1992 (12) TMI 95 - AT - Income Tax

Fees for Technical Services Not Taxable under Income-tax Act

The technical service fees paid by M/s Bharat Heavy Electricals Ltd. (BHEL) to the engineering personnel of M/s Sulzer Brothers Ltd. were found not ... Income, Deemed To Accrue Or Arise In India. Issues Involved1. Whether the technical service fees paid by M/s Bharat Heavy Electricals Ltd. (BHEL) to the engineering personnel of M/s Sulzer Brothers Ltd. (Sulzer) are taxable under section 9(1)(vii) of the Income-tax Act, 1961.2. Whether the fees paid were in pursuance of an agreement made before 1-4-1976 and approved by the Central Government, thereby qualifying for exemption under the proviso to section 9(1)(vii).3. Whether the payments for technical services rendered by Sulzer's personnel in India should be considered under section 5(2)(b) or section 9(1)(i) if not under section 9(1)(vii).Issue-wise Detailed Analysis1. Taxability under Section 9(1)(vii) of the Income-tax Act, 1961The primary issue was whether the fees paid by BHEL to Sulzer for technical services rendered by Sulzer's engineers were taxable under section 9(1)(vii). The Assessing Officer and the CIT(A) held that the payments were taxable, as they were made in pursuance of agreements approved by the Central Government after 1-4-1976, thus falling outside the exemption provided by the proviso to section 9(1)(vii).2. Agreement Made Before 1-4-1976 and Government ApprovalThe assessee argued that the payments were made under the collaboration agreement dated 29-1-1976, which was approved by the Central Government before 1-4-1976. The assessee relied on the proviso to section 9(1)(vii) and various case laws to claim exemption. The CIT(A) and the Assessing Officer contended that the specific terms and conditions for deputation of technicians were not settled before 1-4-1976 and required separate approvals, thus making the payments taxable.The Judicial Member agreed with the assessee, stating that the obligation to render service emanated from the collaboration agreement approved before 1-4-1976. The Judicial Member relied on the Appellate Tribunal's decision in Bharat Heavy Electricals Ltd. v. ITO and the Gujarat High Court's decision in Meteor Satellite Ltd. v. ITO, which clarified that minor alterations or subsequent approvals do not negate the original agreement's validity for exemption purposes.The Accountant Member dissented, arguing that the approval for deputation of technicians and terms of payment were granted after 1-4-1976, thus making the proviso to section 9(1)(vii) inapplicable. The Accountant Member emphasized that the agreement dated 29-1-1976 was not exhaustive and left much to be negotiated later.The Third Member sided with the Judicial Member, stating that the visits were pursuant to the original collaboration agreement approved before 1-4-1976. The Third Member noted that the obligation to render services was part of the original agreement, and subsequent approvals did not constitute new agreements.3. Consideration under Section 5(2)(b) or Section 9(1)(i)The Departmental Representative argued that if the payments were not taxable under section 9(1)(vii), they should be considered under section 5(2)(b) or section 9(1)(i). The Judicial Member and the Third Member rejected this argument, citing the Madras High Court's decision in CIT v. Copes Vulcan Inc. U.S.A., which held that section 9(1)(vii) comprehensively covers fees for technical services, excluding the application of section 9(1)(i).The Judicial Member also referred to the Finance Act, 1976, and the Finance (No. 2) Act, 1977, which inserted and amended section 9(1)(vii) to specify the circumstances under which fees for technical services are deemed to accrue or arise in India. The Judicial Member concluded that the payments were exempt under the proviso to section 9(1)(vii).ConclusionIn conclusion, the majority opinion held that the technical service fees paid by BHEL to Sulzer's engineering personnel were not taxable under section 9(1)(vii) of the Income-tax Act, 1961, as they were made in pursuance of an agreement approved by the Central Government before 1-4-1976. Consequently, the assessments were annulled, and the appeals were allowed.