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 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 direction 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 and other expenses of the engineer during his stay in India. The question for determination before the IAC (Asst.) was whether such fees is assessable to tax at the hands of the assessee in terms of proviso to Section 9(1)(vii) of the Income-tax Act, 1961.
3. Before the IAC (Asst.) the assessee claimed that 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 29-1-1976 which is prior to 1-4-1976 and the proviso to Section 9(1)(vii) confers the exemption on it. According to the IAC (Asst.) article 1.6 of the agreement dated 29-1-1976 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 IAC (Asst.) the fees 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 18-4-1979. The IAC (Asst.) pointed out that the payment owes its origin entirely to this agreement which has been entered into later than 1-4-1976. Therefore, according to the IAC (Asst.), the fees is neither one payable in pursuance of an agreement made before 1-4-1976 nor one which has been approved by the Central Government before 1-4-1976, though the agreement as such is posterior to that date. Therefore, according to the IAC (Asst.) it fails to qualify for the exemption provided by the proviso to Clause (vii) to 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% in terms of (iii) of Sub-section (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. 32,553 from BHEL. A similar view was taken by the IAC (Asst.) in this assessment year as in last year.
4. Aggrieved the assessee filed appeals before the CIT(A) in both the assessment years under consideration. Before the CIT(A) the assessee's representative reiterated the submissions that the payment was made only in pursuance of the agreement dated 29-1-1976. According to him, the approval of the Government of India for payment was taken on 8-9-1977 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 11-11-1975 by the Government. Reliance was placed on a decision of the Appellate Tribunal, Delhi Bench in the case of BHEL v. ITO relating to Siemen's case in [IT Appeal No. 2581 (Delhi) of 1979 dated 2-6-1980). This was followed by the Appellate Tribunal Madras Bench in the case of IAC v. Copes Vulcan Inc. USA by agent BHEL for the assessment year 1978-79 in order dated 21-4-1982.
5. The CIT(A) pointed out that a similar issue was considered by the Gujarat High Court in Meteor Satellite Ltd. v. ITO [1980] 121 ITR311.The High Court in that case explained that Section 9(1)(0 is a mere general provision, dealing with all incomes 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 1-4-1976 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 1-4-1976 and the payment is not income deemed to accrue or arise in India. The CIT(A) pointed out that in the assessee's case 'there is an agreement entered into before 1-4-1976, 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 CIT(A) 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. 's case (supra). The CIT(A) further pointed out that the agreement dated 29-1-1976 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 1-4-1976. The CIT(A) was of the view that in the absence of employer-employee relationship between BHEL and technicians of Sulzer Brothers, the remuneration of fees paid will have to be brought to tax. The CIT(A) also pointed out that the ruling of the Andhra Pradesh High Court in SkodaExport v. Addl. C/T[1983] 143 ITR 452 and that of the Calcutta Bench of the Tribunal in Sandwell & Co. Ltd. v. ITO [1983] 6 ITD 183 will support the assessment made by the IAC (Asst.) in this case. Accordingly, the CIT(A) 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 the learned counsel appearing for the assessee, M/s. Bharat Heavy Electricals 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 4-3-1976. 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 CIT(A) Coimbatore in the case of Copes Vulcan (supra) 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 11-11-1975 of the Government of India, Ministry of Industry and Civil Supplies. The agreement was subsequently entered into with M/s. Sulzer Brothers Ltd. on 29-1-1976 and was submitted to the Government and was also approved by the Government vide letter No. 11-S/75-HEM dated 4-3-1976 of the Ministry of Industry & Civil Supplies, Government of India. According to the 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 the learned counsel, the payments of Rs. 1,11,212 and Rs. 82,553 were in pursuance of the agreement dated 29-1-1976. According to the learned counsel the assessing authorities erred in stating that the agreement for payment of fees has been made after 1-4-1976 and it got the approval of the Central Government on 18-4-1979. In this connection it.
was submitted that the approval of the Central Government accorded vide letter No. 11-8/75-HEM dated 8-9-1977 of the Government of India, Ministry of Industry (and not on 18-4-1979 as stated in the assessment order) was for the release of foreign exchange and also trie 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 11-11-1975. Hence the Government's letter dated 8-9-1977 was not for the agreement dated 29-1-1976 for which the Government's approval was accorded as early as 11-11-1975, according to the learned counsel. Therefore, the learned counsel for the assessee submitted that the payment of fees for technical services in pursuance of the agreement entered into before 1-4-1976 is exempt under the proviso to Section 9(1)(vii) of the IT Act. It was.
therefore, pleaded that the order of the CIT(A) on this point may be modified and tax already paid be relunded in both these assessment years under consideration.
7. On the other hand, the learned Departmental Representative while supporting the order passed by the CIT(A) 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 29-1-1976. The learned Departmental Representative pointed out that Article 1.6 of the agreement dated 29-1-1976, particularly the words "upon request by BHEL, SULZER shall, subject to availability and capacity of Sulzer personnel ... to be mutually agreed upon from time to time" will show that there was no commitment about hiring of the services of Sulzer personnel nor the terms and conditions for such hiring were 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 on 29-1-1976. The learned Departmental Representative further contended that in letter dated 11-11-1975 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 (p. 44). Item 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.
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 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 4-3-1976 took on record the agreement subject to the terms and conditions which were imposed in its earlier letter dated 11-11-1975. 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 31-3-1976.
8. 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 with the approval of the Central Government in their letter dated 8-9-1977. Therefore, the agreement that existed before 1-4-1976 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 1-4-1976 (vide the proviso). In the instant case the payments to foreign technicians cannot be said to have been made in pursuance of the agreement dated 29-1-1976. 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. The learned Departmental Representative also pointed out that the proviso to Section 9(1)(uti) stipulates a direct nexus between the agreement and the payment. In the instant case the agreement does not provide such nexus.
9. 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 29-1-1976 and therefore the same were exempt from income-tax by virtue of proviso to Sub-clause (vii) of Section 9(1). We have already set out the facts in detail. The facts remain that the proposal to enter into a collaboration agreement was approved by the Central Government in F.No. FC/190(75)/160(75) dated 11-11-1975 of the Government of India, Ministry of Industry & Civil Supplies. The agreement was subsequently entered into on 29-1-1976 which was submitted to the Government and the same was approved by the Government as per letter No. 11-8/75-HEM dated 4-3-1976 of the Ministry of Industry & Civil Supplies, Government of India. It is stated that the approval of the Government was accorded in letter No. 11-8/75-HEM dated 8-9-1977 and not on 18-4-1977 as stated in the assessment order. The letter dated 8-9-1977 is for the release of foreign exchange and also the rates for the special engineering services that was obtained by BHEL in pursuance of the condition (ii) in the Annexure to the Government of Inidia's letter No. FC/190(75)/160(75) dated 11-11-1975.
10. The submission made by the learned Departmental Representative that on a combined reading of article 1.6 of the agreement dated 29-1-1976, the letter dated 11-11-1975 of the Government of India does show that the decision about hiring of foreign technicians was taken at a later date culminating with the approval of the Central Government in their letter dated 8-9-1977 and therefore, the agreement that existed before 1-4-1976 does not cover the payment that was subsequently made to the foreign technicians and consequently the exemption provided under proviso to Sub-clause (vii) of Section 9(1) does not apply is not acceptable, in view of the decision of the Appellate Tribunal Delhi-Bench in the case of Bharat Heavy Electricals Ltd. v. ITO [IT Appeal No. 2581 (Delhi) of 1979 dated 2-6-1980]. 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 28-10-1975 was approved by the Government earlier to 1-4-1976. He pointed out that the letter of the Government dated 3-12-1975 clearly stated that the agreement was approved subject to the conditions laid down in its letter dated 13-5-75 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 18-11-1976 i.e., after 1-4-1976. According to him, therefore, 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 the services in this country, there was no question of considering whether it also could be deemed to accrue or arise in India.
We have carefully considered the submissions placed before us on behalf of the rival parties. We will first deal 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 1-4-1976 and approved by the Central Government. What is necessary is that the agreement should have been made before 1-4-1976. 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 1-4-1976 should be approved by the Central Government. In the present case, there is no dispute that the corporate collaboration agreement was made on 28-10-1975, i.e., before 1-4-1976. The assessee, in our opinion, therefore, is entitled to claim the benefit of the proviso with regard to fees payable to Siemens which might be treated as accrued or arisen under Section 9(1) of the Act.
Even if, for the sake of argument, it may be presumed the agreement was not made before 1 -4-1976 inasmuch as the permission of the Government for the payment in question was granted only on 18-11-1976, 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 purpose of the proviso, an agreement made on or after 1-4-1976, shall be deemed to have made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date. We have already referred to the Government's letter dated 13-5-1975 which in substance had approved the agreement. This letter happens to be before 1-4-1976. It can, therefore, be safely concluded that the agreement was made before 1-4-1976. It was in pursuance to this letter of 13-5-1975 that the assessee had sought for and was granted a separate approval for the payment vide Government's letter dated 18-11-1976. It cannot, therefore be treated an approval independent of the approval granted vide letter dated 13-5-1975.
It may be pertinent to mention here that even the Explanation-1 refers only to the date when the agreement is made and does not refer to any particular date before 1-4-1976 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 1 -4-1976. Even in practice, if an agreement is made on 31-3-1976, 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.
11. 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 - Meteor Satellite Ltd. 's case (supra). 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.
12. 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 in 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 Exports Ltd. 's case (supra) according to the learned Departmental Representative.
13. The second alternative contention put forward by the 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 1-4-1976, the payments are not totally exempt from tax.
Reference has been made to the provisions of Sections 44(d), 115(a) and the Schedules of 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 1-4-1976 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 general provisions of Section 9(1)(i) on the same footing as royalty payments made on the basis of old agreements are considered today.
14. In the decision of the Andhra Pradesh High Court in Skoda Export Ltd.'s case (supra) exemption under proviso to sub-clause [uii) 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 exemption provisions lies upon the assessee (see Parimisetti Seetharamamma v. CIT [1965] 57 ITR 532 (SC) - also see H.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 (Punj. & Har.), 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.) and 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 1-4-1976 in accordance with the provisions contemplated under the proviso to sub-Clause (vii) of Section 9(1).
15. The Finance Act, 1976 inserted a new Clause (vii) in Section 9(1) of the Income-tax Act, w.e.f. 1-6-1976 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 do not apply in relation to any income by way of fees for technical service payable in pursuance of an agreement made before 1-4-1976 and approved by the Government. For this purpose an agreement made on or after 1-4-1976 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.
16. 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. U.S.A. [1987] 30 Taxman 549 (Tax. - Rep.), wherein the Madras High Court held as under:-- 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 service 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 Mini).
When there is a special provision dealing with a special type of income, such a provision could exclude a general provision dealing with a special type of income, accruing or arising out of any business connection. Since Section 9(1)(vii) will comprehend the 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) clearly because Section 9(1)(vii) stands excluded as a result of the provision. If such a contention as is put forward by the revenue is accepted, then in respect of cases arising after 1-4-1976 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 not will have to be treated as coming only under Section 9(1)(vii) and not under Section 9(1)(0. 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.
17. Section 115A will not apply if the proviso to Sub-clause (vii) to Section 9(1) applies. So also Section 44D will not apply where the proviso to sub-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, we hold that the assessee is entitled to exemption from tax the fees received from 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 additions made under this head are deleted.
In the result the appeals filed before assessee are allowed.
1. 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. (BHEL for short) for services rendered by the engineers of M/s Sulzer Brothers Ltd. (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 bypass and pressure reducing systems of 200 MW thermal power plants at its Trichy unit. On 11-11-1975 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 11-11 -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: (it) 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.
Thus the deputation of technicians required separate specific approval to be granted by the Government. On 29-1-1976 an agreement was entered into between BHEL and Sulzer. In clauses 1.6 & 1.7 Sulzer agreed to depute personnel, and experts to assist BHEL for which services the 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 4-3-1976 have taken on record the final agreement dated 29-1-1976 only to the extent of the terms and conditions specifically approved by it in its letter No. 190(75)/160(75) dated 11-11 -1975. On 8-9-1977 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 18-4-1979 approval was granted for release of foreign exchange for 1978-79. On 6-2-1980 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 29-1-1976.
Therefore though the agreement is prior to 1-4-1976 and the approval of the Government was prior to 1-4-1976 but nonetheless the approval dated 4-3-1976 was subject to the terms and conditions specified in Government's letter dated 11-11-1975, according to which the 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 6-2-1980 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 1-4-1976. In the circumstances the proviso to Section 9(1)(vii) is not applicable. Similarly the Explanation 1 thereto also is not applicable inasmuch as the agreement made after 1-4-1976 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., 121 ITR 311 can be distinguished from the case of the assessee as in that case the agreement was entered into prior to 1-4-1976 but only an insignificant amendment was effected at the suggestion of the Government of India after 1-4-1976 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 lightly charged to tax.
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, USA, are taxable under Section 9(1)(vii) of the Income-tax Act, 1961 or not? 1. 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.
2. The admitted facts are as follows: The assessee is a foreign company. On 11-11-1975 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 29-1-1976 which was taken on record by the Central Government on 4-3-1976. 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 SULZER personnel to BHEL's manufacturing and erection sites. These services shall be paid for by BHEL as per terms to be mutually agreed upon from time to time.
Pursuant to this Article, BHEL made an application on 4-8-1977 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 8-9-1977 by releasing the foreign exchange. Accordingly, Mr. Konard Kuri visited India between 11-11-1977 and 18-12-1977 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 27-4-1978 by BHEL for release of foreign exchange for a visit of Mr. P. Wilhelm from 5-6-1978 to 1-7-1978. This was approved by the Central Government on 18-4-1979 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 two visits of the experts of the assessee-company had to be assessed as income arising from two separate subsequent agreements approved by the Government after 1-4-1976 and, therefore, assessable under Section 9(1)(vii) of the Income-tax Act, 1961. This was confirmed on appeal.
3. 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 1-4-1976 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 1-4-1976 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? 4. 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 Copes Vulcan Inc. U.S.A. (supra). 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 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), (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.
5.1 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 service had to be mutually agreed 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 1-4-1976. 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 application 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 1-4-1976 and approved by the Central Government. Moreover, the Explanation to Section 9(1) further states that for the purpose of that proviso, an agreement made on or after 1-4-1976 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 1-4-1976 because of the application of this Explanation. I also find that in the case of Copes Vulcan Inc.
where technical services were rendered in India by visiting experts, the Madras High Court held in 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 prior to 1-4-1976.
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 1-4-1976 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.
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? 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.