1997-VIL-102-ITAT-MUM
Equivalent Citation: [1997] 62 ITD 330 (MUM.)
Income Tax Appellate Tribunal MUMBAI
IT APPEAL NOS. 2679, 2680, 2681 AND 3026 TO 3028 (MUMBAI) OF 1990
Date: 24.01.1997
LINDE AG
Vs
INCOME-TAX OFFICER
BENCH
R.P. GARG AND SMT. NIRMAL YADAV, JJ.
JUDGMENT
Garg, AM - These six cross-appeals - three by the assessee and three by the revenue, are against the orders of the Commissioner of Income-tax (Appeals) for assessment years 1984-85, 1985-86 and 1986-87. Since they involve common disputes, they are disposed of by this common order for the sake of convenience.
2. The first dispute in all these appeals is as to what is the nature of receipt by the assessee from the Indian concern in pursuance of the agreements - dated 25-3-1976, commonly known as Supply & Engineering agreement; 10-5-1977, known as Ammonia Service agreement, 12-3-1984, known as Methanol Service agreement; and 30-9-1977 known as Methanol Contract, for supply of design and technical consultancy. Under the agreement dated 25-3-1976, the assessee purchased bulk material and spares required for setting up of a Fertiliser Plant in the State of Gujarat. These purchases were charged from the Indian concern, i.e. Gujarat State Fertilisers Company at cost plus 4% procurement charges. The Assessing Officer treated this receipt of 4% procurement charges as royalty because in the earlier year it was treated so and because the procurement require industrial and scientific experience and the assessee was imparting information concerning industrial and scientific experience by assisting the Indian concern in procuring these materials. He therefore assessed it as royalty by invoking provisions of section 9(1)(vi) read with Explanation 2 thereunder. The CIT(A), however, held that the receipt of 4% procurement charges was a ‘fees for technical services’ to the extent of 50% being relating to inspection etc. and 50% as ‘industrial and commercial profit’ by observing as under :
"10. I have carefully considered the submissions of the learned counsel and also Shri Kabra, the then Assessing Officer. After perusing the terms of the contract and the correspondence papers relating to this activity, I am of the view that a part of this activity falls for taxation being in the nature of ‘fees for technical services’. The reasons for this view are :
(I)When we look at the role of the assessee in setting up the entire plant for GNFC, we find that GNFC was in a position of total dependence vis-a-vis the assessee. It was the assessee’s designs, drawings and processes with which the plants were to be set up under close supervision of the assessee in all matters relating to erection and commissioning. The assessee alone could exercise his judgment as to what raw material and components are to be procured and for what purpose. The timing of procurement and the choice as to who should supply such goods was also within the special province of the assessee.
(II)Correspondence shows that GNFC could only tell as to what raw material had to be procured from Germany. So far as the question of selection of the supplier is concerned, the GNFC had no role to play.
(III)The procurement of materials in Germany had to be made in fine tuning with the pert charts etc. of the various works going on in India. The assessee alone was the best judge of this aspect.
(IV)As stated above, the assessee was also responsible for inspection and tests to be carried out outside India. In a complicated and sophisticated exercise like setting up a giant complex as this one, it cannot be disputed that before selecting the suppliers of various materials, etc., in Germany, the assessee did not carry out requisite inspections and tests. Such an activity though not quantified for price, naturally forms part of the procurement fee.
11. The learned counsel contends that inspection and tests carried out outside India was in connection with the supply of imported equipment by the assessee. This makes no sense at all. If the assessee is selling equipments, testing is part of manufacturing operations and the expenditure thereon is well reflected in its FOB prices. The clause in the contract relating to inspection and tests to be carried out outside India clearly is in connection with the procurement of imported bulk and special materials outside India. The learned counsel was also fair enough to state that the assessee was not directly engaged in the transportation of such material. What he states is that the assessee had to carry out a number of routine and non-technical chores in placing orders and ensuring their supply to India. It cannot be denied that inspection and tests as well as arranging the flow of material in terms of the operational charts in India are in the nature of technical services. I, therefore, hold that a fair part of the procurement fee is to be taxed as ‘fees for technical services’."
3. Both the assessee and the revenue are in appeal. The revenue’s claim is that the entire amount is royalty and for fees for technical services, whereas the assessee’s claim is that the entire amount is industrial and commercial profit and therefore not liable to tax under Double Taxation Agreement between India and West Germany.
4. On a reading of the agreement dated 25-3-1976 the facts as emerge out are that the Gujarat State Fertiliser Company entered into an agreement with the assessee for establishing a new fertiliser project in the State of Gujarat and for that purpose it awarded a contract to the assessee for 1350 tonnes per day capacity Ammonia plant. The contract price of the agreement, is defined in Article 1.06 which reads as under :
"CONTRACT PRICE means the total price payable after adjustments for change in scope and escalations, if any, by OWNER to CONTRACTOR for :
(a) Engineering as per Article 7.01A
(b) Supply of imported equipment as per Article 7.01B
(c) Supply of such grey area equipment which are required to be imported as per Article 7.05."
Clause 7.09 also provides for supply of bulk materials, special materials and spare parts and a separate price is to be charged by the assessee for the same at actuals plus a procurement fee of 4% of FOB price. This clause reads as under :
"7.09 CONTRACTOR shall procure the following on behalf of OWNER and OWNER shall pay to CONTRACTOR at actuals plus a procurement fee at the rate of 4% of their F.O.B. value. For this purpose, CONTRACTOR shall submit to OWNER the original invoices of the VENDOR which will be in the name of OWNER :
(a) Bulk materials like pipings, valves, instruments, electricals etc. which are required to be imported.
(b) Special materials like steel plates, tubes, special steels etc., for equipment to be fabricated in India.
(c)Spare parts etc.
The estimated requirement of foreign exchange for above is 35,000,000 DM (Thirty five million Deutsche Marks)."
The expression bulk materials is defined in clause 1.11 of the agreement to mean materials like pipings, valves, fittings, instruments, electricals etc. to be procured and supplied through the assessee from outside India. Special material is likewise defined in clause 1.22 to mean materials like special steel plates, tubes etc. to be procured and supplied through the assessee from outside India, for fabrication of equipment in India. Spares is not defined. However, spare parts means the equipments, and in this context the spare parts relating to the purchase of bulk material and special material. These items are to be purchased and supplied by the assessee for fabrication of the plant in India.
5. The learned Departmental Representative brought to our notice clause 3.101, 3.103 and 3.104, which read as under :
"3.101 CONTRACTOR shall, at no cost to OWNER carry out inspection and no-load, pressure, vaccum and other required tests of IMPORTED ITEMS wherever technically necessary and possible, in VENDORS’ workshops or other places of manufacture/fabrication, in order to ensure that the specified materials have been used in the manufacture/fabrication of IMPORTED ITEMS and that their workmanship corresponds to the required standards.
3.103 CONTRACTOR shall furnish to OWNER or its authorised representative all inspection/test reports/certificates.
3.104 CONTRACTOR shall send out inquiries for spares along with main IMPORTED ITEMS and shall place orders for spares in consultation with OWNER within 3 months of placement of orders of concerned imported items."
6. On a careful consideration of these various clauses of the agreement and the material on record, we are of the opinion that the 4% procurement fees is nothing but a service for making purchases by the assessee to be used in fabricating the plant in India. This is a pure commercial service and therefore the fees received for arranging or procuring these equipments would be commercial profit within the meaning of Article III of the Double Taxation Agreement between India and West Germany. It is true that all the purchases for which the procurement fees was paid had a close connection with fabrication of plant and procurement required industrial and scientific experience, it cannot be said to be imparting information concerning the technical know-how by making purchases for the Indian concern as held by the Assessing Officer. We may state here that the Assessing Officer has applied section 9(1)(vi) read with Explanation 2 thereunder for these purposes, whereas as per the mandate of section 90(2) of the Act, the decision of the Andhra Pradesh High Court in the case of CIT v. Visakhapatnam Port Trust [1983] 144 ITR 146, Calcutta High Court decision in the case of CIT v. Davy Ashmore India Ltd. [1991] 190 ITR 626 and the Board Circular dated 2-4-1982 reported in 131 ITR (St.) 1, the provisions of treaty are to prevail and the definition contained in Article VIII(A) of the Double Taxation Agreement defining the term ‘royalty’ and the term for ‘fees for technical services’ have to be looked into. That Article VIII(A)(iii) defines the term ‘royalty’ to mean ‘payments of any kind received as a consideration for the use of or the right to use any copyright of literary, artistic or scientific work including cinematographic films’. Clause (iv) of this Article also defines the term ‘fees for technical services’ means ‘the payments of any kind to any person other than payments to an employee or 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. As we have observed above, the procurement services is not imparting of any information concerning industrial, commercial or scientific experience. The fees therefore would not be in the nature of royalty. The Assessing Officer, therefore, in our opinion, was not right in holding the same to be in the nature of royalty. The departmental appeal on this point is accordingly rejected.
8. The CIT(A) however held the aforesaid procurement fees of 4% to be partly in the nature of fees for technical services and partly in the nature of industrial and commercial profits. According to him, the clauses in the agreement relating to inspection and tests to be carried out outside India are clearly in connection with the procurement of imported bulk and special materials outside India; therefore, it cannot be denied that inspection and tests as well as arranging the flow of material in terms of operational charts in India were not in the nature of technical services. He therefore held that a fair part of the procurement fees to be taxed as fees for technical services and estimated the same to be 50% of the amount received by the assessee.
9. The term ‘technical service’ and ‘management service’ came up before the Delhi High Court in the case of J.K. (Bombay) Ltd. v. Central Board of Direct Taxes [1979] 118 ITR 312. This was a case under section 80-O of the Act, wherein also the deduction is available on rendering of technical services. The Court held that technical services under section 80-O would not include commercial services or managerial services. Managerial services, it was held, may be professional services like legal or medical service, but it would not be technical service like engineering service. Their Lordships of Delhi High Court referred to an article on ‘Management Sciences’ in 14 Encyclopaedia 747, wherein it is stated that the management in organisations include at least the following :
(a) discovering, developing, defining and evaluating the goals of the organisation and the alternative policies that will lead towards the goals;
(b) getting the organisation to adopt the policies;
(c) scrutinising the effectiveness of the polices that are adopted;
(d) initiating steps to change policies when they are judged to be less effective than they ought to be.
Management thus pervades all organisations. A reference to the Fontana Dictionary of Modern Thought, page 366 was also made wherein it is stated that management was traditionally identified with the running of business and therefore the management as a process is practised throughout in every organisation from top management through middle management to operational management. Similarly, their Lordships referred to the term ‘technical services’ as defined in Shorter Oxford Dictionary, Vol. II, page 2140, wherein two relevant meanings are given for the word ‘technical’ - the broader meaning is ‘belonging or relating to an art or arts; appropriate or peculiar to, or characteristic of, a particular art, science, profession, or occupation’ but the narrower meaning is ‘also, of or pertaining to the mechanical arts and applied sciences generally, as in the education, school’. Their Lordships held in the broader sense technical services may include managerial services, but in the narrower sense, the word technical would exclude the managerial services.
The Delhi High Court stated that the main reason why the word ‘technical’ cannot be given a wider meaning to include ‘managerial’ or ‘commercial’ is that the performance of managerial or commercial services by an Indian company for a foreign enterprise would amount to virtually managing or running the foreign company and remuneration obtained by running or managing a foreign company would be in the nature of profits while section 80-O deliberately restricts itself of income by way of royalty, commission or fees and excludes other types of remunerations. In the definition for ‘fees for technical services’ the consideration has to be for rendering technical, managerial or consultancy services. By making purchases for the Indian concern no consultancy services is provided as no advice is given to them. It is a simple procurement of equipments by the assessee for them. It is also not a technical service in the sense of technical education is concerned with teaching applied sciences and special training in applied sciences, technical procedures and skills required for practice of trade or profession, especially those involving the use of machinery or scientific equipment. If the information is given for the use of the machinery or scientific equipment it would partake the character of fees for technical services but when it is only for the procurement of the scientific equipments it would be a simple service of commercial and industrial nature. It therefore cannot be termed as a technical service for which the procurement fees charged by the assessee cannot be a consideration for technical services. The third category is managerial service. The managerial service, as aforesaid, is towards the adoption and carrying out the policies of an organisation. It is of permanent nature for the organisation as a whole. In making the stray purchases, it cannot be said that the assessee has been managing the affairs of the Indian concern or was rendering managerial services to the assessee. The learned Departmental Representative brought to our notice a concept of ‘marketing management’ but such marketing services are to be, as aforesaid, on a regular basis, i.e., when the purchases of the assessee on a permanent or semi-permanent or at regular interval basis. It does not include the purchases made only to be utilised for a particular venture taken up by the assessee, which in this case is fabrication of a new scientific plant. It being a one time job and not marketing management of making purchases by the assessee for the new concern. The assessee is remunerated for its efforts and time spent in making these simple purchases on behalf of the Indian concern and in our opinion, has nothing to do with rendering of any technical, managerial or consultancy service to the Indian concern. In these circumstances, in our opinion, the entire amount of the procurement fees received is in the nature of commercial profit and is neither a royalty or fees for technical services. It is therefore exempt fully from the income-tax in India by virtue of Article III of Double Taxation Agreement, which provides that profits of an enterprise of a contracting State shall be taxable in that State unless the enterprise carries on business in other contracting States through a permanent establishment situated therein. The assessee is not carrying on a business in India through a permanent establishment and therefore the profits in arranging and procuring equipments for the Indian concern would not be taxable in India.
10. The contention of the learned Departmental Representative based on the finding of the CIT(A) that a part of the procurement fees could be relating to the inspection and other services as stated in the agreement and therefore resorting to 50% estimate of the procurement fees pertaining to that, has no force. Clause 3.101 of the agreement specifically says that the assessee contractor has to carry out inspection etc. at no cost to the owner i.e. the Indian concern. Therefore, in view of this agreement, no fees can be attributed to this activity in contravention of the agreement between the parties.
11. In the assessee’s appeals for assessment years 1984-85 and 1985-86, the other common ground is with regard to the deduction of Rs. 5,000 under section 80VV of the Act. As the profits of the assessee are being assessed at a flat rate of 20% on the gross amount, there is no room for any deduction under section 80VV separately. The claim is accordingly rejected.
12. The third ground in the assessee’s appeals for assessment years 1984-85 and 1986-87 is with regard to the charging of interest of Rs. 3,42,104 and Rs. 1,00,617 respectively under section 217 of the Act. Under section 195 of the Act, any payment made by the Indian concern is subject to deduction of tax at source. The rate of the tax to be deducted at source and the rate at which the assessee is to be charged are the same. Therefore the entire income of the assessee is subject to tax deductible at source. No interest under section 217 of the Act can be charged. In this connection we may refer to the decision of the Tribunal in the case of Siemens Aktiengesellschaft v. IAC in ITA No. 346/Bom/88, order dated 7th May 1992, wherein paragraph 6 it was observed as under :
"We have carefully considered the rival submissions and also perused the records. The Tribunal, in the assessee’s own case has accepted the assessee’s contentions in earlier years. Under the provisions of section 209 of the Income-tax Act, the advance tax has to be calculated on the basis of the current income which was to be reduced by the amount of income-tax that would be deductible during the Financial year in accordance with provisions of sections 192 to 194, 194A, 194C, 194D and 195 of the Income-tax Act, 1961. It is undisputed that the royalty and dividend income received by the assessee are subject to tax deducted at source under the provisions of section 195 of the Act. The assessee, in our view, is not required to pay any advance-tax considering the tax deductible at source. Under these circumstances, the assessee is not liable to pay any interest under section 217 of the Act. Following our own view in the earlier year, we hold that the interest levied under section 217 is not proper."
Facts and circumstances being similar, we hold that no interest under section 217 of the Act can be charged from the assessee. Accordingly, levy of interest is deleted.
13. In the assessee’s appeal for assessment year 1985-86, there is one more ground with regard to the assessability of DM 99,773 as against the assessee’s claim of DM 81,207. This amount was receivable under the Ammonia Service agreement dated 10th May 1977. The assessee’s contention is that the difference of DM 18,566 was not receivable and therefore merely because a higher amount bill was issued the income should be assessed as per the billed amount. We do not find any force in this contention of the assessee. An amount of DM 99,773 was raised in terms of the agreement and it accrued to the assessee. Accordingly, the income to that extent has accrued to the assessee. If any amount is received at a lesser amount and there is no hope of recovery for the balance, the assessee may claim the same in the year when the recovery thereof became impossible and irrecoverable. In this year no such evidence has been brought on record. We therefore cannot exclude the difference of DM 18,566 from the income of the assessee.
14. In the revenue’s appeals, the following common disputes are raised:
"1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in holding that the definition of royalty and fees for technical services as provided in agreement for avoidance of double taxation between India and Federal Republic of Germany will prevail over the definition provided in the Act and the income derived from Ammonia Service agreement dated 10-5-1977, Methanol Agreement dated 30-9-1977 and Methanol Service Agreement dated 24-11-1983 was chargeable at 20% tax rate.
2. On the facts and in the circumstances of the case and in law the learned CIT(A) erred in holding that the engineering fees flowing from Methanol Agreement dated 30-9-1977 was chargeable to tax at 20%.
3. On the facts and in the circumstances of the case and in law the learned CIT(A) erred in holding that 50% of receipt from engineering and supply agreement on account of procurement of equipment is taxable as ‘fees for technical services’."
15. The first ground is rejected in view of our discussion while disposing of the assessee’s ground No. 1 wherein it was held that in view of the decisions of the Andhra Pradesh High Court Visakhapatnam Port Trust’s case (supra) Calcutta High Court and the Board Circular 131 ITR 1st., (supra), the provisions of the treaty are to prevail over the provisions contained in the Income-tax Act. The ground is accordingly rejected.
16. The second common ground in these three appeals of the revenue is to be decided against the revenue in view of the discussion of the Tribunal, order dated 18th July, 1995 in the case of Sandvik A B Sweden in I.T.A. Nos. 804/PN/87 and 1783 & 1784/PN/88 for assessment year 1984-85, which is reproduced below :
"The next issue discussed at the Bar was, as to whether the payment was a lump-sum payment so as to fall within the Item (1) of sub-clause (ii) of clause (b) of sub-section 115A of Item (2) of that sub-clause. Item (1) provided the rate of 20% on the lump-sum payment and Item (2) provided the rate of 40% on the lump-sum payment. In the present case, from a reading of the agreement dated 30-12-1982, it can safely be concluded that this was a case of lump-sum payment, although the amount was made payable in 4 equal yearly instalments. The relevant clause of the agreement dated 30-12-1982 is clause 7.1 which has been reproduced above. It is evident from the above that a lump-sum consi-deration has been fixed at Rs. 50 lacs, but it is made payable in 4 equal instalments. Nothing, however, prevented the Indian company from paying the whole of the entire lump-sump amount in one year. It would, therefore, not be correct to contend that merely because the amount has been made payable in 4 equal instalments, it is not a lump-sum payment and, therefore, Item (2) of sub-clause (ii) of clause (b) of sub-section 115A shall apply. We accordingly hold that had the income of Rs. 12,50,000 accrued to the foreign company in the year under appeal, it would have been taxable at the rate of 20%. In this view of the matter, assessee’s appeal partly succeeds and is allowed, but the departmental appeal fails and is dismissed."
Respectfully following the aforesaid order of the Tribunal, we do not agree with the lump-sum consideration and lump-sum payment, a distinction made out by the assessee.
17. The third ground is disposed of against the revenue by the discussion in our order while disposing of the assessee’s appeals in ground No. 1.
18. In the result, the three assessee’s appeals are partly allowed and the three revenue’s appeals are dismissed.
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