges agreed upon was 1,07,000 DM and the work is to be finished over a period of 180 mandays. In the event of the mandays actually required at site being less the NR shall have to allow proportionate reduction in the total charge. However, there would not be any upward variation in the amount under any circumstances. In the amended contract, Para 11F also was added which deals with regard to the terms of payment towards supply of technical assistance for the purpose of erecting the conveyor belt and for commissioning the same. The said Para says that irrevocable Letter of Credit will be opened to cover the erection and supervision charges of 1,07,000 DM and payment will be made against invoice duly certified and endorsed by officials of Bailadila Deposit No. 5 Project after 30 days from the date of receipt of such signed invoice. In pursuance of the contractual terms there is no dispute that technicians working under the NR were deputed to India and they have erected and also maintained the conveyor belt at Bailadila Deposit No. 5 Project which is said to be situated in Madhya Pradesh. The NMDC wanted to pay a sum of 72,522 DM in assessment year 1985-86 and 17,833 DM in assessment year 1986-87 towards erection, commissioning and supervisory charges agreed to under the contract to the NR. The NMDC requested the ITO concerned to issue No Objection Certificate for sending the said amounts, respectively, to the NR. The Income-tax Officer, C-Ward, Company Circle, Hyderabad while issuing the No Objection Certificates dated 5-3-1986 for assessment year 1985-86 and NOC dated 4-2-1987 for assessment year 1986-87 directed that an amount of 29,009 DM for assessment year 1985-86 and 5,350 DM for assessment year 1986-87 should be deducted towards Income-tax and the rest of the amounts for which permission is sought are allowed to be sent by NMDC to the NR. As a representative assessee to the NR under section 163 of the Income-tax Act, the NMDC contended that the amounts sought to be sent for assessment years 1985-86 and 1986-87 to the NR viz., 72,522 DM and 17,833 DM respectively were not at all chargeable to income-tax since the technical services were rendered for arranging the conveyor belt in a Mining Project undertaken by the NR and hence the payment does not come within the definition of " fees for technical services ", given under Explanation to section 9(1)(vii). This contention of the assessee though was not dealt with by the ITO was accepted by the CIT(A) II, Hyderabad who followed an earlier decision of the CIT(A) II dated 30-9-1985 in the case of a similar payment made to the same NR by the NMDC for assessment year 1981-82. Following her predecessor's decision dated 30-9-1985, the learned CIT(A) held that the ITO's attempt to classify the services rendered by the NR as technical services is without substance and consequently she held that tax is not deductible at source on the remittances to be made to the NR by NMDC. The learned CIT(A) also ordered refund of tax deducted at source from the amount sought to be remitted to the NR for assessment years 1985-86 and 1986-87. Thus, by her separate orders, the learned CIT(A) passed in ITAs No. 494 and 495/Com(C)/CIT-II/ 1986-87 dated 16-8-1987 allowed the appeals and also ordered refund of TDS ordered to be deducted from the amounts sought to be sent to the NR by the NMDC for assessment years 1985-86 and 1986-87 respectively. The revenue felt aggrieved against the orders of the learned CIT(A) for assessment years 1985-86 and 1986-87 and brought these appeals before us and thus the matters stand for our consideration.

4. Since common contentions are raised in these appeals they can be taken up together and disposed of by a common order. Two contentions are raised in these appeals by the Department. First is that an order passed under section 195 by the Income-tax Officer is not an appealable order and so the CIT(A) should not have entertained any appeal against the ITO's order under section 195 permitting remittances of amounts to the NR by NMDC for assessment years 1985-86 and 1986-87 and secondly it was contended that the amounts sought to be remitted to the NR by NMDC in assessment year 1985-86 as well as 1986-87 are taxable in India and therefore the TDS was correctly directed to be deducted by the ITO, while issuing No Objection Certificates for assessment years 1985-86 and 1986-87 to the NMDC.

5. We have heard Shri S. C. Jaini, learned Sr. DR for the Department and Shri T. S. S. N. Murthy, learned counsel for the assessee. On behalf of the assessee, a Paper book was filed containing the tender accepted by the NMDC etc. On behalf of the Department, the earlier orders of the Tribunal for assessment year 1981-82 were filed. The learned DR contended that the order under section 195 is not an appealable order either under sections 246 or 248. We do not agree with this contention. Section 248 clearly lays down that any person having in accordance with the provisions of sections 195 and 200 deducted and paid tax, in respect of any sum chargeable under the Income-tax Act other than interest and who denies his liability to make such deductions, may appeal to the CIT(A) to be declared that he is not liable to make such deduction. Further reference may be made to the Supreme Court decision in CIT v. Wesman Engg. Co. (P.) Ltd. [1991] 188 ITR 327. The position is made very clear in the head note of the decision itself which is as follows :

" When once an appeal has been filed under section 248 of the Income-tax Act, 1961, against an order of the Income-tax Officer under section 195(2) on an application for determining the chargeable proportion of the sum to be remitted to a non-resident for the purpose of deduction of tax at source, the Appellate Assistant Commissioner is competent to pass an order with respect to the quantum of the amount on which tax is to be deducted or to revise the proportion of the amount chargeable under the provisions of the Act as determined by the Income-tax Officer. The right to appeal under section 248 is not restricted to total denial but covers even a partial denial with reference to a part of the payment subjected to deduction of tax at source. The language of section 248 is wide enough to cover any order passed under section 195. "

We may also site the Tribunal's decision on this point which is in Dalmia Cement (Bharat) Ltd. v. ITO [1987] 20 ITD 76 (Delhi). In the head note of the decision at page 77, the following is what is stated :

" In section 248 the crucial words are who denies his liability to make such deduction. ' In this clause the most crucial words are ' such deduction '. ' Such deduction ' would mean the deduction as required of him under the provisions of sections 195 and 200. If under those provisions, the assessee was required to deduct certain amount of tax but the assessee disputed the quantum only if he deducted and paid such tax to the Government, he would be entitled to claim before the appellate authority that under the provisions of the Act he was not liable to deduct tax at such rate or on such amount or as the case may be. "

In view of the above two decisions, we hold that there is no merit in the Department's contentions that order under section 195 is not appealable.

6. Now coming to the merits of the case, the learned DR contended that the matter is concluded by the earlier Tribunal's order in the case of this very NR for assessment year 1981-82 and In support of his contention, he filed a copy of the orders of the B-Bench dated 11/87 passed in ITA No. 20/Hyd/86. This appeal was filed by the revenue against the same NR when there was a dispute whether TDS should be deducted while sending the amounts agreed to under the contract by the NMDC. In assessment year 1981-82, a sum of 33,000 DM was sought to be sent by the NMDC to the NR and in that connection NOC was requested from the ITO. The ITO while issuing the NOC directed that an amount of Rs. 1,19,450 should be deducted towards TDS and the rest of the amount may be sent to the NR. In that year also the position taken by the revenue was that the amount was covered by section 9(1)(vii) since it was the payment made towards providing technical service by the NR. However, as a representative assessee the NR contended that since the assessee had undertaken the Mining Project and as a part of the obligations which arise to the NR under the contract the technical services were rendered, 9(1)(vii) does not apply and it comes within the Explanation given under Explanation to section 9(1)(vii). While deciding the merits and demerits, the Tribunal held, to which I was a party that the TDS directed to be deducted by the ITO is correct and the order of the CIT(A) on the question is liable to be set aside. However, it is argued that the order of the Tribunal for assessment year 1981-82 turns out purely on the peculiar facts and circumstances of that year and the facts relating to assessment year 1981-82 are quite different from the facts relating to assessment years 1985-86 & 1986-87. The facts relevant for assessment year 1981-82 which we have considered In the earlier order were the following.

7. For that year, under the contract dated 10-11-1977, the NR agreed to sel and the NMDC agreed to purchase 18 sets of splicing belt. Under the contract there was no clause undertaking the responsibility of erection, commissioning or maintenance of the conveyor belt after it is being arranged at the Bailadila Project site. After the conveyor belt contracted for under the contract was delivered within a short time, there was some correspondence between the NMDC and the Government of India, regarding the erection of the conveyor belt. The Government of India wanted that NMDC Engineers should undertake the work of erection. However, the NMDC was of the opinion that it would be better if the technicians belonging to the NR are associated with the erection. The NMDC conducted negotiations with the NR and the NR by its letter dated 2-3-1978 agreed to undertake the work on payment of 33,000 DM. After receipt of that letter, the NMDC requested Government of India to release the required foreign exchange. On 18-3-1978, foreign exchange was released as required and on 28-3-1978, the NMDC accepted the offer put forward by the NR and afterwards the NR deputed two of its supervisors for a period of 20 working days for belt changing, as well as, for erection of new belt. The letter dated 28-3-1978 which the NMDC wrote to the NR while accepting its offer would show that the payment of 33,000 DM was accepted on certain conditions. The first condition was that the NR should depute two of his supervisors/erectors for a period of 20 working days for belt changing and erection of new belt. The second condition is that a lump sum amount towards supervision of erection and installation charges will be made. Payment will be made against an irrevocable Letter of Credit opened in favour of the NR with Dredner Bank AG. Koeln. against the presentation of sanctioned invoices by NMDC officials and certificate regarding the satisfactory completion of work by officials of Bailadila Iron Ore Project. Under Clause 4 of that Agreement, after the erection and belt changing is done, one of the erection supervisors of the NR, would stay at the Project site for a period of one month to train the personnel of the NMDC in the maintenance of conveyor belt without extra charges. Thus, for supply of material as well as for its erection there are two separate agreements entered into between the NMDC and the NR. The Two separate contracts do not form part of an integrated contract. We have rejected the arguments advanced on behalf of the assessee that both the contracts represent one integrated contract and therefore the technical fees paid is merely incidental to the purchase of conveyor belt. Next we took up the argument whether the amount payable under the contract would be exempt on the ground that it is consideration for construction, assembling mining or like products by the NR in India. We found that the expression " in connection with " is not found in Explanation to section 9(1)(vii). We hold that the Explanation under section 9(1)(vii) merely grants exemption for consideration received for any construction, assembling mining or like product undertaken by the recipient. In other words, in order to come under the exemption, the NR should have entered into a contract for the construction, assembly or mining. We are concerned with the technical services pure and simple and not receipts for construction, assembly and mining etc. The technical services must be for providing managerial, technical or consultancy services and these managerial, technical or consultancy services should not be for construction, assembly etc. According to the contract it is clear that the technicians are here only for supervising the erection of the conveyor belts. Two persons by themselves certainly cannot erect the conveyor belt. It is to be the work of many others. These two technicians are there only to supervise the erection and giving technical advice in connection with the erection. We agreed with the learned DR in that case that technical fee is for technical advice in connection with erection and the actual erection was done by others. Having thus found that the payment of technical fee was agreed upon on a separate, distinct and different contract from the original contract and the payment of technical fee is only for giving technical advice in connection with the erection and not for undertaking the erection by the NR, we disagreed with the CIT(A) that when she held that the amount payable was in connection with construction, assembly etc.

8. However, the facts relating to assessment years 1985-86 and 1986-87 are quite different. The agreement dated 17-1-1985 is an integrated contract under which the NR agreed not only to supply the conveyor belt but also agreed to assemble them, erect them at the Project site and also agreed to maintain them and assure guarantee performance of the conveyor belt for 5 years. A fair reading of the contractual term would show that the whole responsibility of erecting the conveyor belt was that of the NR under the contract and not merely the duty to supervise the erection. Clause 11 of the agreement dated 17-1-1985 is captioned " Supervision, erection and supply of splicing tools. " Under clause 11A splicing tools mentioned in Annexure-II of the contract should all be supplied by the NR free of cost. Under clause 11B deals with supervision, erection and commissioning charges. M/s Clouth shall also provide supervision, splicing, erection and commissioning by sending their erection team, NMDC shall pay a consolidated amount of DM 1,07,000 towards supervision/erection and commissioning charges. Under Clause 11C, it is the NMDC which is obliged to provide the required number of their technicians free of cost in splicing and belt changing work. It is estimated that the conveyor belt would be arranged by spending 180 mandays. Clause 12 of the agreement shows that the NR gave performance guarantee to the NMDC for the guaranteed life of the conveyor belt till it carries 75 million tonnes or for 5 years operation whichever is earlier. Whatever may be said about the responsibility to erect the conveyor belt at the Project site for assessment year 1981-82, the responsibility of such erection was fully and clearly undertaken by the NR under the agreement dated 17-1-1985 which is relevant while deciding the case for 1985-86 and 1986-87. The learned counsel for the assessee argued that it cannot be said that the amount of 1,07,000 DM agreed to under the contract dated 17-1-1985 was only towards tendering advice in the erection of the conveyor belt. Further the number of technicians which are required in the erection of the conveyor belt, commissioning and supervision as well as for maintenance are not mentioned in the agreement dated 17-1-1985. That itself would disclose that however many technicians supervisory or other technical staff are required for erection, commissioning and maintenance is completely the responsibility of the NR but not of the NMDC at all, whereas under the contract which was considered by the Tribunal for assessment year 1981-82, the NR agreed only to depute two of its technicians to supervise the erection. No such number was mentioned in the agreement dated 17-1-1985 for the obvious reason that NMDC is not concerned with their number since the erection of the conveyor belt is the complete responsibility of the NR. Therefore it is very clear that 1,07,000 DM is intended towards erection, commissioning and maintenance charges but not for merely tendering advice at the time of erection of the conveyor belt. Thus, there are material differences between the two types of contract entered, which this Tribunal considered while disposing of the appeals for 1981-82 and these two appeals relating to 1985-86 and 1986-87. Therefore, the ratio of the earlier Tribunal's decision should not automatically be applied to the facts of this case since they were quite different. The facts on hand are quite akin to the facts appreciated by the Honourable Andhra Pradesh High Court in CIT v. Hindustan Shipyard Ltd. [1977] 109 ITR 158. In that case Hindustan Shipyard Limited is a Government of India Undertaking entered into an agreement with a Polish company to supply diesel engines with accessories. The engines were agreed to be erected by the staff of the purchaser under the supervision of the erector and the supervising engineer was placed at the disposal of the purchaser by the Polish company. The Polish company agreed to supply an erector and supervising engineer for a period of 12 months for every ship free of charge and to provide free of cost one guarantee engineer for a period of six months on board the ship. The agreement also contemplated that a training course is to be conducted in Poland for 8 employees of the purchaser to be sent in batches and the expenses including travelling expenses were to be borne by the Polish company. The question which came up before the AP High Court was whether the Polish company has got any business connection in India and it had earned any income in India. At Page 159 (head-note) the AP High Court held the following :---

" In the instant case, though the Polish company 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. On the facts of the case, therefore, there was no business connection between the assessee and the Polish company. "

9. As against these arguments of the learned counsel for the assessee, the learned DR contended that there is no distinction at all between the facts which were appreciated by the Tribunal while giving its order for assessment year 1981-82 and the facts which are relevant for assessment years 1985-86 and 1986-87 and therefore the earlier order of the Tribunal which is already referred to above fully should govern the disposal of the case and according to him, the order to deduct the TDS before remitting the amounts to the NR for assessment years 1985-86 and 1986-87 are perfectly justifiable orders and they are not liable to be interfered with.

10. After hearing both sides, we are inclined to agree with the arguments advanced by the assessee's counsel. We have minutely compared the dates as well as the provisions of the contracts relevant for assessment year 1981-82 on the one hand and assessment years 1985-86 & 1986-87 on the other. We fully agree with the points of distinction between them brought about the highlighted by the learned counsel for the assessee. For assessment year 1981-82 supply of goods (conveyor belts and splicing tools) and supply of supervision by technicians were provided by two separate and distinct contracts for which considerations were different whereas the terms of the contract relevant for assessment years 1985-86 and 1986-87 is one integrated contract in which the NR is obliged to supply goods (conveyor belts and splicing tools) as well as it had undertaken erection of the conveyor belt, commissioning it and maintaining it for 5 long years. Simply because towards erection and commissioning charges a sum of 1,07,000 DM was agreed upon does not make the obligation to erect the conveyor belt a separate contract. In our opinion, it remains one of the terms of the integrated contract only. Now let us consider how far the payments towards erection charges come under the Explanation to section 9(1)(vii). In the appeal for assessment year 1981-82, we find specifically that the payment of the amount of 33,000 DM is towards rendering technical advice or for supervising the erection of the conveyor belt. The same cannot be said in the face of clear contractual terms in the contract dated 17-1-1985 relevant to assessment years 1985-86 and 1986-87. The contract thus shows that the payment of 1,07,000 DM was intended towards erection and commissioning charges. Explanation to section 9(1)(vii) is as follows :---

" For the purposes of this clause, " fees for technical services " means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the receipient chargeable under the head ' Salaries '. "

From the facts and circumstances before us it cannot be said that the NR simply agreed to provide service of its technical personnel only. It had undertaken to complete erection, commissioning and maintenance. Erecting a conveyor belt is a form of construction. There is nothing to suggest what type of construction is contemplated by that word used in section 9(1)(vii). If loose parts of a machinery are assembled it can also be called as construction of the machine. In this section both construction as well as assembly were used. Even if these words like construction and assembling are to be understood as per ejusdem generis rule to assemble or to construct a conveyor belt is itself a project of a big magnitude. The cost of the conveyor belt as given in Annexure-I to the agreement dated 17-1-1985 is 25,70,400 DM FOB. Such heavy machinery costing crores of rupees were assembled at the project site and an integrated conveyor belt was constructed at the project site at a cost of 1,07,000 DM. Under these circumstances can we say that the charge for assembling or construction of the conveyor belt is simply for supervising the act of construction or assembling or for setting up of the conveyor belt ? It is no doubt true that the NR itself was not engaged in any mining work. But that by itself does not make the erection of a huge conveyor belt costing crores of rupees in a Project area cannot itself be called a Project. Therefore we have no hesitation to hold that the assessee is engaged in a Project of either constructing a conveyor belt or assembling a conveyor belt at the Project site which is intended to convey the iron ore mined in Bailadila, Madhya Pradesh. Therefore we hold that the assessee would come within Explanation--2 to Section 9(1)(vii) and the payments sought to be for which No Objection Certificates were sought to be obtained for assessment years 1985-86 and 1986-87 cannot be said to be fees for technical services. In view of the Andhra Pradesh High Court's decision in Hindustan Shipyard's case cited  supra, these amounts which are sought to be sent for assessment years 1985-86 and 1986-87 cannot also be considered as income earned in India by the NR. It is significant that under the Explanation to section 44D or the Explanation provided under section 115A it is said that the words " fees for technical services " should bear the same meaning as was given in Explanation---2 to section 9(1)(vii).

11. Having regard to all the above, we hold that there are no merits in the appeals preferred by the Department for assessment years 1985-86 and 1986-87. We further hold that the learned CIT(A) is perfectly justified in her conclusions. We therefore uphold her orders and dismiss the appeals preferred by the Department

 

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