AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2004 (3) TMI 54
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....ed Double Taxation Avoidance Agreement between the Republic of India and the Federal Republic of Germany? 2. Whether, on the facts and in the circumstances of the case, the Tribunal Was right in holding that the engineering fees received/receivable by the assessee could also be considered as falling within the definition of 'fees for technical services' even in terms of the provisions of section 9(1)(vii) of the Income-tax. Act, 1961, and that the restrictive clause in Explanation 2 to the said clause (vii) of section 9(1) of the Income-tax Act would not apply to the present case? 3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the present case would be covered by article VIIIA of the amended Double Taxation Avoidance Agreement between the Republic of India and the Federal Republic of Germany and not by article III of the said agreement?" The facts in brief: The assessee is a non-resident company incorporated in the Federal Republic of Germany. It does not have any permanent establishment of doing business in India. It entered into an agreement with Metallurgical Engineering Consultants (India) Ltd. (hereinafter refe....
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....tentions raised by the assessee by means of his order dated November 28, 1986, a copy of which has been produced as annexure A to this reference. The Assessing Officer found that since the German Bank was working merely as an agent of the Indian resident MECON/RINL, the payment although made in Germany, would be considered to have been made by the Indian party and would therefore be squarely covered by the deeming provisions of clause (6) of article VIIIA of the amended DTA Agreement. He further held that the exemption claimed was not applicable to the assessee and the payment for engineering fees was the payment made towards fees for technical services and as such was governed by the amended DTA Agreement entered into between the two countries, which had come into effect for the assessment year 1984-85 in accordance with article XVI of the amended DTA Agreement. The grievance made by the assessee challenging the correctness of the order of assessment did not find favour in the appeal filed by it before the Commissioner of Income-tax (Appeals) (hereinafter referred to as "the Commissioner (Appeals)"). He took the view that the assessee had undertaken electrical contract for LMMM an....
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....ces, it would prevail over article III dealing with business profits in cases where the payment is, clearly of the nature of fees for technical services. The Tribunal also negatived the contention of the assessee that the payments were assessable only on accrual basis and the payments accrued during the relevant assessment year alone was liable for tax. The Tribunal, relying upon the decision of the Madras High Court in the case of CIT v. Standard Triumph Motor Co. Ltd. [1979] 119 ITR 573 and the decision of the Supreme Court in the case of Standard Triumph Motor Co. Ltd. v. CIT [1993] 201 ITR 391, observed that so far as the non-resident assessee is concerned, accrual and receipt become synonymous and in the case of the assessee, the assessee has been taxed on actual receipt basis, in a year to year manner, and therefore the question of accrual of the income in India would be irrelevant to the issue of taxation on technical services received by the assessee. The additional contention of the assessee that the designs and drawings supplied had to be treated as plant and machinery and could be termed as "engineering fees", was negatived by the Tribunal on the ground that no evidence ....
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....ission that if there is no liability under section 9(1)(vi) or (vii), the assessee cannot be made liable by reading the amended DTA Agreement only. He pointed out that the approach of the Tribunal that since there are two agreements entered into between the parties, it cannot look into the nature of the agreement, is erroneous in law. He further contended that the drawings and designs supplied by the assessee were only a portion of the entire project and therefore the same should be treated as "plant and machinery". In substance, it is his contention that the technical services and engineering fees received by the assessee should be treated as drawings and designs and consequently as plant and machinery, etc. He referred to us the decision in the case of Associated Cement Companies Ltd. v. Commr. Of Customs [2001] 124 SIC 59 (SC); in the case of Commr. of Customs v. Parasrampuria Synthetics Ltd. [2002] 125 SIC 255 (SC); in the case of CIT v. Standard Triumph Motor Co. Ltd. [1979] 119 ITR 573 (Mad); in the case of Scientific Engineering House (Pvt.) Ltd. v. CIT [1986] 157 ITR 86 (SC); in the case of CIT v. Davy Ashmore India Ltd. [1991] 190 ITR 626 (Cal); in the case of CIT v. Klaym....
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....m in India during such year. Explanation 1. -Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India. Explanation 2. -For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India." Section 9 of the Act sets out the income which is deemed to accrue or arise in India. The relevant portions of section 9, which may be useful for our purpose, is extracted, which reads as hereunder: "9. Income deemed to accrue or arise in India. -:(1) The following incomes shall be deemed to accrue or arise in India- (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in Indi....
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....on (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 recipient chargeable under the head 'Salaries'." Chapter IX of the Act provides for double taxation relief. Section 90 of the Act confers power on the Central Government to enter into any agreement with the Government of any country for granting relief from payment of double tax both under the Indian law and under the foreign law. In terms of the provisions contained in section 90 of the Act, a double taxation agreement dated February 24,1983, came to be entered into between the Republic of India and the Federal Republic of Germany. Clauses (4) and (6) of article VIIIA of the amended DTA Agreement and article III of the said agreement read as follows: "Article VIIIA. (4) The term 'fees for technical services' as used in this article means payments of any kind to any person, other than payments to an employee of the person making the pa....
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....a permanent establishment on the basis of an apportionment of the total profits of the enterprise to its various parts, nothing in paragraph (2) shall preclude that contracting State from determining the profits to be taxed by such an apportionment as may be customary; the method of apportionment adopted shall, however, be such that the result shall be in accordance with the principles contained in this article. (5) No profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise. (6) For the purposes of the preceding paragraphs, the profits to be attributed to the permanent establishment shall be determined by the same method year by year unless there is good and sufficient reason to the contrary. (7) Where profits include items of income which are dealt with separately in other articles of this agreement, then the provisions of those articles shall not be affected by the provisions of this article." We will now proceed to consider each of the questions referred to us by the Tribunal, on the merits. As noticed by us earlier, the Tribunal has taken the view that if there....
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.... has observed thus: "In determining the liability of a non-resident company, if there is any Agreement for Avoidance of Double Taxation entered into under section 90 of the Income-tax Act, 1961, the said agreement must prevail over the provisions of the Income-tax Act; otherwise, there was no point in entering into any agreement for avoidance of double taxation. When ever any specific arrangement or agreement has been made regarding the taxability of any income under the Agreement for Avoidance of Double Taxation, such arrangement or agreement will necessarily prevail over the provisions of the statute" Now, we proceed to consider the first question. The Tribunal, on examination of the stipulations in the amended DTA Agreement entered into between the assessee and MECON, has found that the engineering fees received/receivable by the assessee were in the nature of "fees for technical services" in accordance with the definition of fees for technical services as given in clause (4) of article VIIIA of the amended DTA Agreement entered into between the two countries. To come to the said conclusion, the Tribunal at paragraph 7.2 of the order, has observed as follows: "7.2 Since....
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....ant and machinery as the drawings and designs were prepared outside India and delivered outside India. In our view, the decision in the case of Scientific Engineering House Pvt. Ltd. [1986] 157 ITR 86 (SC) relied upon by Sri Sarangan is of no assistance to him. In that decision, the Supreme Court, on interpretation of relevant terms in the two agreements, and more particularly clauses 3 and 6 of the agreement which came up for consideration, took the view that the payments made were really for rendition of documentation services which was the main service to be rendered by the foreign collaborator and it was not an incidental service and the payment made could be regarded as being mainly for and by way of purchase price of the drawings, designs, charts and all other documents comprised in the documentation service specified in clause 3 of the agreement. This is clear from the observation made by the court which reads as hereunder: "Turning to the first question, having regard to the relevant terms of the two agreements, we find it very difficult to accept the view concurrently expressed by the Tribunal and the High Court that the 'documentation service' undertaken to be rendered....
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.... of printed documents by way of design, chart or drawing and depending upon the nature of the services rendered, can be treated as "technical service". Ultimately, the question is how the parties have understood with regard to the nature and purpose for which the payment is made. In the instant case, as rightly concluded by the Tribunal and the subordinate authorities, the engineering fees paid have to be understood as "payment made for technical services". The decisions in the case of Associated Cement Companies Ltd. [2001] 124 STC 59(SC); Parasrampuria Synthetics Ltd. [2002] 125 STC 255 (SC); Klayman Porcelains Ltd. [1998] 229 ITR 735 (AP); Neyveli Lignite Corporation Ltd. [2000] 243 ITR 459 (Mad) and in the case of Energomach Exports [1998] 232 ITR 448 (Karn), relied upon by Sri Sarangan, in our view, will not be of any assistance to him. In the case of Associated Cement Companies Ltd. [2001] 124 STC 59 (SC) one of the questions that came up for consideration before the Supreme Court was, whether the drawings, diskettes, manuals, imported to India specified in the Customs Act and the Tariff Act are statutorily regarded as goods attracting a specified rate of customs duty on t....
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....rvation made by the court for the purpose of considering the question whether the printed drawings, designs and plans imported would attract customs duty, is of no assistance to Sri Sarangan to support his contention that the drawings, designs and charts, in the present case also would fall within the meaning of plant and machinery. The decision in the case of Klayman Porcelains Ltd. [1998] 229 ITR 735 (AP) relied upon by Sri Sarangan is also of no assistance to him. In the said case, the question that came up for consideration was, with regard to the nature of "royalty". While considering the said question, having regard to the relevant terms in the agreement and in the background of the finding recorded by the Tribunal, the Andhra Pradesh High Court took the view that the consideration was paid for construction/installation of kiln; and in the light of the said conclusion, the court took the view that it was unable to take the view that the amount was paid for imparting any information concerning the working of, or the use of, a patent, invention, model, design, secret formula of process or trade mark or similar property falling under clause (ii) of Explanation 2 or for impart....
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....t background the court took the view that no licence of any patent is involved and "sub-clause (vi) and also (vii) of section 9(1) of the Act" could have no application as the design was only preliminary to the manufacture and integrally connected therewith. In the case of Energomach Exports [1998] 232 ITR 448 (Karn), the question that came up for consideration before this court was whether rendering of services for erection of the machinery sold by the assessee-company to the Karnataka Power Corporation and making the machinery function by deputing engineers and offering technical services amounts to transaction involved in business connection. After considering what is meant by "business connection", the court observed thus: "In the present case, the foreign company has no share or interest in the management of the Indian company. The foreign company has sold the machinery to the Indian company and for installation of the said machinery and plant supplied technical personnel and technical services until the machinery starts functioning and production. Thereafter, the services of the technical personnel in the Indian company will cease and the Indian company is not responsib....
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....y found by the Tribunal, the restrictive clause given to Explanation 2 of section 9(1)(vii) of the Act cannot be considered to apply to the facts of the present case, inasmuch as the assessee cannot be considered to have taken any project for construction or assembly in India. It is only payments made for any construction, assembly or like project undertaken by the assessee, which are excluded from the purview of income received by way of fees for technical services as set out in section 9(1)(vii) of the Act. It is true, as contended by Sri Sarangan, that if the provisions contained in the taxing statute are more beneficial to the assessee than the terms contained in the amended DTA Agreement, then the provisions contained in the taxing statute will prevail and the benefit contained in the Act must be extended to the assessee. However, in the instant case, as rightly noticed by the Tribunal, we do not find any contradiction between the provisions contained in the taxing statute and the terms contained in the amended DTA Agreement. The terms provided in the amended DTA Agreement are consistent with the provisions contained in section 9(1)(vi) of the Act. Therefore, the assessee cann....
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....he observation made by the Tribunal at paragraph 8 of the order, which reads: "8. The other contention of the assessee that the payments under consideration represented supplemental payments towards cost of the plant and machinery supplied by it may also be examined by us now. It is an admitted fact that there is a separate provision for making of payment by the Indian company to the assessee towards such cost of plant and machinery. The representative of the assessee has merely stated that for the sake of convenience only the supplemental payment for that purpose was stipulated as engineering fees in the contract between the two parties. The said representative has not, however, come up with any concrete reasons or evidence in support of this particular contention. Since the agreement shows two different payments and the payment under consideration has clearly been termed in the agreement as 'engineering fees', there is no reason for us to think otherwise that this payment is also actually supplemental to the other payment. In any case, the onus lies heavily on the assessee to prove its contention in this regard by showing that what is apparent in the agreement between the two ....