1. These appeals filed by the assessee relate to the assessment years 1979-80 and 1980-81. Since the questions involved in these appeals are common, they are taken up together and disposed of by this common order for the sake of convenience.
2. According to the facts appearing in this case, the assessee is a nonresident foreign company. At the instance of M/s. BHEL, the non-resident foreign company, M/s. Sulzer Brothers Ltd., sent one of its engineers to assist it in checking at its manufacturing and erection sites, the collections, design, drawings and part lists of equipment prepared by it. For such services rendered by its employees, it had been in receipt of fees of Rs. 1,11,212 from M/s. BHEL. This is apart from M/s. BHEL meeting the to and fro expenses and other expenses of the engineer during his stay in India. The question for determination before the Inspecting Assistant Commissioner (Assessment) was whether such fees are assessable to tax at the hands of the assessee in terms of the proviso to Section 9(1)(vii) of the Income-tax Act, 1961.
3. before the Inspecting Assistant Commissioner (Assessment) the assessee claimed the fees to be exempt on the ground that it is in accordance with Article 1.6 of the agreement entered into with the approval of the Central Government on January 29, 1976, which is prior to April 1, 1976, and the proviso to Section 9(1)(vii) confers the exemption on it. According to the Inspecting Assistant Commissioner (Assessment), Article 1.6 of the agreement dated January 29, 1976, does not provide for any specified fees like the one under consideration though it speaks in general about providing technical services subject to feasibility and other terms to be mutually agreed upon from time to time. According to the Inspecting Assistant Commissioner (Assessment), the fee under consideration has in fact been mutually agreed upon beyond April, 1976, and it got the seal of approval of the Central Government as late as April 18, 1979. The Inspecting Assistant Commissioner (Assessment) pointed out that the payment owes its origin entirely to this agreement which has been entered into later than April 1, 1976. Therefore, according to the Inspecting Assistant Commissioner (Assessment), the fee is neither one payable in pursuance of an agreement made before April 1, 1976, nor one which has been approved by the Central Government before April 1, 1976, though the agreement as such is posterior to that date. Therefore, according to the Inspecting Assistant Commissioner (Assessment), it fails to qualify for the exemption provided by the proviso to Clause (vii) of Section 9(1). He also held that no deduction of any kind from the fees is permissible in view of the blanket prohibition against such deduction in terms of Section 44D. He further held that it shall suffer tax at a flat rate of 40 per cent, in terms of Sub-clause (iii) of Clause (b) of Section 115A(1). This was the case in the assessment year 1979-80. In 1980-81, the assessee-company was in receipt of Rs. 82,553 from BHEL. A similar view was taken by the Inspecting Assistant Commissioner (Assessment) in this assessment year as in the last year.
4. Aggrieved, the assessee filed appeals before the Commissioner of Income-tax (Appeals ) for both the assessment years under consideration. Before the Commissioner of Income-tax (Appeals), the assessee's representative reiterated the submissions that the payment was made only in pursuance of the agreement dated January 29, 1976.
According to him, the approval of the Government of India for payment was taken on September 8, 1977, and this was only for the purpose of release of foreign exchange and also the rates for the special engineering services. According to the learned representative, the approval had already been granted earlier on November 11, 1975, by the Government. Reliance was placed on a decision of the Appellate Tribunal, Delhi Bench, in the case of BHEL v. ITO relating to Siemens' case in I.T.A. No. 2581 (Delhi)/79, dated June 2, 1980. This was followed by the Appellate Tribunal, Madras Bench, in the case of Inspecting Assistant Commissioner v. Copes Vulcan Inc. USA by agent BHEL for the assessment year 1978-79 in order dated April 21, 1982.
5. The Commissioner of Income-tax (Appeals) pointed out that a similar issue was considered by the Gujarat High Court in Meteor Satellite Ltd. v. ITO [1980] 121 ITR 311. The High Court, in that case, explained that Section 9(1)(i) is a mere general provision, dealing with all income accruing or arising, whether directly or indirectly in India, whereas Section 9(1)(vi) dealt with income by way of royalty alone. It was also pointed out in that case that, under the proviso to Clause (vi), if there is an agreement made before April 1, 1976, and that agreement has been approved by the Central Government, then income by way of royalty payable under the agreement is not to be deemed to accrue or arise in India. The High Court also clarified that, if any of the inconsequential or minor clauses came to be altered at the instance of the Central Government, then approval need not be taken before April 1, 1976, and the payment is not income deemed to accrue or arise in India.
The Commissioner of Income-tax (Appeals) pointed out that, in the assessee's case there is an agreement entered into before April 1, 1976, but the agreement leaves the matter relating to payment to non resident technicians open to be settled as per terms to be mutually agreed upon from time to time. According to the Commissioner of Income-tax (Appeals ), in the instant case, it is yet to be shown by the assessee that the terms of payment were only of minor nature to warrant the application of the Gujarat judgment in Meteor Satellite Ltd. v. ITO [1980] 121 ITR 311. The Commissioner of Income-tax (Appeals) further pointed out that the agreement dated January 29, 1976, is not exhaustive and leaves much of the matter open for future negotiations. He also pointed out that he is not impressed by the argument that the agreement should be considered as completed prior to April 1, 1976. The Commissioner of Income-tax (Appeals) was of the view that, in the absence of an employer-employee relationship between BHEL and the technicians of Sulzer Brothers, the remuneration or fees paid will have to be brought to tax. The Commissioner of Income-tax (Appeals) also pointed out that the ruling of the Andhra Pradesh High Court in Skoda Export v. Addi CIT [1983] 143 ITR 452 and that of the Calcutta Bench of the Tribunal in Sandwell and Co. Ltd. v. ITO [1983] 6 ITD 183 will support the assessment made by the Inspecting Assistant Commissioner (Assessment) in this case. Accordingly, the Commissioner of Income-tax (Appeals) confirmed the assessments and dismissed the appeals.
6. Aggrieved, the assessee is in appeal before us in both the assessment years under consideration. According to learned counsel appearing for the assessee, M/s. Bharat Heavy Elcctricals Ltd. have entered into an agreement with M/s. Sulzer Brothers Ltd., Switzerland, for manufacture of high duty control valves and associated equipment for by-pass and pressure reducing systems and the agreement was approved by the Central Government on March 4, 1976. It was submitted that, during the assessment year 1979 80, a sum of Sw. Fr. 29,468 (Rs. 1,33,797) was paid to M/s. Sulzer Brothers Ltd. towards special engineering services rendered by their technical personnel in India.
Similarly, in the assessment year 1980-81, a sum of Rs. 82,553 (equivalent of Sw. Fr. 18,656) was paid to the non-resident assessee for technical services rendered by their engineer in India.-Placing reliance upon the decision of the Appellate Tribunal, Delhi Bench, and the decision of the Commissioner of Income-tax (Appeals), Coimbatore, in the case of M/s. Copes Vulcan Inc. USA, it was submitted that the amount paid by BHEL to the assessee is not taxable. It was further submitted that the proposal to enter into a collaboration agreement with M/s. Sulzer Brothers Ltd. was approved by the Central Government, vide No. FC/190(75)/160(75), dated November 11, 1975, of the Government of India, Ministry of Industry and Civil Supplies. The agreement was subsequently entered into with M/s. Sulzer Brothers Ltd. on January 29, 1976, and was submitted to the Government and was also approved by the Government, vide letter No. 11-S/75-HEM, dated March 4, 1976, of the Ministry of Industry and Civil Supplies, Government of India. According to learned counsel appearing for the assessee, the services of the assessee's technical experts are made available to BHEL under Article 1.6 of the agreement which provides for such technical experts being sent to India for technical services at BHEL's manufacturing and erection sites. For these technical services, separate fees will have to be paid as per the agreement. Hence, according to learned counsel, the payments of Rs. 1,11,212 and Rs. 82,553 were in pursuance of the agreement dated January 29, 1976. According to learned counsel, the assessing authorities erred in stating that the agreement for payment of fees has been made after April 1, 1976, and it got the approval of the Central Government on April 18, 1979. In this connection, it was submitted that the approval of the Central Government accorded, vide letter No. 11-8/ 75-HEM, dated September 8, 1977, of the Government of India, Ministry of Industry (and not on April 18, 1979, as stated in the assessment order) was for the release of foreign exchange and also the rates for the special engineering services and was obtained by BHEL in pursuance of the condition (ii) in the annexure to the Government of India's Letter No. FC/ 190(75)/160(75), dated November 11, 1975. Hence the Government's letter dated September 8, 1977, was not for the agreement dated January 29, 1976, for which the Government's approval was accorded as early as November 11, 1975, according to learned counsel. Therefore, learned counsel for the assessee submitted that the payment of fees for technical services in pursuance of the agreement entered into before April 1, 1976, is exempt under the proviso to Section 9(1)(vii) of the Income-tax Act. It was, therefore, pleaded that the order of the Commissioner of Income-tax (Appeals) on this point may be modified and tax already paid be refunded in both these assessment years under consideration.
7. On the other hand, the learned Departmental Representative, while supporting the order passed by the Commissioner of Income-tax (Appeals ) contended that, on the facts of the case, it cannot be accepted that the payments to the foreign technician were made in pursuance of the agreement dated January 29, 1976. The learned Departmental Representative pointed out that Article 1.6 of the agreement dated January 29, 1976, particularly the words "upon request by BHEL, Sulzer shall, subject to availability and capacity of Sulzer personnel ... to be mutually agreed upon from time time" will show that there was no commitment about hiring of the services of Sulzer personnel nor were the terms and conditions for such hiring settled. The entire matter was left open to be decided in future at the convenience of the parties concerned. Therefore, according to the learned Departmental Representative, it cannot be said that the terms and conditions for hiring of the foreign technicians were on the basis of the agreement drawn up on January 29, 1976. The learned Departmental Representative further contended that in letter dated November 11, 1975, of the Government of India (vide page 42 of the paper book), the Government approved the terms and conditions subject to the restrictions imposed in the annexure (page 44). Item No. 2 of the annexure reads as follows: "The deputation of technicians either way shall be governed by specific approval to be granted by the Government on application in terms of numbers, period of assistance and training, rate of allowances to be paid, travelling charges and other items of expenses, etc." 8. Therefore, according to the learned Departmental Representative, so far as deputation of technicians was concerned, the same was to be dealt with separately on the basis of a separate application to be made by the applicant from time to time indicating the terms and conditions in each case. Another submission made by the learned Departmental Representative was that the Government, in its letter dated March 4, 1976, took on record the agreement subject to the terms and conditions which were imposed in its earlier letter dated November 11, 1975. Thus, there is no evidence that the terms and conditions relating to deputation of foreign technicians, not to speak of the payments made to them, were settled before March 31, 1976.
9. The learned Departmental Representative further pointed out that, from the correspondence furnished by the assessee, it is apparent that the decision about hiring of foreign technicians was taken at a later date culminating in the approval of the Central Government in their letter dated September 8, 1977. Therefore, the agreement that existed before April 1, 1976, does not cover the payment that was subsequently made to the foreign technicians. Another submission made by the learned Departmental Representative was that, under Section 9(1)(vii), technical service fees are taxable. The same is exempt only when such fees are paid in pursuance of an agreement made before April 1, 1976 (vide the proviso ). In the instant case, the payment to foreign technicians cannot be said to have been made in pursuance of the agreement dated January 29, 1976. It is because the said agreement is silent about the number of personnel to be hired, the period of their engagement, the rate of remuneration to be paid to them and other terms and conditions which are necessary. Learned Departmental Representative also pointed out that the proviso to Section 9(1)(vii) stipulates a direct nexus between the agreement and the payment. In the instant case, the agreement does not provide such nexus.
10. We have heard the rival submissions made by the parties. The point for consideration is whether the payments were made in pursuance of the agreement dated January 29, 1976, and, therefore, the same were exempt from income-tax by virtue of the proviso to Clause (vii) of Section 9(1). We have already set out the facts in detail. The fact remains that the proposal to enter into a collaboration agreement was approved by the Central Government in F. No. FC/190(75)/160(75), dated November 11, 1975, of the Government of India, Ministry of Industry and Civil Supplies. The agreement was subsequently entered into on January 29, 1976, which was submitted to the Government and the same was approved by the Government as per letter No. 11-8/75-HEM, dated March 4, 1976, of the Ministry of Industry and Civil Supplies, Government of India. It is stated that the approval of the Government was accorded in letter No. 11-8/75-HEM, dated September 8, 1977, and not on April 18, 1977, as stated in the assessment order. The letter dated September 8, 1977, is for the release of foreign exchange and also the rates for the special engineering services that were obtained by the BIIEL in pursuance of condition (ii) in the annexure to the Government of India's letter No.FC/ 190(75)/160(75), dated November 11, 1975.
11. The submission made by the learned Departmental Representative that, on a combined reading of Article 1.6 of the agreement dated January 29, 1976, the letter dated November 11, 1975, of the Government of India does show that the decision about hiring of foreign technicians was taken at a later date culminating in the approval of the Central Government in their letter dated September 8, 1977, and, therefore, the agreement that existed before April 1, 1976, does not cover the payment that was subsequently made to the foreign technicians and, consequently, the exemption provided under the proviso to Clause (vii) of Section 9(1) does not apply is not acceptable, in view of the decision of the Appellate Tribunal Delhi-Bench in I.TA No. 2581 (Del.) of 1979. in the case of Bharat Heavy Electricals Ltd. v. ITO dated June 2, 1980. In that case also, a similar argument was advanced before the Tribunal as under : "The learned Departmental Representative on the other hand supported the order of the Commissioner of Income tax (Appeals). He submitted that it could not be said that the agreement dated October 28, 1975, was approved by the Government earlier to April 1. 1976. He pointed out that the letter of the Government dated December 3, 1975, clearly stated that the agreement was approved subject to the conditions laid down in its letter dated May 13, 1975, one of which was that the deputation of technicians was to be governed by a specific approval to be granted by the Government. He submitted that this specific approval was accorded only on November 18, 1976, i.e., after April 1, 1976. According to him, therefore, the proviso to Section 9(1)(vii) had no application to the case of the assessee. He also submitted that when the income had accrued or arisen in India by virtue of the technicians having rendered services in this country, there was no question of considering whether it also could be deemed to accrue or arise in India." 12. While considering this line of argument, the Tribunal held as under: " We have carefully considered the submissions placed before us on behalf of the rival parties. We will first see whether the assessee is entitled to the exemption under the proviso to Clause (vii) of Section 9(1) of the Act. To claim exemption under the proviso, it is necessary that the agreement should have been made before April 1, 1976, and approved by the Central Government. What is necessary is that the agreement should have been made before April 1, 1976. The clause does not say that it should also be approved by the Government before that date. The clause only states that the agreement made before April 1, 1976, should be approved by the Central Government. In the present case, there is no dispute that the corporate collaboration agreement was made on October 28, 1975, i.e., before April 1, 1976. The assessees, in our opinion, therefore, are entitled to claim the benefit of the proviso with regard to fees payable to Siemens which might be treated as having accrued or arisen under Section 9(1) of the Act.
Even if, for the sake of argument, it may be presumed that the agreement wqs not made before April 1, 1976, inasmuch as the permission of the Government for the payment in question was granted only on November 18, 1976, still we are of the opinion that the assessee is entitled to the benefit of the proviso in terms of Explanation 1. The Explanation states that, for the purposes of the proviso, an agreement made on or after April 1, 1976, shall be deemed to have been made before that date, if the agreement is made in accordance with the proposals approved by the Central Government before that date. We have already referred to the Government's letter dated May 13, 1975, which, in substance, had approved the agreement. This letter happens to be before April 1, 1976. It can, therefore, be safely concluded that the agreement was made before April 1, 1976. It was in pursuance of this letter of May 13, 1975, that the assessee had sought for and was granted a separate approval for the payment, vide Government's letter dated November 18, 1976.
It cannot, therefore, be treated as an approval independent of the approval granted, vide letter dated May 13, 1975.
It may be pertinent to mention here that even Explanation 1 refers only to the date when the agreement is made and does not refer to any particular date before April 1, 1976, on which it might have been approved by the Central Government. In other words, the approval of the Central Government need not necessarily come before April 1, 1976. Even in practice, if an agreement is made on March 31, 1976, the approval of the Government cannot be expected on that very day. We, therefore, hold that the assessee is entitled to the exemption from tax on the fees payable for German technicians in terms of the proviso to Clause (vii) of Section 9(1) of the Act." 13. It is obvious from the language of the proviso that the approval of the Central Government even if granted on or after April 1, 1976, will not necessarily take the case out of the protection of the proviso (see Meteor Satellite Ltd. v. ITO [1980] 121 ITR 311 (Guj)). Thus, considering the facts appearing in this case in the light of the above-said order of the Tribunal and that of the decision of the Gujarat High Court, we hold that the amount paid by the assessee was covered by the proviso and so was saved from the Indian tax net.
14. Alternatively, the Departmental Representative submitted that, if the amount is held as not taxable under the deeming provisions of Section 9(1)(vii), the same would fall to be taxed under Section 5(2)(b). According to the learned Departmental Representative, under Section 5(2)(b), the income accruing or arising to a non-resident of India is taxable. In the instant case, the assessee is a non-resident and it rendered service in India through its personnel. The payments which were made towards such services therefore directly accrued to the assessee in India. Thus, if the income is not taxable under the deeming provisions, it would still be taxable as a direct accrual of income.
This argument would derive support from the decision of the Andhra Pradesh High Court in Skoda Export v. Addl CIT [1983] 143 ITR 452 according to the learned Departmental Representative.
15. The second alternative contention put forward by learned Departmental Representative was that, if the amount is held as not taxable because of the proviso to Section 9(1)(vii), it will fall to be deemed as taxable income under Section 9(1)(i). Even in cases where the royalty or technical service fees are paid on the basis of agreements executed before April 1, 19'76, the payments are not totally exempt from tax. Reference has been made to the provisions of Sections 44D, 115A and the Schedules to the Finance Act from year to year. The learned Departmental Representative pointed out that royalty paid in recent years on the basis of agreements entered into before April 1, 1976, enjoy a tax-holiday. Therefore, if, in the instant case, the payment cannot be considered under Section 9(1)(vii) because of the proviso, it can always be considered as a deemed income of the non-resident under the general provisions of Section 9(1)(i) on the same footing that royalty payments made on the basis of old agreements are considered today.
16. In the decision of the Andhra Pradesh High Court in Skoda Export v.Addl CIT [1983] 143 ITR 452, exemption under the proviso to Clause (vii) of Section 9(1) was not the subject-matter in issue since it was not in the statute book at that time. Therefore, that decision will not be applicable to the facts of this case. It was not the case of the Department that there was any business connection between the assessee and BHEL. Section 5 has specifically been made subject to the provisions of this Act. Sections 3 and 4 of the 1922 Act corresponding to Sections 4 and 5 of the 1961 Act impose a general liability to tax upon all incomes. But the Act does not provide that whatever is received by a person must be regarded as income liable to tax. In all cases in which a receipt is sought to be taxed as income, the burden lies upon the Department to prove that it is within the taxing provision. Where, however, a receipt is of the nature of income, the burden of proving that it is not taxable because it falls within the exemption provisions lies upon the assessee ( see Parimisetti Seetharamamma v. CIT [1965] 57 ITR 532 (SC) ; also see //. E. H.Nizam's Religious Endowment Trust v. CIT [1966] 59 ITR 582 (SC) ; CET v. Sheth Motilal Karsondas [1971] 82 ITR 333 (Guj); Dilip Kumar Roy v.CIT [1974] 94 ITR 1 (Bom) ; Raja Ragavendra Singh v. State of Punjab [1976] 102 ITR 40 (P & H) ; CIT v. Chrestian Mica Industries Ltd. [1977] 109 ITR 517 (Cal) ; S.A. Ramakrishnan v. CIT [1978] 114 ITR 253 (Mad) ; Addl CIT v. S. Krishnaswamy Reddiar [1978] 115 ITR 505 (Mad); Maharaja Dharmendra Pratap Narain Singh v. State of U.P. [1980] 121 ITR 806 (All). Thus, in the instant case, the assessee has proved that the agreement in question was entered into prior to April 1, 1976, in accordance with the provisions contemplated under the proviso to Clause (vii) of Section 9(1).
17. The Finance Act, 1976, inserted a new Clause (vii) in Section 9(1) of the Income tax Act, with effect from June 1, 1976, specifying the circumstances in which income by way of fees for technical services will be deemed to accrue or arise in India and also defining the expression " fees for technical services ". Under the above said Clause (vii), income by way of fees for technical service is deemed to accrue or arise in India. The Finance (No. 2) Act, 1977, has added a proviso to Clause (vii) of Section 9(1) to the effect that the deeming provision contained in the said clause does not apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before April 1, 1976, and approved by the Government. For this purpose, an agreement made on or after April 1, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with the proposals approved by the Central Government before that date.
18. The answer to the alternative grounds raised by the Department is contained in the decision of the Madras High Court in the case of CIT v. Copes Vulcan Inc. [1987] 167 ITR 884, 887, wherein the Madras High Court held as under (at page 887) : " Having regard to the language used In Section 9(1)(vii), it is not possible to construe that provision as referring to income by way of fees for technical services in cases not involving business connection. Whether there is a business connection or not, any income by way of fees for technical services should, therefore, be taken to have been covered by the provision in Section 9(1)(vii).
When there is a special provision dealing with a special type of income, such a provision could exclude a general provision dealing with income accruing or arising out of any business connection.
Since Section 9(1)(vii) will comprehend income by way of fees for technical services rendered as a result of business connection or otherwise, it is not possible to apply the provision in Section 9(1)(i) merely because Section 9(1)(vii) stands excluded as a result of the proviso. If such a contention as is put forward by the Revenue is accepted, then in respect of cases arising after April 1, 1976, when the proviso will have no application, there will be two provisions operating in the same field in respect of fees for technical services. Such a construction should normally be avoided.
We are, therefore, of the view that the income by way of fees for technical services either arising out of business connection or otherwise will have to be treated as coining only under Section 9(1)(vii) and not under Section 9(1)(i). In this view, we are in agreement with the view taken by the Tribunal in this case. Hence we do not consider it necessary to direct a reference in this case. The petition is, therefore, dismissed. No costs." 19. Section 115A will not apply if the proviso to Clause (vii) to Section 9(1) applies. So also Section 44D will not apply where the proviso to Clause (vii) to Section 9(1) applies. Accordingly, considering the facts appearing in this case in the light of the decision of the Madras High Court cited supra [1987] 167 ITR 884, we hold that the assessee is entitled to exemption from tax on the fees received from the BHEL in terms of the proviso to Clause (vii) of Section 9(1) of the Act. In that view of the matter, the orders passed by the authorities below on this point are reversed and the additions made under this head are deleted. In the result, the appeals filed by the assessee are allowed.
20. I have gone through the order proposed by my learned brother, but I am unable to agree with his decision. Hence, I am recording my note of dissent. In this appeal, the question is whether the fees paid by M/s.
Bharat Heavy Electricals Ltd. ( " the BHEL " for short) for services rendered by the engineers of M/s. Sulzer Brothers Ltd. ( " the Sulzer " for short) are assessable under Section 9(1)(vii) or not. For the sake of facility, the relevant facts are stated briefly. M/s. BHEL entered into a collaboration agreement with M/s. Sulzer for the manufacture of high duty control valves and associated equipment for by-pass and pressure reducing systems of 200 MW thermal power plants at its Trichy unit. On November 11, 1975, the Government of India (Ministry of Industry and Civil Supplies, Department of Industrial Development, Secretariat for Industrial Approvals, Foreign Collaboration Unit), was prepared to approve the terms of collaboration subject to conditions regarding lump sum payment of 1.5 million Swiss Francs subject to Indian taxes in three instalments and also the conditions detailed in the annexure to that letter dated November 11, 1975. BHEL was required to confirm the conditions stipulated and to conform to the terms in the final collaboration agreement to be signed by the parties. Clause (ii) of the annexure related to deputation of technicians which reads as under : "(ii) The deputation of technicians either way shall be governed by specific approval to be granted by the Government on application in terms of numbers, period of assistance and trading, rate of allowances to be paid, travelling charges and other items of expenses, etc." 21. Thus, the deputation of technicians required separate and specific approval to be granted by the Government. On January 29, 1976, an agreement was entered into between BHEL and Sulzer. In clauses 1.6 and 1.7, Sulzer agreed to depute its personnel and experts to assist BHEL for which services BHEL should pay as per terms and conditions to be mutually agreed upon in each case and from time to time. The Government of India (Ministry of Industry and Civil Supplies, Department of Heavy Industry) in letter dated March 4, 1976, have taken on record the final agreement dated January 29, 1976, only to the extent of the terms and conditions specifically approved by it in its letter No.190(75)/160(75) dated November II, 1975. On September 8, 1977, the Government of India (Ministry of Industry) approved the rates for special engineering services for 1977-78 and release of foreign exchange for Sw. Fr. 50,000. On April 18, 1979, approval was granted for release of foreign exchange for 1978-79. On February 6, 1980, the Government approved the contract of service of technicians for the purpose of exemption under Section 10(6)(viia) of the Income-tax Act, 1961. In view of these facts, it is clear that the deputation personnel and experts of Sulzer and the terms and conditions of fees payable to them were left to be decided separately and they did not form part and parcel of the agreement reached between BHEL and Sulzer on January 29, 1976. Therefore, though the agreement is made prior to April 1, 1976, and the approval of the Government was prior to April 1, 1976, none the less the approval dated March 4, 1976, was subject to the terms and conditions specified in Government's letter dated November 11, 1975, according to which specific approval of the Government should be obtained regarding deputation of personnel and experts and terms and conditions of their payment. In other words, the approval to the agreement granted by the Government was limited in scope and only on February 6, 1980, the Government approved the contract of service of the technicians. In other words, so far as the question in these appeals is concerned, the approval was granted by the Government only after April 1, 1976. In the circumstances, the proviso to Section 9(1)(vii) is not applicable. Similarly, Explanation 1 thereto also is not applicable inasmuch as the agreement made after April 1, 1976, was not in accordance with the proposals approved by the Central Government before that date. In this connection, I wish to point out that the decision of the Gujarat High court in the case of Meteor Satellite Ltd. [1980] 121 ITR 311 can be distinguished from the case of the assessee as in that case, the agreement was entered into prior to April 1, 1976, but only an insignificant amendment was effected at the suggestion of the Government of India after April 1, 1976, which was not material in nature. In the circumstances, I agree with the reasons and conclusions of the Commissioner (Appeals) and hold that the fees received shall be deemed to accrue or arise in India in terms of Section 9(1)(vii) and, therefore, they were rightly charged to tax.
23. As we have differed on the following point, the case is referred to the President for reference to the Third Member, viz. : " Whether, on the facts and in the circumstances of the case, the technical service fees paid by M/s. Bharat Heavy Electricals Limited to the engineering personnel of M/s. Sulzer Brothers Limited are taxable under Section 9(1)(vii) of the Income-tax Act, 1961, or not?" 24. These appeals have been referred under Section 255(4) of the Income-tax Act, 1961, on a difference of opinion between the two Members who originally heard the case.
25. The admitted facts are as follows. The assessee is a foreign company. On November 11, 1975, the Central Government approved in principle a collaboration agreement between the assessee-company and Bharat Heavy Electricals Ltd. The terms of the collaboration agreement were set down in a deed dated January 29, 1976, which was taken on record by the Central Government on March 4, 1976. Article 1.6 of the agreement was as follows :-- " 1.6. Upon request by BHEL, SULZER shall subject to availability and capacity of SULZER personnel, assist BHEL in checking the calculations, design, drawings and part lists of EQUIPMENT prepared by BHEL and shall delegate SUL-ZER personnel to BHEL's manufacturing and erection sites. These services shall be paid for by the BHEL as per terms to be mutually agreed upon from time to time." 26. Pursuant to this article, BHEL made an application on August 4, 1977, for the release of foreign exchange to the extent of SW. Francs 50,000 to meet the expenses of the visit of experts of the assessee to India for checking the drawings and designs. This was approved by the Government on September 8, 1977, by releasing the foreign exchange.
Accordingly, Mr. Konard Kuri visited India between November 11, 1977, and December 18, 1977, for checking the designs for which SW. Fr.
29,468 amounting to Rs. 1,11,212 was paid and the tax of Rs. 44,485 was deducted at source. Similarly, an application was made on April 27, 1978, by BHEL for release of foreign exchange for the visit of Mr. P.Wilhelm from June 5, 1978, to, July 1, 1978. This was approved by the Central Government on April 18, 1979, and an amount of SW. Fr. 18,656 equivalent to Rs. 82,553 was paid and tax of Rs. 33,020 was deducted at source. The Assessing Officer, while making the assessments for the assessment years 1979-80 and 1980-81, came to the conclusion that the amounts received by the assessee for the visits of the two experts of the assessee-company had to be assessed as income arising from two separate subsequent agreements approved by the Government after April 1, 1976, and, therefore, assessable under Section 9(1)(vii) of the Income-tax Act, 1961. This was confirmed on appeal.
27. When the assessee appealed further, the learned Judicial Member came to the conclusion that these visits were pursuant to the collaboration agreement already approved by the Government prior to April 1, 1976, and, therefore, saved by the proviso to Section 9(1)(vii) from being assessed to tax. On the other hand, the learned Accountant Member agreed with the authorities below that the amounts were received in respect of separate agreements subsequent to April 1, 1976, and, therefore, liable to be taxed. On this difference, the following question has been referred to the Third Member for a decision : " Whether, on the facts and in the circumstances of the case, the technical service fees paid by M/s. Bharat Heavy Electricals Ltd. to the engineering personnel of M/s. Sulzer Brothers Limited are taxable under Section 9(1)(vii) of the Income-tax Act, 1961, or not?" 28. When the matter was taken up, it was contended on behalf of the assessee that a perusal of Article 1.6 of the agreement itself indicated that these visits were in pursuance of the original agreement and, therefore, protected by the proviso to Section 9(1)(vii). Reliance was placed on the decision of the Madras High Court in the case of CIT v. Copes Vulcan Inc. [1987] 167 ITR 884. On the other hand, it was contended on behalf of the Revenue that, since separate requests had to be made and further approval of the Government was required, these visits must be considered to be separate agreements approved by the Government and falling outside the scope of the proviso to Section 9(1)(vii). Reliance was also placed on the Memorandum explaining the provisions of Section 9(1)(vii) (see [19771 107 ITR (St). 186), to contend that it was only payment for service outside India which was brought into the tax net by Section 9(1)(vii) and, in a case like the present one, where services were rendered in India, even the provisions of Section 9(1)(vii) were not necessary as the amount will be taxable under Section 5(2). It was also argued that the proviso was intended to' save agreements finalised on the understanding that it would be exempt from tax and in the present case since there was no stipulation about the amounts earlier, it could not be said that there was any understanding of exemption prior to that date. The assessee replied that it was because of a doubt whether consultancy services could be regarded as having been rendered in India merely because of the visit of the expert that Section 9(1)(vii) had to be brought into the statute book and further that agreements made on the understanding that it will be exempt from tax, have been saved.
29. I have considered the submissions of both sides and have perused the collaboration agreement and the orders of the authorities below as well as the orders of the Members who have heard the case earlier. I find that Article 1.6 of the collaboration agreement clearly stipulated an obligation on the part of the assessee to depute an expert for checking the designs if required by BHEL. It may be that the consideration for such consultation services had to be mutually agreed upon and it was negotiable and subject to the approval of the Government. But the obligation to render service emanated from the collaboration agreement and it is that obligation which had been approved by the Government even earlier to April 1, 1976. In the circumstances, I agree with the learned Judicial Member that the application for release of foreign exchange for the visit of the experts did not amount to separate applications for approval of any fresh agreement. It follows that the amount received by the assessee was saved by the proviso to Section 9(1)(vii) which specifically states that nothing contained in that section shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before April 1, 1976, and approved by the Central Government.
30. Moreover, the Explanation to Section 9(1) further states that, for the purposes of that proviso, an agreement made on or after April 1, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date. Since the proposal to obtain consultation by visiting experts had been approved by the Government earlier, even if the application for release of foreign exchange is considered to be a fresh agreement, it will be deemed to have been made before April 1, 1976, because of the application of this Explanation. I also find that, in the case of Copes Vulcan Inc. [1987] 167 ITR 884, where technical services were rendered in India by visiting experts, the Madras High Court held in [1987] 167 ITR 884 that it was to be considered only under Section 9(1)(vii) and it would be exempt under the proviso if the amount was paid in pursuance of an agreement made prior to April 1, 1976. In the circumstances, I agree with the learned Judicial Member that the amounts received by the assessee for technical services rendered by visiting experts in pursuance of the collaboration agreement entered into prior to April 1, 1976, are not liable to be taxed because of the proviso to Section 9(1)(vii). The assessments have, therefore, to be annulled. The matter will now go before the regular Bench for the disposal of the appeals in accordance with the opinion of the majority.
31. 8.12.1992. On a difference of opinion between the two Members, the following question was referred to the Third Member : " Whether on the facts and in the circumstances of the case, the technical service fees paid by M/s. Bharat Heavy Electricals Ltd. to the engineering personnel of M/s. Sulzer Brothers Limited, are taxable under Section 9(1)(vii) of the Income-tax Act?" 32. The Third Member has agreed with the learned Judicial Member. In conformity with the opinion of the majority of the Members who heard the case, the assessments are annulled. The appeals are allowed.