1. These cross appeals are against the orders of the Commissioner of Income-tax (Appeals) for assessment years 1984-85 to 1988-89. Since there is a common dispute, they are being disposed of by this common order for the sake of convenience.
2. In all the appeals filed by the Revenue for assessment years 1984-85 to 1988-89, the dispute is with regard to taxability of the amount received by the assessee, M/s SMS Schloemann Siernag Aktiengesels chaft (hereinafter referred to as SMS), towards design and engineering services in pursuance of two separate agreements with M/s Rashtriya Ispat Nigarn Ltd., Visakhapatnam Steel Project - one in respect of Wire Rod Mill and the other in respect of Light and Medium Merchant Mill. In the Wire Rod Mill agreement, SMS is the prime contractor whereas in the case of Light and Medium Merchant Mill agreement, SMS is a Confirming Party and M/s Metallurgical & Engineering Consultants (India) Ltd. Thereinafter referred to as MECON) is the main contractor. In the first contract, SMS was given the overall responsibility with regard to the entire work referred to in the scope, whereas in the second contract, the overall responsibility was to be jointly shared by SMS on one hand and MECON on the other. The first contract is dated 15-11 -1983 whereas the second contract is dated 9-2-1993.
(ii) design and engineering fees including reimbursement of expenditure and fees for training services; There is no dispute insofar as the taxability of the receipts for supply of equipment and spares is concerned. The dispute, however, is with regard to the taxability of the receipt of design and engineering lees and fees for imparting training abroad. The assessee's stand has been that the, receipt bv the assessee was not taxable as the receipts for the services rendered abroad formed part of the commercial profits of the assessee, that. though separate payments were stipulated for supply of machinery and lor supply of engineering services relating and incidental to the supply of machinery, the contract was a composite one for supply of equipment, that the documentation forms part of the equipment and plant and without the documentation, the purchaser would not be in a position either to erect or tooperate the same, that the Assessing Officer had issued a no objection certificate for remittance of these amounts by Rashtriya Ispat Nigam Ltd. to the assessee without deduction of tax therefrom, considering that any income arising therefrom was exempt from tax, that the receipt towards engineering fees did not fall under the definition of t he term "Royalty" in terms of Section 9(1)(vi) of the Income-tax Act, as the documentation related only to erection and operation of equipment and did not involve either the transfer of any right in the know-how and the purchaser could not manufacture similar items of equipment even if it wanted to with the aid of the documentation supplied by the assessee, and that the receipt of engineering fees did not fall under the definition of "Fee for Technical Services" in terms of Section 9(1)(vii) of the Income-tax Act as I he services were not separate from the supply of equipment and as the contract was not tor performance of services in the preparation of designs and, besides, the said definition clearly excludes any consideration for construction, assembly, mining or like project undertaken by the recipient. The assessee submitted that the case was covered by the decision of the Tribunal, Hyderabad Bench, in the case of Klayman Porcelains Ltd. v. ITO[1984]8 ITD 265.
3A. The Assessing Officer did not agree with the assessee. He held in the order for assessment year 1984-85 that the assessee had agreed to transfer licence for latest Morgan know-how for setting up Wire Rod Mill and had transferred technical know-how through the Indian contractor and, therefore, it was liable to tax as a receipt of royalty under Section 9(1)(vi). He also held that the fees for services rendered by the assessee were in the nature of fees for technical services in connection with erection of the plant which would attract the provisions of Section 9(1)(vii) even though rendered outside India and that even if each agreement was a composite agreement for supply of equipment and also for provision of documentation in connection with the setting up of the plant, the stipulations in the agreement for separate payment towards Engineering Fees clearly indicated that the same did not form an integral part of the payment for supply of equipment. According to him, the supply of documentation, designs, instructions, etc., as engineering services were not integrated with supply of machinery insofar as these technical informations were to be applied independently by Visakhapatnam Steel Project for erection of the plant with the collaboration of different Indian and foreign contractors. The agreements used the word "fees" for rendering of engineering services and "price" for the supply of equipment. In the absence of any special circumstances, the terms used in the agreements would be correct indicators of the nature of receipt. He also held that under the Double Taxation Agreement as applicable with effect from 1 -4-1984, receipts in connection with delivery of engineering services outside India would be liable to be taxed under Section 9(1)(vii) when they were in the nature of 'royalty' or 'fees' for which specified rate of tax was provided in such agreements. In the assessment year 1983-84, the assessee had taken a definite stand to substantiate that it had prepared drawings and documents specially for the Indian concern by way of "tailor-made" and not "on-the-shelf" technology and, therefore, the Assessing Officer was of the view that the royalty payments were in the nature of "fees" rather than "royalty", on the basis of which the proceedings under Section 147 were dropped. In assessment years 1985-86 and 1986-87, the claim that the receipts by the assessee were in the nature of "royalty" was dropped and the Assessing Officer has taken a definite view that the payments were clearly in the nature of "fees" falling within the scope of Section 9(1)(vii) as distinct from "royalty" under Section 9(1)(vi) of the Income-tax Act.
4. The CIT(Appeals) held that the technical drawings/data would not partake the character of any know-how or information meant for commercial exploitation of the same, but these were rather linked with the erection of the plant and its test operation. The use of the information was only for erection of the equipment and not for exploitation of such information for commercial use, which use, according to him, was an essential element of royalty. He stated that no income was earned by the purchaser of the information either by using it or by selling it and, in this connection, he has mentioned the following points in arriving at his conclusion :- (i) Not only that the equipments supplied were under Tailor-made-order' but the drawings were also of the same nature insofar as these were not readymade or 'from-the-shelf'.
(ii) The drawings do not relate to any designs or patents with the help of which another item of equipment can be manufactured. They only relate to the general lay-out and operation of the equipment.
(iii) The information or knowledge or experience involved in preparation of the drawings is not imparted or transmitted to the purchaser or its personnel who can use the drawing/data for another plant. Had the purchaser been in possession of adequate knowledge and experience passed through such documentation, it would not have gone for separate contracts through Global tenders in respect of erection of 3 Merchant Mills. Further, the contract agreements revealed that V.S.P. had received and paid separately for drawings relating to each of the Mills and also to different contractors involved in erection of each plant.
He then adverted to determining as to whether the receipts by the assessee were in the nature of fees for technical services and held that the payments were fees for technical services as per the definition under the Double Taxation Agreement, but they cannot be assessed as fees for technical services under the Income-tax Act because of the definition of the said expression under the Income-tax Act in Explanation 2 to Section 9(1)(vii) by use of the words viz., but does not include consideration any construction, assembling, mining or like project undertaken by the recipient.
In this connection, he accepted the contention of the assessee that when the liability to tax is restricted under the provisions of either the Income-tax Act or the Double Taxation Agreement, the provisions more favourable to the assessee have to be applied. According to him, if the obj ect of Double Taxation Agreement was to include what is excluded in the Income-tax Act, there should have been an express provision in the Double Taxation Agreement to that effect.
5. The CIT(Appeals), by following the decision of the Andhra Pradesh High Court in the case of CIT v. Hindustan Shipyard ltd. [1977] 109 ITR 158, and in the case of CIT v. Visakhapatnam Port Trust [1983] 144 ITR 146, held that the relationship between SMS on the one hand and the foreign and Indian sub-contractors on the other was one on principal to principal basis, dealing with each other at arm's length. The most significant fact in this regard, he stated, is noted in para 3 of Article 1 of W.R.M. contract, that the erection of the plant was excluded from the contract agreement as also from the scope of work undertaken by SMS. In L.M.M.M. contract, there was a clear stipulation in para 10 of Schedule 1 that erection was the responsibility of V.S.P.with expert advice and supervision provided through deputation of personnel belonging to other contracting parties. The overall guarantee undertaken by SMS in providing proper engineering designs and in supervision of erection and performance of the plant and also for co-ordinating activities of all contractors would not give rise to any income earned in India even by way of the deeming provisions envisaging taxation of services rendered outside India. This was because of all these technical services were in connection with construction of the project.
6. As regards the decision of the Tribunal in Klayman Porcelains Lld.'s case (supra) the CIT(Appeals) stated that it was confined to applying the definition of the term 'Royalty' and not Tees' to a case where the supply to equipments and engineering flowed from one contracting party which had also provided experts for supervision, engineering and commissioning of the plant, whereas in the present case, undisputedly, the receipts were in the nature of fees for technical services rendered outside India. Though SMS might be exercising certain control on supervision and commissioning of the plant in India, such supervision and co-ordination was neither through maintaining any permanent establishment in India nor by deputing its own agent, but was through separate contractual relationship on principal to principal basis with foreign sub-contractors and the Indian contractors. He, therefore, held that the engineering fees received by the assessee under both the contracts were attributable to fees for technical services under the first part of Explanation 2 to Section 9(1)(vii), but the same would not be taxable because the services rendered were in connection with construction and erection of a project falling within the exclusionary clause contained in the last part of the said Explanation.
7. As regards the fees for training services, he held that the same were taxable as fees for technical services. The training services abroad were clearly in the nature of technical services to V.S.P. so that the personnel were well-equipped to run the plants alter their commissioning and the related lumpsum payments were 'fees' within the meaning of Article VIII-A(4) of the Double Taxation Agreement read with Section 9(1)(vii) of the Income-tax Act. He, therefore, upheld the action of the Income-tax Officer for assessment years 1985-86 and 1986-87 bringing the same to tax.
8. Both the assessee and the Revenue are in appeal. The Revenue's appeals are against the finding of the CIT(Appeals) that the engineering fees for techniccil services were not taxable and the assessee's appecils are against the assessment of fees for training under Section 9(1)(vii) of the Income-tax Act for assessment year 1985-86 and 1986-87. The following common grounds are raised by the Revenue in its appeals :- (1) On the facts and circumstances of the case, the amounts payable to the German Company viz., SMS Schloemann are in the nature of fees for technical services and are liable to tax in India in view of amended provisions of the AADT between India and the Federal Republic of Germany w.e.f. 1-4-1984. The CIT(Appeals) erred in holding that the amounts are not taxable for assessment years 1984-85 to 1988-89.
(2) On the facts of the case, the learned CIT(Appeals) erred in holding that the amounts, though taxable as per the new AADT, are not taxable because they fall out of the scope of the provisions of Section 9(1)(vii).
(3) The learned CIT(Appeals) erred in holding that the amounts in question cannot be brought to tax as per the new AADT coming into force from 1-4-1984 as the amounts fall under the exclusionary clause in Explanation 2 of Section 9(1)(vii) and as the new AADT did not provide to exclude the payments in express terms, it cannot be taken as a provision for taxing the amounts.
(4) The CIT(Appeals) erred in holding that the provisions of new AADT which provide for taxing the amounts at a specified rate of 20% will not over-ride and provisions of Section 9(1) of the Income-tax Act on the facts and circumstances of the case.
The learned Commissioner of Income-tax is not justified in upholding the action of the Income-tax Officer in treating the price receivable by the appellant from Visakhapatnam Steel Project, to whom the appellant had supplied machinery and equipment, towards arranging for the training of the personnel of latter outside India in the design, operation and maintenance of the plant, as 'Fee for Technical Services' and as income taxable in India under Section 9(1)(vii) of the Income-tax Act. The appellant submits that the said income is not taxable in India for the following reasons : (i) The same does not fall within the ambit of Sub-section (2) of Section 5 of the Income-tax Act, 1961; (ii) The same is payable outside India towards reimbursement of expenses incurred for services rendered outside India. It cannot also be considered as accruing or arising in India, since the same does not fall within the meaning of 'Royalty' or 'Fee for Technical Services' under the provisions of Section 9(1)(vi) or (vii). We rely on the decision of Income-tax Appellate Tribunal, Bombay S.B. in the case of Siemens Aktiengesellschaft v. ITO [1987] 22 ITD 87 in support of above contention.
(iii) The amount cannot be considered as Fee for Technical Services within the meaning of Clause (vii) of Sub-section (1) of Section 9, as the Explanation to the said clause though includes in the definition, the provision of services of technical or other personnel, does not cover training of personnel. Arranging for training of personnel of the Indian Purchaser at different plants outside India does not constitute services of managerial, technical or consultancy nature.
(iv) Just as the cost of documentation relating to the plant by way of drawings, designs, etc., is considered to be constituting the cost of the Plant (as was held by the Hyderabad Bench of the Income-tax Appellate Tribunal in the case of Klayman Porcelains Ltd. v. ITO[1984] 8 ITD 265, since without documentation the machinery can neither be erected nor operated, so also the price paid for training of the Purchaser's personnel outside India constitutes the cost of Plant, since without the said training the Plant can neither be operated nor maintained by the Purchaser.
For the above and such other grounds that may be urged at the time of hearing, the appellant prays that relief as claimed above be granted.
9. The learned departmental representative made the following submissions :-- (1) Both the agreements entered into by M/s VSP with M/s SMS dealt with supply of equipment and supply of design and engineering services separately. Not only the scope of work in respect of such supplies was separately delineated, the payments therefor were also separately prescribed as well as termed. In the circumstances, the two different activities cannot be stated to be constituting a composite work.
(2) When the work and payments for engineering services had been separately dealt with, there is nothing to warrant the inference that the payment thus separately made would form an integral part of payments made for supply of equipment alone.
(3) The use of nomenclature in the agreement cannot be simply brushed aside as immaterial. Reference has already been made to the distinction between 'price' and 'fees'. It was erroneous on the part of the CIT(Appeals) to ignore such distinctions and to dismiss the nomenclature as immaterial because the agreements nowhere suggested that the terms and conditions could be interpreted differently than what had been stated therein.
(4) When the agreement itself characterised certain payments as fees for technical services, there is no need for interpretation on the same issue. It has to be taken that the parties had stated in the agreement what they had intended. There cannot possibly be any reason for attributing an alien interpretation to the stated position. Any attempt at such interpretation would pre-suppose that the parties did not know about the implications of the nomenclature as used by them from the taxation point of view. Such a pre-supposition would be without basis.
(5) The CIT(Appeals) has agreed that the subject payments are fees for technical services. He has also agreed that between the AADT on the one hand and the Income-tax statute on the other, AADT, shall prevail. And yet, he has ignored the definition of fee for technical services as given in the AADT by making reference to what he calls harmoneous construction. There was neither any compulsion nor any necessity for such a harmoneous construction. When the agreement (AADT) clearly defines fees for technical services, and does not include therein anything resembling the exclusionary clause found in Explanation 2 to Section 9(1)(vii), such non-inclusion cannot be treated as a matter of chance. The definition having been framed by the taxation experts of the two countries, it has to be presumed that the non-inclusion of the exclusionary clause was a conscious and deliberate one. In the circumstances, the only conclusion that can be inferred is that fees for technical services had been consciously defined in the AADT and the exclusionary clause had been consciously omitted. As a logical corollary, it must also be stated that the definition of fees for technical services as provided in the AADT must be seen as an express provision to the contrary vis-a-vis the exclusionary clause in Section 9(1)(vii). Hence, the so-called harmoneous construction attempted by the CIT (Appeals) was an act of unauthorised super-imposition which cannot be accepted.
(6) It is seen that what prompted the CIT (Appeals) to speak of harmoneous construction is a submission made by the assessee that between the AADT on the one hand and the provisions of the statue on the other, whichever is beneficial to the assessee will have to be adopted. No doubt, the submission thus made is correct in principle.
In fact, subsequently, the provisions of Section 90 have been amended to incorporate very much the same thing. Such incorporation is to be found in Sub-section (2) to Section 90. However, it ought to be noted that Section 90(2) would apply only where the issue is avoidance of double taxation. The same would not apply if the issue is avoidance of taxation altogether. Applying Sub-section (2) of Section 90 to a case where liability to tax is being denied would be incorrect. Therefore, there was no merit in the submission which had been made by the assessee before the CIT(Appeals) and equally no merit in the acceptance thereof by the Appellate Authority.
(7) The very purpose of entering into AADT is to ensure that certain income does not get taxed twice, i.e., once in the country of the payer and again in the country of the recipient. The purpose is not be exempt such income from tax in both the countries. Therefore, when an appellate authority refers to an AADT it is incumbent upon him to make sure that the impugned payments are subjected to tax in either of the countries which are parties to the said AADT. Without doing so, an appellate authority has no right to conclude that the impugned payments are not taxable at all. In the subject order, the CIT(Appeals) has taken no steps to examine whether or not the subject payments are subjectable to, or have already been subjected to, tax in West Germany. Consequently, his finding that the design and engineering services are not taxable in India is not only incorrect, it also amounts to defeating the very purpose for which India had entered into agreement for avoidance of double taxation with West Germany.
(8) The CIT(Appeals) has committed an error in treating the impugned payments as non-taxable on the ground that the services to which such payments related fall within the ambit of the exclusionary clause of Explanation 2 to Section 9(1)(vii). Firstly, as has been already argued, there was no need to treat the supply of equipment on the one hand and the supply of engineering services on the other as constituting a composite work. Similarly, there was no justification in treating the payment for supply of engineering services as forming an integral part of the consideration for the supply of equipment. Secondly, even if it is assumed for the moment, without conceding, that the services in question were in the nature of services referred to in the exclusionary clause in Explanation 2 to Section 9(1)(vii), still the same would not ipso facto make the consideration for such services non-taxable. Section 9(1)(vii) merely defines fees for technical services. If something is not includible in this definition, the same could at the most be treated as payment other than fees for technical services. There is nothing in Section 9(1)(vii) to warrant the conclusion that such other payments are necessarily non-taxable. It is not known as to on what basis the CIT(Appeals) arrived at such a conclusion. Obviously he has ignored the very many other provisions in the statement which deal with the taxability of remittances made to foreign concerns. He has also ignored, and very unfortunately so, the CBDT Circular No. 202 wherein it had been clarified that the profits derived from the excluded services (i.e., services falling within the exclusionary clause) will have to be taxed as per the regular provisions of the Act. In its circular, the Board had explained the rationale for inserting the exclusionary clause in Section 9(1)(vii). To quote, "Such consideration has been excluded from the definition on the ground that such activities virtually amount to carrying on business in India for which considerable expenditure will have to be incurred by a nonresident and, accordingly, it will not be fair to take such consideration in the hands of a foreign company on gross basis or to restrict to 20% the gross amount as provided is new Section 44D of the Income-tax Act. Consideration for any construction, assembling, mining of like project will, therefore, be chargeable to tax on the net basis, i.e., after allowing deduction in respect of costs and expenditure incurred for earning the same and charged to tax at the rates applicable to the ordinary income of the non-resident as specified in the relevant Finance Act." As the foregoing would clearly show, the finding given by the CIT(Appeals) is not only without basis, it is also absolutely erroneous.
(9) In a recent decision involving an identical issue, the ITAT, Bangalore Bench has held that the payments for engineering services would partake the nature of fees for technical services and would be taxable accordingly. In the case of AEG Aktiengesselschaft v. IAC [IT Appeal Nos. 791 to 793-(Bang.) of 1987 Assessment years 1984-85, 1985-86 and 1986-87, order dated 24-8-1993]. M/s AEG is one of the collaborators of M/s VSP, the other collaborators being M/s SMS Schloemann Siemag, etc. In this case also, before the Tribunal, the foreign company had raised the very same agreements as had been raised before the CIT(Appeals), VSP in the appellate order at hand.
The issues being the same and the arguments also being the same, the decision rendered by the ITAT Bangalore in the cited case needs to be followed in disposing of the present appeals as well. It may be relevant to note here that M/s AEG is a West German company, much the same way as M/s SMS is. There was only one distinction between the two parties and that is, while M/s SMS is a prime contractor as per its agreement with M/s VSP, M/s AEG was not. But then, the said distinction is not a material one inasmuch as we are concerned with nature of service and nature of payments and not with status of contractors.
(10) In a very recent decision given in the case of M/s SKODA Exports for assessment year 1991-92, the CIT (Appeals), Visakhapatnam, has held that the payments for design and engineering services are nothing but fees for technical services. It needs to be emphasised that in deciding as above, the CIT (Appeals), Visakhapatnam, has elaborately discussed and differed from the order of his predecessor-in-office which is the subject-matter of the present appeal.
10. The learned Counsel of the assessee, on the other hand, supported the order of the CIT (Appeals) and submitted that because of the later part of the decision in Explanation 2 to Section 9(1)(vii), the receipts would not be assessable as fees for technical services and, therefore, the question of application of double taxation agreement would not arise. Alternatively, he submitted that the receipt by the assessee was not a fee but was a price for equipment purchased in the shape of know-how, manuals, etc., which can appropriately be stated as "mechanical Equipment". It was a sort of purchase of an industrial asset of which property passes outside India and, therefore, it cannot be taxed in India. He further submitted that the case of the assessee would not fall under Explanation 2 Section 9(1)(vii) even on the ground that the services were not rendered independently but they related to the supply of the equipment. Alternatively, he submitted that the consideration was received for a "like project" undertaken by the assessee within the meaning of Explanation 2 to Section 9(1)(vii) of the Income-tax Act. He referred in this connection to the following decisions (i) Klayman Porcelains Ltd.'s case (supra) - for the proposition that it was a part of supply of equipment and, therefore, not assessable as fees for technical services.
(ii) CIT v. Davy Ashmore India Ltd. [1991] 190 ITR 626 (Cal.) - for the proposition that the receipt of royalty under the agreement is a consideration for the use of, or the right to use, and not for the transfer of know-how which according to him would be a plant in the light of the decision in the case of Scientific Engg. House (P.) Ltd. v. CIT[1986] 157 ITR 86 (SC).
(iii) Referring to the decision in the case of Challapalli Sugars Ltd. v. CIT[1975] 98 ITR 167 (SC), he submitted that every expenditure incurred by an assessee prior to installation of a plant would be in the nature of capital.
(iv) He also referred to the decision in the case of Visakhapatnam Port Trust (supra), wherein it was held that Double Taxation Avoidance Agreement supercedes the provisions of the Income-tax Act.
Particular reference was invited to page 168 of the report.
(v) He then referred to the decision in the case of McDowell & Co.
Ltd. v. CTO [1985] 154 ITR 148 (SC), wherein it was held that excise is a part of the sale, and on the same analogy, the receipt by the assessee was a part of the price of the equipment.
(vi) He then referred to the Special Bench decision of the Tribunal in the case of Graphite Vicarb India Ltd. v. ITO [1993] 199 ITR 119 (Cal.) (AT), wherein it was held that in a case of outright sale the receipt cannot be assessed as fees for technical services.
(vii) Referring to the decision of the ITAT, Bangalore Bench, in the case of AEG Aktiengesselschaft (supra), he submitted that it was a case of failure of the assessee to prove.
(viii) Lastly, he referred to the decision in the case of Hindustan Shipyard Ltd. (surpd) at page 171, and contended that the considerations received by the assessee was for the part of supply and erection of the equipment was incidental thereto.
11. We have heard the parties and considered their rival submissions.
In Wire Rod Mill contract, the receipts in dispute are of drawing and engineering fees of the aggregate amount of Rs. 2,96,90,100 DM out of which receipts in the two years under appeal are 14,04,505 DM in assessment year 1984-85 and 2,08,25,901 DM in assessment year 1986-87.
In the preamble of this agreement, the assessee had stated that it had a licence from Morgan Construction Co., USA, and was in full possession of the latest know-how and agreed with V.S.P. to make available the benefits of the licence in the Wire Rod Mill proposed to be installed by V.S.P. As per the agreement, the assessee was to prepare the plant design and engineering and supply of plant, spares and various services was to be made by various concerns both foreign and Indian as stated in the agreement. The assessee had undertaken an overall responsibility of all the obligations.
12. For the sake of convenience, we reproduce the various clauses of the agreement. The preamble to the agreement reads as follows :- Whereas the Purchaser proposes to establish a 4-strand Wire Rod Mill complete with furnace, and electrical equipment (hereinafter referred to as 'Plant') as a part of the integrated steel plant being established at Visakhapatnam for producing wire rods as specified in this Agreement.
Whereas the Prime Contractor has stated to the Purchaser that they are the licensee of Morgan Construction Company of USA and are in full possession of the latest Morgan Know How. The Prime Contractor has further confirmed to the Purchaser the availability of benefits of Morgan licence in the Wire Rod Mill proposed to be installed for the Purchaser.
Whereas the Contractors have stated that all the parties hereto in their respective capacity as Prime Contractor and the Indian Contractors shall render Plant design and engineering services, manufacture, delivery, Technical Assistance through Supervision of erection and commissioning, performance guarantee tests, training services abroad, etc., as agreed to by the Contractors in this Agreement with the Purchaser; Whereas in addition to the aforesaid scope of supply and services, the Prime Contractor undertakes overall responsibility as stated hereunder in this Agreement; NOW IT IS HEREBY agreed and declared by and between the parties hereto as follows; In consideration of the premises and the payments to be made-by the Purchaser to the Prime Contractor, the Indian Contractors and the Foreign Major Sub-Contractors (as defined hereinunder) the Contractors hereby covenant with the Purchaser to perform the work as detailed in Schedule-1 "Scope of Work" to this Agreement subject to and on the terms and conditions contained herein.
While the Indian Contractors shall be individually responsible for their respective obligations of the completeness of the Plant and for the indigeneous portions of the scope of supply and work for its successful sustained integrated operation of the Plant and for due and faithful performance of the obligations of the Contractors as specified in this Agreement, the Prime Contractor shall be fully responsible for the complete integrated performance of the Plant, overall responsibility for integration, co-ordination of all activities and all other obligations of the Contractors under this Agreement and for due and faithful performance of the obligations and penalty under the terms of the Agreement.
The erection of the Plant is excluded from this Agreement and from the scope of work to be undertaken by the Prime Contractor as stated hereunder. The erection of the complete Plant shall be undertaken by the nominated Erection Contractor (Indian Contractor Mechanical) for which the Purchaser will enter into a separate Contract with the Indian Contractor Mechanical based on the offers available.
Any default/deficiency in the execution of this Agreement for supply and supervision will not be considered as an excuse for claiming extra amount by the Indian Contractor Mechanical in the erection Contractor and vice versa and default/deficiency in the execution of erection Contract should not be a ground for claiming extra amount by the Contractors under this Agreement. Similarly, any default/ deficiency in the execution of the separate Agreement between the Purchaser and Stein Heurtey (as described in Article 2.2 hereunder) for supply and supervision will not be considered as an excuse for claiming extra amount by the Indian Contractor Mechanical in the erection Contract and the Prime Contractor under his overall responsibility shall ensure that no claims are made by Stein Heurtey in their separate Agreement with the Purchaser arising out of any default/deficiency in the execution of the erection Contract by Indian Contractor Mechanical as well as in the execution of this Agreement. Further, improper execution of erection work by the Indian Contractor Mechanical will not form an excuse for the Prime Contractor for insufficient performance of the guaranteed figures.
While the Indian Contractor Mechanical will be responsible directly to the Purchaser through the separate Contract as aforesaid, for performing the erection of Plant as per his scope of work properly, the Prime Contractor will be fully responsible for overall coordination.
2.1 The Prime Contractor has appointed GFA-Anlagenbau GmbH of Federal Republic of Germany as Foreign Major Sub-Contractor for Technical Assistance through Supervision of erection, etc., for the mechanical equipment and for Technical Assistance through Supervision during manufacture of Indian Equipment including overall coordination of activities.
2.2 The Prime Contractor had originally propose Stein Heurtey of France as the Foreign Major Sub-Contractor for foreign part of the furnace for the Wire Rod Mill. However, the Purchaser has decided to enter into a separate direct contract with Stein Heurtey in order to utilise the French Protocol Credit. The Prime Contractor has, however, agreed that their overall responsibility for coordination and intregrated performance of the Plant including performance guarantees would not be affected in any way by such an arrangement.
The details of Furnace Foreign Part (Stein Heurtey) have been retained in this Agreement for information only for reasons of completeness. Notwithstanding that a separate Agreement will be entered into between the Purchaser and Stein Heurtey, the Prime Contractor shall be responsible for all the obligations and responsibilities of Stein Heurtey arising out of this separate Agreement between the Purchaser and Stein Heurtey. Notwithstanding the details of Furnace Foreign Part (Stein Heurtey) are included in this Agreement for information and reasons of completeness, the obligations of the Prime Contractor, whereever it has reference to the Plant, shall include for Furnace Foreign Part also.
2.3 For the foreign part of the electrics Siemens AG of Federal Republic of Germany is the Foreign Major Sub-Contractor Electrics.
The Indian Contractor Electrics has a collaboration agreement with Siemens AG. Siemens AG shall be the Foreign Major Sub-Contractor Electrics to the Indian Contractor Electrics.
2.4 Unless repugnant to the context, the Foreign Major Sub-Contractors mentioned at Articles 2.1, 2.2 and 2.3 hereof are collectively hereinafter referred to as Foreign Major Sub-Contractors.
2.5 For the manufacture and supply of the indigenous Equipment, the Indian Contractors shall appoint their Indian Major Sub-Contractors with the prior approval of the Prime Contractor and the Purchaser.
Approval of the Purchaser is subject to the provisions of Article 6 of the General Conditions of Contract. List (Panel) of such Indian Major Sub-Contractors shall be furnished to the Purchaser. The decision of the Purchaser regarding designating any Sub-Contractor as Indian Major Sub-Contractors shall be final and binding and the Purchaser will not be unreasonable in this regard.
Notwithstanding the Supply of indigenous Equipment including commissioning spares, tools and tackle, operating supplies, spares required for operation and maintenance, directly by the Indian Contractors to the Purchaser's Site/Railway siding, the Prime Contractor shall remain wholly liable to perform, fulfil and discharge all the obligations and responsibilities under this Agreement for the design, manufacture, delivery of the Plant, workmanship and the satisfactory performance in all respects as well as the overall coordination of the integrated supply and of all obligations under this Agreement (excluding erection) and the same shall not in any way be reduced, diminished or absolved for any reason whatsoever.
Notwithstanding the fact that the Purchaser has made separate arrangements for making direct payments in favour of the Indian Contractors and the Foreign Major Sub-Contractors in respect of indigenous and imported equipment, supplies and services from the aforesaid Indian Contractors and Foreign Major Sub-Contractors, as per this Agreement, the Prime Contractors shall remain liable to perform, fulfill and discharge all the obligations and responsibilities under this Agreement for the design, manufacture, delivery of Plant, its workmanship and satisfactory performance in all respects and the same shall not in any way be reduced, diminished or absolved for any reason whatsoever.
Article 5 deals with the date of commencement, Article 6 enumerates the various schedules forming part of the agreement, Article 7 enumerates the annexures forming part of the agreement and Article 8 adopts the meaning of the terms used in the Purchaser's General Conditions of Contract. Articles 9 and 10 read as under :- (a) The several Schedules listed in Article 6 above and forming part of this Agreement are to be taken mutually explanatory to one another. However, in case of conflict between the Schedules and the documents listed in Article 7 above, the provisions contained in the Schedules shall prevail. Further, in the event of any conflict between Annexure I and other Annexures hereto, other Annexures shall prevail.
(b) The headings of the Schedules and the Annexures hereto are for the sake of convenience only and shall not be construed as affecting the scope, context or interpretation thereof or any other provisions of this Agreement.
There are no understandings or agreements between the Purchaser and the Contractors which are not fully expressed herein including the Schedules referred to in Article 6 and the documents mentioned in Article 7 hereof and no statement or agreement, oral or written, made prior to or at the signing hereof shall affect or modify the terms hereof otherwise be binding on the parties hereto. No modifications or amendments to this Agreement including Schedules and Annexures hereto shall be valid unless the same is agreed to in writing by the parties hereto, specifically stating the same as an amendment to this Agreement.
In consideration of the payments to be made by the Purchaser, the Contractors shall be responsible for and perform the following : 1.1.1 Design and Engineering for one complete Wire Rod Mill together with their auxiliaries more fully described in the Contract Specifications hereinafter referred to as the 'Plant' with the supply of both indigenous as well as imported Equipment, so as to make the Plant complete in all respects in accordance with Article 7 of the Purchaser's General Conditions of Contract having a guaranteed capacity to produce, inspect and handle 6,00,000 tons of finished wire rods as per the specified product mix set out in Schedule-8 hereto in specified hours as set out in the Contract Specifications hereto at 1.4 million tonnes liquid steel stage of Visakhapatnam Steel Project with an inbuilt capacity as more fully described in the Contract Specifications. In order to ensure the adequacy of handling facilities the Purchaser will make available to the Prime Contractor the details of cranes foreseen by the Purchaser and the Prime Contractor will furnish his request of crane capacity, types, lifting tackle, etc., sufficiently well in time to the Purchaser to install the cranes and provide tackle, etc., in line with the Prime Contractor's such request.
1.1.1.1 The Contractors taking into account the requirements of the Purchaser have furnished the Contract Specifications which have been accepted by the Purchaser. The Contract Specifications shall be treated as binding documents for the purpose of determining the scope of supply under this Agreement. If these Contract Specifications are incomplete or ambiguous in any respect, the relevant correspondence listed in Annexure I shall be binding on the Purchaser and the Contractors. Notwithstanding the aforesaid, the Prime Contractor shall remain liable for completeness of the design and engineering of the Plant and the Indian Contractors be responsible for their respective portions of scope of work. During the course of designing of the Plant, if the Contractors desire to make changes in the nomenclature and quantity as well as to modify the design of certain Equipment with a view to improving the design/performance of certain units, the Contractors can do the same only with the recommendation of Prime Contractor and with prior approval of the Purchaser. Once these modifications are agreed upon by the Purchaser in writing, they will become an integral part of the Contract.
1.1.2 The Contractors shall coordinate their part of the Plant and services with those to be procured from their Sub-Contractors so that the overall Schedule of Delivery is met and so as to make the Plant complete in all respects, it being agreed and understood that the Contractors shall remain responsible and liable to the Purchaser for the work being done by the Foreign Major Sub-Contractors and the Indian Sub-Contractors.
1.1.3 Any electrical schemes/layout drawings in the Indian Contractor Electrics' scope of supply shall be submitted to the CIEG, Andhra Pradesh, by the Indian Contractor Electrics on behalf of the Purchaser for obtaining approval. However, the Purchaser will pay the necessary fees and complete the other formalities and the Indian Contractor Electrics on behalf the Purchaser for obtaining approval shall follow-up the same with CIEG, Andhra Pradesh. Any modification required by the CIEG, Andhra Pradesh, for electrical equipments being supplied by the Indian Contractor Electrics shall be carried out by them without any additional charges to the Purchaser. However, any modification/ additional facilities required for the layout area/equipments not covered under the Indian Contractor Electrics' scope will be taken care of by the Purchaser.
1.2.1 The Prime Contractor and the Foreign Major Sub-Contractor Electrics and Stein Heurtey shall supply all the imported Equipment as specified in the Contract Specifications, on for FOB Ports of Shipment basis within the time stipulated in Schedule-3, para 3.2.1.
1.2.2 The details of imported Equipment to be supplied under this Agreement are mentioned in Annexure II and Annexure III hereto.
1.2.3 The Indian Contractors shall supply to the Purchaser the indigenous Equipment including the necessary foundation bolts and special inserts on for Visakhapatnam Steel Project Railway siding basis in case of despatches by rail or FOR Plant Site/Stores basis in case of despatches by road within the time stipulated in Schedule-3, para 3.2.2. The Contractors shall also be responsible for the workmanship, quality, delivery and performance of Equipment supplied by their Sub-Contractors.
The details of indigenous Equipment are mentioned in Annexure II hereto.
Article 1.2.4 provides for Technical Assistance through Supervision during manufacture of Indian Equipment by GFA-Anlagenbau GmbH appointed as per Article 2.1 of the agreement. Other articles are not relevant for the purposes of these appeals and hence they are not being reproduced. Schedule-2 provides for the consideration as follows : The Contract Prices for the contractual obligations of and work to be performed by the Contractors together with Foreign Major Sub-Contractors under this Agreement are set out below.
2.1 Foreign part mechanical equipment and services (PRIME CONTRACTOR 'S SCOPE OF WORK) 2.1-2 Design and Engineering Fees and Reimbursement of Expenses thereof Item 2.2 deals with consideration for the scope of work done by GFA. Item 2.3 onwards deals with electrical and other equipments and services.
13. In Light and Medium Merchant Mill contract, the amount in dispute is the aggregate receipt of 2,59,55,000 DM out of which receipts in assessment year 1985-86 are 1,05,64,399 DM and in assessment year 1986-87 77,73,873 DM. The other dispute is with regard to training services receipt of the aggregate amount of 29,42,000 DM out of which the receipts in assessment year 1985-86 are 11,97,474 DM and in assessment year 1986-878,81,168 DM. In this agreement, the main contractor is MECON and the assessee is the confirming party. The Preamble to this agreement reads as under: Whereas the Purchaser proposes to establish a Light and Medium Merchant Mill (hereinafter referred to as 'Plant'), as a part of the integrated steel plant being established at Visakhapatnam for producing rounds, rebars, angles, channels, tees, etc.
Whereas the Contractor has entered into a know-how Licence Agreement dated 22-2-1981 with Confirming Party for obtaining and has obtained the technical know-how and knowledge owned or possessed by SMS relating to Light and Medium Merchant type of rolling mills along with related auxiliary equipment for such rolling mills, Whereas the Contractor has assured the Purchaser that the Plant to be designed and supplied by the Contractor to the Purchaser would be based on the technical know-how, knowledge and data owned or possessed by SMS and the detailed design and engineering of the Contractor for the Plant would also be in accordance with the aforesaid know-how from SMS. Whereas the Contractor has stated that SMS in its capacity as the Confirming Party hereto and also in its capacity as the Major Sub-Contractor shall render plant design and engineering services, supervisory services, training services, etc., as agreed to by the Contractor in this Agreement with the Purchaser; Whereas both the Contractor and the Confirming Party have agreed to jointly fulfil the obligations as stated in this Agreement at such times as manner so as to ensure design, manufacture and delivery of Equipment as per the technological quality standards prescribed by SMS and as per the delivery schedule and provisions contained in this Agreement including supervision of erection, commissioning and consideration of performance guarantee tests.
Under Article 1, though the Indian Contractor covenanted to perform the work as per Schedule-1, both MECON (India) and SMS were "jointly responsible for the obligations of the completeness of the plant for its successful sustained integrated operation and for due and faithful performance of all the Contractor's obligations as specified in this Agreement. Under Article 2, there were 7 Major Sub-Contractors including SMS, who had undertaken different segments of work relating to supply and supervision of mechanical, furnace and electrical parts of the contract. Though joint responsibility of SMS and MECON was envisaged, unlike the WRN contract, the primary responsibility for the performance of this contract through coordination, guarantee, etc., rested with the Indian contractor which had possibly ensured collaboration of SMS and other foreign sources through separate agreements which are not relevant for the present purpose. The following excerpts from the Schedules are relevant: In consideration of the payments to be made by the Purchaser, the Contractor shall be responsible for and perform the following : 1.1.1 Design and engineering for one complete Light and Medium Merchant Mill together with their auxiliaries more fully described in the Contract Specifications (hereinafter referred to as the 'Plant') with the supply of both indigenous as well as imported Equipment, so as to make the Plant complete in all respects in accordance with Article 7 of the Purchaser's General Conditions of Contract having a guaranteed designed and engineered capacity to produce, inspect, transfer and stack 710,000 tonnes of finished Light and Medium Merchant Products as per the specified product mix set out in Schedule 8 hereto and similarly produce, inspect, transfer and stack 798,000 tonnes of 125 X 125 mm billets for Wire Rod Mill and for sale in specified hours as set out in the Contract Specification at 3.4 million tonnes liquid steel stage of Visakhapatnam Steel Project as more fully described in the Contract Specifications. In order to ensure the adequacy of the handling facilities the Purchaser will make available to the Contractor the details of cranes foreseen by the Purchaser and the Contractor will furnish his requests of crane capacity, types, lifting tackles, etc., sufficiently well in time for the Purchaser to install the cranes and provide tackles, etc., in line with Contractor's such requests.
1.1.1.1 The Contractor taking into account the requirements of the Purchaser has furnished the Contract Specifications which have been accepted by the Purchaser. The Contract Specifications shall be treated as binding documents for the purpose of determining the scope of supply under this Agreement. If these Contract Specifications are incomplete or ambiguous in any respect, the relevant correspondence listed in Annexure 1 shall be binding on the Purchaser and the Contractor. Notwithstanding the aforesaid, the Contractor and Confirming Party shall remain liable for completeness of the design and engineering of the Plant. During the course of designing of the Plant, if the Contractor desires to make changes in nomenclature and quantity as well as to modify the design of certain Equipment with a view to improving the design/performance of certain units, the Contractor can do the same only with the prior approval of the Purchaser. Once these modifications are agreed upon by the Purchaser in writing they will become an integral part of the Contract.
1.1.1.2 The Contractor shall coordinate his part of the Plant and services with those to be procured from his Sub-Contractors so that the overall schedule of delivery is met and so as to make the Plant complete in all respects, it being agreed and understood that the Contractor shall remain responsible and liable to the Purchaser for the work being done by the Sub-Contractors.
1.2-1 The Contractor shall be responsible for supply of all the drawings and technical documents and information in respect of this Agreement as listed in Article 11 of the Purchaser's OCC modified and agreed as per Schedule-7 hereof.
The Contractor and the Confirming Party shall take necessary steps for the Purchaser to arrange for separate Cooperation Agreement valid for all countries other than the Australian territory, USA, Canada, Mexico, Federal Republic of Germany, France, Grant Britain, Netherlands, Italy, Belgium Denmark, Ireland, Greece, Luxembourg, Norway, Finland, Sweden, Austria, Portugal, Spain and Switzerland, between the purchaser and Tempcore Association/CRM at no additional cost to the Purchaser. The Confirming Party has also informed the Purchaser that for the aforesaid Licence Agreement, there shall be no fees or other payment recurring or non-recurring to be made by the Purchaser.
1.4-1 The Contractor shall arrange for training abroad of the Purchaser's personnel to the extent of 347 man-months (including 92 man-months in Steel Plants) for design, operation and maintenance of Plant as per details at Annexure XII hereto.
1.4-2 The Contractor shall give a detailed training programme for every Purchaser's trainee well in advance of his arrival at the place of training. The training programme can be changed by mutual agreement of the parties hereto depending on the requirements. The Contractor shall supply all training manuals, (one reproducible wherever available and five copies), instructions and other connected literature in six copies to the Purchaser in English language. In addition, each trainee shall also receive a copy of such training manual, instructions and other connected literature.
The Contractor shall also arrange for a technical orientation course to be imparted in English language to the Purchaser's trainees and arrange for necessary English speaking personnel to explain the operation, maintenance and design features to the Purchaser's trainees.
1.4-3 The training services referred to in para 1.4.2 hereinabove shall be arranged by the Contractor through the Foreign Major Sub-Contractors. The prices for such training services are mentioned at para 2.1 of Schedule 2. The travelling and living expenses of the Purchaser's trainees shall be borne by the Purchaser, The Contractor shall, however, assist in arranging medical insurance for such trainees.
1.5.1 The Contractor shall depute his and/or Confirming Party's/ foreign Major Sub-Contractors' engineers/experts for carrying out inspection of the Equipment and Materials, supervision during its manufacture and test and test runs as well as at the time of shop acceptance and pre-assemblies in respect of the Equipment to be manufactured by the Indian Sub-Contractors to satisfy himself and to ensure the quality of the indigenous Equipment being manufactured so that the overall production guarantee as well as the other obligations under this Contract are met by him. The number of such experts, their duration of stay in India and the places in which they will be posted shall be adequate and shall be discussed and mutually agreed upon. Such inspections shall not absolve the Contractor from his obligations including performance guarantees hereunder.
Articles 1.6 onwards deal with supply of plant etc. Article 1.10 deals with supervision and reads as under : 1.10 Deputation of experts for supervision of erection Commissioning and performance guarantee tests 1.10.1 The erection of the Plant shall be the responsibility of the Purchaser. The Contractor/Confirming Party/Major Sub-Contractor shall depute his/Confirming Party's/Indian and Foreign Sub-Contractor's experts to the Site to supervise the following : Erection, commissioning and conducting of Performance guarantee tests and proving of guarantees of the Plant with their auxiliaries as contracted hereunder so as to establish to the Purchaser that the guarantees as agreed by the Contractor in accordance with Annexure XIV hereof are fully met.
1.10.2 The Contractor guarantees that for the complete work mentioned at para 1.10-1 hereinabove, the number of experts to be deputed to Site shall not exceed the following :....
2.1 The Contract price for all the contractual obligations by the Contractor together with Major Sub-Contractors - foreign or Indian -under this Agreement is set out below. All the payments payable in respective currencies are on FOB Port of Shipment or FOR Visakhapatnam Railway Sidings/FOT site basis.
2.1.1 Mechanical Equipment and Services (SMS scope of work) Contract PricesEquipment & Commissioning Spares DM 95,757,000 (DM Ninety Five2.1.1.2 Engineering Fees and Training Services Abroad: (a) Engineering Fees including DM 25,955,000 Fees for Tempcore and cost (DN Twenty Five of Importation of Drawings Million Nine including Reimbursements.
Hundred Fifty Five Thousand only) Abroad (190 man-months) DM 2,942,000 (DM Two Million NineSpares for 2 years of operation DM 9,759,000and maintenance.
(DM Nine Million Seven Hundred 14. In both the agreements, there is a Schedule-7 styled as "Purchaser's general conditions of contract". Article 11 thereof enlists elaborately the details of the nature of drawings, lay-outs, business data, manuals, etc., to be submitted by the assessee for erection of different plants. The following brief description in this regard as prepared by the technical personnel of VSP was submitted by the assessee before the CIT(Appeals): Nature of drawings, data and documents submitted by foreign suppliers for LMM & WRM This shows the disposition of all equipment within the shop indicating co-ordination and tie up dimensions. This is submitted for approval so that the supplier can go ahead with further engineering.
This shows the plan of each equipment indicating co-ordinates and tie up dimensions. This is submitted for approval to ensure equipment meets the parameters specified in the contract. After approval, this becomes the basis for the party to go ahead with the manufacturing of equipment.
This shows the schemes of hydraulic lubrication and water systems.
This is submitted for approval to meet parameters of contract. After approval the party goes ahead with manufacture/selection of equipment.
This shows the requirement of compressed air, nitrogen, steam, gas, etc., by the party for operation of the plant. This requirement has to be met by VSP. Single line drawings, general arrangement drawings for electrical equipment, interlocking and sequence control drawings, etc., are submitted for approval prior to manufacture of electrical equipment.
Based on this, VSP will have to meet the power requirement for running the plant.
These drawings show the requirement of foundation for each equipment. VSP has to construct the foundation as per this.
These drawings indicate the levels, alignment and sequence of erection. These are used for erection of plant.
These are normal operation and maintenance manuals generally given along with the equipment.
All layouts, general arrangement drawings, flow diagrams, electrical drawings, spare parts and operational parts drawings incorporating changes made during erection and commissioning of the plant. These drawings are used for operation and maintenance of plant and equipment.
From the above it is, in our opinion, an irresistible conclusion that the consideration for drawing and design and also engineering services received by the assessee would be fees for technical services within the meaning of Explanation 2 to Section 9(1)(vii) of the IT Act. We, therefore, hold that the CIT(Appeals) was right in holding that the receipt by the assessee was a receipt in the nature of fees for technical services both under AADT and IT Act.
15. The CIT(Appeals), however, held that though it was a receipt for technical services both under AADT and the IT Act, the same could not be subjected to tax because the receipt was in connection with erection and commissioning of the plant which is excluded from the later part of the definition of the term "fees for technical services" given in Explanation 2 to Section 9(1)(vii) of the IT Act. His further finding is that though it was a fee for technical services under the AADT, it would not be taxable in India because of the later part of the definition of the expression "fees for technical services" as the object of AADT was to avoid double taxation and not to bring a receipt to tax if it was not chargeable under the IT Act. On going through the various terms of the agreements, the provisions of the AADT and Section 9(1)(vii) of the IT Act read with Explanation 2 thereunder, we are of the opinion that the finding of the CIT(Appeals) for deleting the receipt from the income of the assessee is not correct.
16. A close reading of the two agreements shows that the erection of plant is excluded from the purview of the assessee's scope of work.
Para 3 of Art. 1 in WRN contract, extracted above, specifically states : The erection of the Plant is excluded from this Agreement and from the scope of work to be undertaken by the Prime Contractor as stated hereunder. The Erection of the complete Plant shall be undertaken by the nominated erection Contractor (Indian Contractor Mechanical) for which the Purchaser will enter into a separate Contract with the Indian Contractor Mechanical based on the offers available.
Similarly, para 1.10.1 in LMM agreement specifically states that "the erection of the Plant shall be the responsibility of the Purchaser" (i.e., VSP) and the assessee and other parties are to depute their experts to supervise the erection, commissioning and conducting of performance guarantee tests, etc. The CIT(Appeals) himself states this in para 21 of his order in the following words :-- The most significant fact in this regard is noted in Para 3 of Article 1 of W.R.M. Contract that the erection of the Plant was excluded from the Contract Agreement as also from the scope of work undertaken by S.M.S. In L.M.M.M. contract, there was clear stipulation in Para 10 of Schedule 1 that erection was the responsibility of V.S.P. with export advice and supervision provided through deputation of personnel belonging to other contracting parties....
It is, therefore, in our opinion, clear that the assessee was not paid for the services as consideration for "construction, assembly or mining" within the meaning of the last portion of the definition of "fees for technical services" given in Explanation 2 to Section 9(1)(vii) of the IT Act. In spite of this finding of his, the CIT (Appeals) held that overall guarantee undertaken by S.M.S. in providing proper Engineering Designs and in supervision of erection and performance of the Plant and also for coordinating activities of all Contractors would not give rise to any income earned in India even by way of the deeming provisions envisaging taxation of services rendered outside India and that this was because all these technical services were in connection with construction of the project. We do not find any merit or rationale in his finding to exclude the consideration from the income of the assessee. What is to be excluded is "consideration for any construction, assembly, mining or like project undertaken by the recipient". It is the receipt of consideration for any construction, assembly, etc., and not for the services of supervision thereof. The assessee is not doing, nor has it undertaken under the agreement, the work of construction or assembly of the plant in India.
17. The mere connection of supervisory services undertaken by the assessee would not, in our opinion, be tantamount to undertaking of the construction or assembly of the plant which could exclude it from the definition of "fees for technical services" given in Explanation 2 to Section 9(1)(vii) of the IT Act. To be eligible for being excluded from the definition of "fees for technical services", the receipt of consideration has to be for construction and assembly by the assessee itself and not for its supervision alone. Construction or assembly as such is to be undertaken by the assessee but not mere supervision thereof, under the agreement. The finding of the CIT(Appeals) to this extent is, therefore, not correct, factually as well as legally. We vacate the same.
18. Sri S.E. Dastur, learned Counsel of the assessee, however, contended that the consideration for supervisory services, if considered as not for construction or assembly, could be taken to be a consideration for a "like project" appearing in Explanation 2 to Section 9(1)(vii) after the words "construction, assembly, mining". The supervision and design and engineering services are directly and intimately connected with the erection of the plant and machinery and, therefore, it should be treated as a kind of consideration for a "like project" under Explanation 2 to Section 9(1)(vii). Here also, we do not find any merit in the contention of the assessee. The term "like project" has to be understood in the light of the preceding words "construction, assembly, mining", that is, by following the principle of ejusdem generis, if the consideration for erection and commissioning can be, and as we have held it is, for doing these activities by the recipient of the consideration himself, the consideration for a like project has also to be likewise done and undertaken by the recipient thereof. When supervisory services cannot form part of construction, assembly or mining, the same has to be excluded from the term "like project" as well. A like project has to be a project done by the assessee and not mere supervision thereof. Supervision alone cannot be termed as a "project" falling in the family of terms "construction, assembly and mining". We, therefore, do not find any merit in the contention of the assessee which can support the order of the CIT (Appeals). As the receipt is "fees for technical services" under the IT Act and not excluded by the last portion of the definition of that expression given in Explanation 2 to Section 9(1)(vii), the same would be fees for technical services both under the AADT and the IT Act and, therefore, there would be no apparent conflict as anticipated and discussed by the CIT(Appeals). The question as to which law, AADT or IT Act, is to prevail thus becomes academic in this case and we do not wish to express any opinion thereon.
19. It is true that drawings and designs were supplied in connection with the equipment but that does not exclude it from being treated as a technical service. When a receipt satisfies the ingredients of Section 9(1)(vii) and Explanation 2 thereunder, it has to be treated as fees for technical services irrespective of the fact that it has a relation to the supply of plant and equipment. Under the scheme of the agreements, the assessee was to prepare drawings and designs and render other engineering services and also to make available the benefits of the latest Morgan know-how possessed by it under the WRM agreement.
These designs and engineering services are tailor made and not readymade or "from the shelf". The assessee is to arrange the supply of plant and equipment and spares in accordance therewith enabling VSP to set up the two mills in India. Whereas these services are to be rendered by the assessee, the supply of the equipment and spare parts is not only and necessarily by the assessee alone, but by many others, overseas as well as Indian concerns enumerated in the two agreements.
The supply follows the services and not vice versa as was the position in the case of Klayman Porcelains Ltd. (supra) a decision by the Hyderabad Bench of the ITAT, and Hindustan Shipyard Ltd.'s case (supra) a decision by the Andhra Pradesh High Court.
20. In the case of Klayman Porcelains Ltd. (supra), engineering data were held to constitute plant and, therefore, it was held that the supply of the same from abroad would have the same consequences as the supply of materials. It was a case where the Revenue attempted to bring to tax the payment received for the supply of engineering data as 'royalty' within the definition under Section 9(1)(vii). The Tribunal held that all the documents related to the kiln which was specifically designed for the Indian company's use, that the Indian company was not interested in the designs, etc., and had to pay for them as part of the cost of construction of the kiln, that it had no intention to exploit the technical data even for construction of another kiln for itself, leave alone for others, and that the Indian company's consistent and repeated argument that the designs were not acceptable of being understood by its engineers, much less of being used by them for exploitation of the drawings, could not be ignored altogether. The impugned receipt, therefore, it was held, did not come under Clause (i) of Explanation 2 to Section 9(1)(vi) relating to transfer of assets or Clause (ii) relating to imparting of information or Clause (iii) relating to use of any patent, etc. It was further held that the Revenue's attempt to show that it might be 'imparting of any information concerning technical, industrial, commercial dr scientific knowledge, expertise or skill' under Clause (iv) or rendering of service in connection with aforementioned articles under Clause (vi), must also fall as the Indian company was not interested in the information and had not paid for any information as such. It was further held that there was also no service done in connection with the supply in relation to the payment. The present is not a case of Royalty under Section 9(1)(vi). It is a case where the receipt is in the nature of "fees for technical services" within the meaning of Explanation 2 to Section 9(1)(vii) of the IT Act. In the case of Klayman Porcelains Ltd. (supra), the foreign company undertook to supply, erect and commission a kiln in India, the only service rendered in India being that of supervision by an expert deputed by the foreign company and it was specifically stated that the remuneration for such supervision was separately paid for and the tax liability in respect of such services was not the matter before the Tribunal. That case, therefore, is of no help to the assessee.
21. In the case of Hindustan Shipyard Ltd. (supra) before their Lordships of the Andhra Pradesh High Court, the facts are that the assessee entered into an agreement with a Polish company for the purchase of diesel engines with accessories. The agreement made detailed provisions for inspection, testing and acceptance of the engines. The engines were agreed to be erected by the staff of the purchaser under the supervision of the erector and a supervising engineer was placed at the disposal of the purchaser by the Polish company. The Polish company agreed to supply an erector and supervising engineer for a period of 12 months for every ship free of charge and to provide free of cost one guarantee engineer for a period of 6 months on board the ship. On these facts, the High Court held that though the Polish company agreed to render certain limited services, the services were connected with the effective fulfilment of the contract of sale and were merely incidental to the contract and were usually included in all such contracts by way of guarantee of the efficient working of the products sold. In that case, the question with regard to application of Section 9(1)(vi) was not a subject-matter of consideration. The assessment years involved were 1967-68 to 1970-71, i.e., before the introduction of Clause (vii) of Sub-section (1) of Section 9 in the statute w.e.f. 1-6-1976. As we have already held, when a particular receipt of consideration satisfies the ingredients of the provisions of Explanation 2 to Section 9(1)(vii), it has to be treated as a fee for technical services irrespective of the fact that the services were incidental to and were connected with the supply of the equipment. This case of Hindustan Shipyard Ltd. (supra) also is of no help to the assessee.
22. The fact that the design and engineering services rendered by the assessee would form part of plant in the hands of the purchaser in view of the decision of the Supreme Court in the case of Scientific Engg.
House (P.) Ltd. (supra) and in the case of Challapalli Sugars Ltd. (supra) would not, in our opinion, take the receipt by the assessee out of the purview of Section 9(1)(vii). It may be a capital disbursement insofar as the purchaser is concerned, but that does not necessarily mean that it would be a capital receipt in the hands of the recipient or a receipt for the supply of a capital asset. The assessee entered services to the VSP by preparing the design and rendering engineering services to enable the latter to set up the two mills in India under its supervision by importing equipment and spares not only from the assessee but from many others as well. These services, insofar as the assessee is concerned, are in the nature of technical services and the receipt of consideration therefor would, in our opinion, be chargeable to tax under Section 9(1)(vii) read with Explanation 2 thereunder. We accordingly reverse the order of the CIT(Appeals) and restore that of the Assessing Officer to this extent.
23. It was stated at the time of hearing that the agreement provided for separate consideration for the supply of spare parts and for design and engineering services and, therefore, it would not be permissible for the assessee to submit that the fees for design and engineering services would also be part of the supply of equipment as the two agreements are separate. After considering the rival submissions, we are of the opinion that what has to be seen is the substance of the matter and not the form. Even though two agreements are separately entered into by the assessee if in fact they constitute one and a single agreement, they are to be understood as such irrespective of the fact that for one payment the price is paid and for the other a fee. We have gone through the various terms and conditions of the agreements and, as aforesaid, the amount received by the assessee for design and engineering services being assessable under Section 9(1)(vii) as fees for technical services, this question really does not require any consideration and we are not resting our decision on the basis of the argument of the Revenue based on the decision of the Bangalore Bench of the Tribunal in the case of AEG Aktiengesselschaft (supra), wherein it was held that when a separate consideration is provided for design and engineering services under the agreement, it cannot be considered as a part of the supply of plant and machinery merely on that ground.
24. In the assessee's appeals for assessment years 1985-86 and 1986-87, the only issue which remains for consideration is the nature of receipt for imparting training to the employees of VSP under the LMMM contract.
The relevant clause is Clause 1.4 of the agreement which has been extracted by us in paragraph 13 of this order. This is held to be a part of "fees for technical services" by the CIT(Appeals) by observing as under:-- ...As noted earlier, the scope of work For SMS in this regard was to impart training for 190 man-months out of total 347 man-months.
Under Annexure XII of the Contract Agreement, there were elaborate provisions regarding the tentative training programme under various jobs like mechanical and electrical operations of existing Merchant-Bar Mill in Germany and in the SMS workshop. The practical training Schedule gives break-down lists of the number of trainees, nature of important jobs and the period, i.e., man-months in each job. There is, however, a clause regarding list of exclusions which contains that certain costs are not included in the price received by SMS. These are travelling, boarding, lodging, salary, insurance and other incidentals so far as personal benefits of the trainees in Germany are concerned. It was also mentioned that in case such services are provided by SMS at the specific request of the purchaser, these will be separately charged to latter. After going through these details, I am satisfied that the payments towards training services would be clearly liable to tax as 'fees for technical services' being lumpsum consideration for rendering appropriate technical training to the personnel of VSP not in connection with the construction of the Steel Plant Project in India but for its operation and running even after the projects were set up. The reliance on the decision in 22 ITD 87 would not be appropriate as the payments would neither be treated as reimbursement of actual expenses for imparting of training nor would partake the character of Royalty. The training services abroad are clearly in the nature of technical services to VSP so that its personnel are well equipped to run the Plants after their commissioning and the related lumpsum payments were fees within the meaning of Article VIII-A(4) of AADT r.w.s. 9(1)(vii). Therefore, I uphold the action of the ITO for the assessment years 1985-86 and 1986-87 with regard to taxability of the relevant receipts towards training services, as noted under item-2(b) at page 3 of this order.
In view of the specific finding of the CIT(Appeals) that the payments towards training services would be clearly liable to tax as 'fees for technical services' being lumpsum consideration for rendering appropriate technical training to the personnel of VSP, not in connection with the construction of the Steel Plant Project in India, but for its operation and running even after the projects were set up, it would be assessable under Section 9(1)(vii) of the IT Act. As the payments were made neither as reimbursement of actual expenditure for imparting of training nor do they partake of the character of 'royalty', the relience on the decision of the Special Bench of the Tribunal in the case of Siemens Aktiengesellschafi v. ITO[1987] 22 ITD 87 (Bom.), would not be of any help to the assessee. It is a technical service rendered by the assessee to VSP so that its personnel are well-equipped to run the mills after their commencement. The CIT(Appeals) was, in our opinion, justified in holding that the fees for training the employees were in the nature of "fees for technical services within the meaning of the Section 9(1)(vii) of the IT Act. We uphold his order on this aspect.
25. In the result, the appeals by the Revenue are allowed and the appeals by the assessee are dismissed.