1. These cross appeals are directed against the order of the CIT(Appeals) dated 28-11 -1989 for the assessment year 1984-85. We may mention that these appeals were decided earlier, but the order of the Tribunal was recalled vide order dated 9-1-1997 in M.A. No. 139/Mum/96.
The grounds taken by the assessee in its appeal read as under :- 1. The learned Commissioner of Income-tax (Appeals) erred in law and on facts in not accepting the assessee's contention that the amount of Rs. 99,97,462 received by way of fees for supervision of construction and erection in terms of the Agreement dated 15-2-1981 with RCF Ltd. was in the nature of fees for technical services and was not management charges and, hence, was not liable to Indian income-tax under the IT. Act, 1961, read with the relevant provisions of the Agreement for the Avoidance of Double Taxation of Income between India and Denmark.
2. Without prejudice to the above ground of appeal, the learned CIT (Appeals) erred in law and on facts in rejecting the appellant's alternative contention that, in any event, having regard to the nature of services specified in Article 2.11. of the said Agreement with RCF Ltd. for which the amount of Rs. 99,97,462 was received by HTAS, the greater part of this amount could be properly regarded only as fee for technical services and not as management charges and, hence, was not liable to tax.
1. On the facts and in the circumstances of the case and in law, the learned CIT(Appeals) erred in deleting the addition of Rs. 14,24,167 made in respect of service rendered for pre-commissioning and commissioning including test run and guarantee tests.
2. On the facts and in the circumstances of the case and in law, the learned CIT(Appeals) erred in deleting the addition of Rs. 5,22,839 made in respect of arranging for practical experience of Indian technicians.
2. The assessee is a Denish company. It entered into certain agreements with various companies for the provision of certain services and has received payment as per the terms of the agreements. The issue raised in these cross appeals relate to the amounts received by the assessee under two separate agreements entered into with Rashtriya Chemicals & Fertilizers Ltd. ("RCF"), a Public Sector Company registered under the Indian Companies Act, 1956. The first agreement is dated 15-2-1981 and the second is dated 19-7-1982. The first relates to the construction and erection of an Ammonia Plant and the second for the construction and erection of Cracking unit. There is a Double Taxation Avoidance Agreement entered into between Denmark and India dated 16-9-1959. There is also a subsequent agreement dated 8-3-1989 between the two countries. For the purposes of these appeals, we are concerned only with the earlier agreement.
3. The Assessing Officer brought to tax an amount of Rs. 99,97,462 described as payment for supervision of construction and erection under Article 4.06 of the agreement dated 15-2-1981. He has also brought to tax another amount of Rs. 14,24,167 described as payment for supervision of pre-commissioning and commissioning services in terms of Article 4.07 of the same agreement dated 15-2-1981. He has also brought to tax another amount of Rs. 5,22,839 described as payment for technical advisory services for technical co-ordination in terms of Article 4.2 of the second agreement dated 19-7-1982. The CIT(Appeals) upheld the addition of the amount of Rs. 99,97,462 but deleted the other two additions, i.e., Rs. 14,24,167 and Rs. 5,22,839. The assessee is in appeal against the confirmation of Rs. 99,97,462 and the department is in appeal against the deletion of the amounts of Rs. 14,24,167 and Rs. 5,22,839.
4. The Assessing Officer brought to tax the above-mentioned three amounts on the ground that they were payments for services of the nature of management charges. The CIT(Appeals) held that only the amount of Rs. 99,97,462 was payment for the services of the nature of management charges whereas the other two amounts were only payments for technical services rendered by the foreign company to the Indian concern. In this view of the matter, he upheld one addition and deleted the other two additions. The controversy raised in these appeals is regarding the nature of the services for which payments were received by the foreign company. There is also an issue whether the Departmental Representative can be permitted to argue at this stage that the assessee has no permanent establishment in India.
5. For understanding the nature of the issues raised in these appeals, it is necessary to refer to the terms of the Double Taxation Avoidance Treaty between India and Denmark dated 16-9-1959. Article III of this Treaty so far as it is relevant for our purpose stood as follows :- Article III(1). Subject to the provisions of paragraph (3) below, tax shall not be levied in one of the territories on the industrial or commercial profits of an enterprise of the other territory unless profits are derived in the first-mentioned territory through a permanent establishment of the said enterprise situated in the first-mentioned territory. If profits are so derived, tax may be levied in the first-mentioned territory on the profits attributable to the said permanent establishment.
(3) For the purposes of this Agreement the term 'industrial commercial profits' shall not include income in the form of rents, royalties, interest, dividends, management charges, remuneration for labour or personal services or income from the operation of ships or aircraft but shall include rents or royalties in respect of cinematographic films.
It may be observed that as per the above Article of the Treaty, industrial and commercial profits of a foreign enterprise are not taxable in India unless they are derived from a permanent establishment in India. It has also to be noticed that certain items of income like, royalties and management charges are excluded from the purview of industrial or commercial profits for the purposes of this agreement. In other words, if certain payments are received by the foreign company for management charges, they become taxable in India even though the foreign enterprise has no permanent establishment in India. If, on the other hand, the payments are received for technical services they are taxable in India only if the foreign enterprise has a permanent establishment in India. This is on the assumption that payments for technical services are an integral part of "industrial or commercial profits" referred to in Article 111(1) of the Treaty as such payments are not specifically excluded from industrial or commercial profits in the said Article. It is the contention of the learned counsel for the assessee that technical service charges are an integral part of "industrial or commercial profits" whereas the learned D.R. disputes that assumption. Similarly, it is the contention of the learned counsel for the assessee that the Denish company has no permanent establishment in India whereas the learned D.R. has sought to contend that this assumption is not correct. The position taken by the learned counsel for the assessee in this regard is that this controversy whether the assessee has a permanent establishment in India or not is a closed Chapter and cannot be raised before the Tribunal for the first time.
6. Having noticed the scope of the controversy, we may now turn to the terms of the two agreements entered into by the Denish company with the Indian concern. Article 1.01 of this agreement gives scope of the services rendered by the foreign company, which is described as Consultant. It reads as follows :- Consultant shall for the consideration provided hereunder, make arrangement for the following services to be performed for the Ammonia Plant: (ii) Prepare and supply process design and-engineering documentation.
(viii) Prepare or obtain and supply network schedules for all activities including those of Vendors and Sub-Contractors.
(ix) Provide services for procurement of spares and maintenance tools.
(xi) Associate Owner's representative to participate during design, engineering & procurement services.
(xii) Provide services for arranging transportation and shipping of Equipment.
(xiii) Provide construction management services. (xiv) Provide pre-comrnissioning services. (xv) Achieve the Guaranteed Completion Point. (xvi) Provide commissioning services.
(xvii) Provide post commissioning services after acceptance of Ammonia Plant.
(xviii) Arrange for practical experience of Owner's personnel in accordance with Article 2.17.
(xxiii) Furnish technical information and know-how as may be required for the operation of Ammonia Plant.
Article 2.01 provides that the Consultant has to provide certain nonexclusive, non-transferable rights to the Indian Company which is described as the owner and Consultant has also to furnish services of engineers, designers, etc., for the performance of work pursuant to the agreement.
Article 2.02 provides that the Consultant should provide the design and engineering for the Ammonia Plant.
Article 2.03 provides for drawing and documents to be supplied by the Consultant.
Article 2.04 provides for the services to be rendered by the Consultant for the procurement of equipment required for the Ammonia Plant which also stipulates that the Consultant shall secure services of Vendors specialised in installation and commissioning of the machinery.
Article 2.05 provides that the Consultant should help in obtaining import licences and other permits by preparing necessary data.
Article 2.06 relates to network schedule to be prepared by the Consultant and this Article reads as follows :- Consultant shall make available a Master Schedule indicating the important Milestones of activities relating to Work from Effective Date of Agreement to the acceptance of Ammonia Plant. Consultant shall also prepare a composite network schedule and shall obtain from Vendors/Sub-contractors the schedule of activities relating to the tasks to be carried out by them. Information from Vendor/Subcontractor shall be incorporated in consultant's bi-monthly computer printout indicating the status of Vendor/Sub-contractor activities in relation to Consultant's composite network schedule and if necessary the Master Schedule shall be updated.
Article 2.10 relates to the services to be provided for transporting and shipping of equipment which is bought from the Vendors.
Article 2.11 which relates to payment in question of Rs. 99,97,462 reads as follows :- Consultant shall provide services for the management of all activities relating to civil works, erection, site fabrication, piping, instrumentation, electrical installation, interpretation, of drawings and other miscellaneous construction jobs of Ammonia Plant leading to the Guaranteed Completion point. Consultant shall organise these activities in appropriate sequence and proper methods giving due regard to the requirements of safety, quality, sound engineering practice, compliance of relevant codes and regulations and for achievement of Guaranteed Completion Point. The Construction Management Services performed by Consultant shall also include the following :- (i) Preparation of the list of qualified contractors for the various construction activities in association with the Owner's representative.
(ii) Preparation of bid documents for tendering in association with Owner's representative.
(iii) Inviting and receiving sealed quotations to be opened in presence of Owner's representative.
(iv) Bid evaluation in association with Owner's representative including negotiations with prospective contractor where necessary.
(v) Preparation of work order stipulating all terms, conditions quality, time schedule and penalties for award of work by Owner.
Articles 2.12 and 2.14 relate to the payment of Rs. 14,24,167 and read as follows :- Consultant shall render and be responsible for supervision and direction of recommissioning activities leading to Guaranteed Completion Point of Ammonia Plant. These activities will include relevant checkings, adjustment, testing, calibration, running in and trial runs of individual equipments and other similar jobs. Owner shall provide experienced/trained and suitable operating and maintenance personnel who will perform their tasks under the supervision and direction of Consultant. Consultant shall provide experienced personnel as required for carrying out the supervision of pre-commissioning activities with Owner's personnel. Consultant on behalf of owner shall arrange for Vendor's specialists where required. Suitable provision for such services should be made by Consultant at the time of placing the Purchase Order.
Consultant shall render and be responsible for supervision and direction of commissioning after pre-commissioning activities are completed giving due regard to safety of equipment according to sound international practices.
The assessee has also to give a Performance Guarantee and the relevant Article 2.13 reads as follows :- Consultant shall be responsible for completing the design, engineering, procurement, inspection & expediting, arranging for transportation of Equipment, services for construction supervision and pre- commissioning for making Ammonia Plant ready for acceptance of feedstock according to the Guaranteed Completion Point.
Consultant shall guarantee Ammonia Plant completion point making the first 1350 MTPD Ammonia unit ready for accepting feedstock within 37 (Thirty-seven) months from the Effective Date of agreement and the second 1350 MTPD Ammonia unit within 41 (Forty-one) months from the Effective Date of Agreement.
The assessee has to assist the owner in co-ordination of various activities and Article 2.24 reads as follows :- Consultant shall assist Owner in achieving overall co-ordination of all work connected with the Project as described in Article 3.02.
Towards this end Consultant shall agree for a meeting as soon as practicable after the Effective Date of Agreement with Owner, FPDIL and such other parties as are necessary to settle the following :- (i) Review the basic design conditions set forth in final Proposal and where appropriate, review possibilities for standardisation.
(ii) Review the overall Steam and Power Network of Ammonia & Urea Plant and Off-Sites.
(iii) Assess the priorities and key dates required to be included in the Consultant's schedules.
(v) Fix up a date and agenda of any subsequent meeting as may be required in association with Owner/FPDIL/Sub-contractors.
(vi) Discuss with Pollution Consultant appointed by Owner and supply technical information to Owner about various pollution emission/discharge points from different sources indicating the quality, quantity of gaseous/liquid emission of pollutants from the Ammonia Plant. Consultant shall also supply to Owner any additional information required on the above matter during the performance of process design and basic engineering stage.
The payments to the Denish Company are governed by Article 4 and the relevant portion reads as follows :- Consultant shall receive gross lump sum fees as described in this article for the faithful performance of Work detailed in Article 1.01 through 2.26 of this Agreement leading to proving the performance guarantees & acceptance of Ammonia Plant by Owner. The Consultant Work will be classified as follows for the purpose of payment of fees only : (ii) Basic Design & Engineering package to be done and delivered in Denmark.
7. We are not concerned with the other payments described as Fixed fees, licence & know-how fees, Basic Engineering & Design package, etc., under Articles 4.01,4.02,4.03,4.04 and 4.05 of the Agreement in the present appeal.
Article 4.06 of the Agreement which relates to payment of Rs. 99,97,462 reads as follows :- US $ 5,359,091 (US Dollars five million, three hundred fifty-nine thousand ninety-one only) being the gross lump sum fees corresponding to 315 man-months for supervision of construction including civil works, erection and installation of Ammonia Plant.
The fees are subject to adjustment as provided under Article 4.09 hereof.
Article 4.07 which relates to payment of Rs. 14,24,167 reads as follows :- US $ 681,818 (US Dollars Six hundred eighty-one thousand, eight hundred eighteen only) being the gross lump sum fees corresponding to 40 man-months for services of pre-commissioning and commissioning services including the sustained load test and successful guarantee test of Ammonia Plant. The fees are subject to adjustment as provided under Article 4.09 hereof.
8. The first limb of the argument taken by the learned counsel for the assessee is that the taxability of the amounts in question has to be considered in terms of the Treaty for Avoidance of Double Taxation dated 16-9-1959 between India and Denmark. In other words, the benefit of the Treaty has to be given wherever applicable and the terms of the Treaty override the terms of the Income-tax Act, 1961. For this proposition, he relied upon the Circular No. 333, dated April 2,1982 of the CBDT which is at 137 ITR 1 (Statutes) and reads as follows :- Subject : Conflict between the provisions of the Income-tax Act, 1961 and the provisions of the Double Taxation Avoidance Agreement - Clarification.
It has come to the notice of the Board that sometimes effect to the provisions of double taxation avoidance agreement is not given by the Assessing Officers when they find that the provisions of the agreement are not in conformity with the provisions of the Income-tax Act, 1961.
2. The correct legal position is that where a specific provision is made in the double taxation avoidance agreement, that provision will prevail over the general provisions contained in the Income-tax Act, 1961. In fact, the Double Taxation Avoidance Agreements which have been entered into by the Central Government under Section 90 of the Income-tax Act, 1961, also provide that the laws in force in either country will continue to govern the assessment and taxation of income in the respective country except where provisions to the contrary have been made in the Agreement.
3. Thus, where a Double Taxation Avoidance Agreement provides for a particular mode of computation of income the same should be followed, irrespective of the provisions in the Income-tax Act.
Where there is no specific provision in the agreement it is the basic law, i e., the Income-tax Act, that will govern the taxation of income.
In this context, he has also relied upon the decision of the Hon'ble Andhra Pradesh High Court in the case of CIT v. VisakhapatnamPort Trust[1983] 144 ITR 146/15 Taxman 72 and also of the Tribunal (Spl.
Bench) in the case of Siemens Aktiengesellschaft v. ITO [1987] 22 ITD 87 (Bom.).
9. The next limb of the argument of the learned counsel for the assessee is that technical service charges are part of industrial and commercial profits. For this proposition, he has relied upon the decision in Siemens Aktiengesellschaft's case (supra) and also the decisions of the Tribunal, Bombay Bench in the cases of G.U.I Jaeger GmbH v. ITO [1991] 37 ITD 64 and Atlas Copco AB of Sweden v. Dy. CIT [1995] 53 ITD 293.
10. The next limb of the argument of the learned counsel for the assessee is that technical service charges being part of industrial and commercial profits are not taxable in India in terms of the aforesaid Treaty because the assessee had no permanent establishment in India.
11. In response to a query from the Bench as to why the assessee cannot be regarded as having had a permanent establishment in India during the relevant period in terms of the definition of permanent establishment in the Treaty, the learned counsel for the assessee replied that firstly, the assessee was only giving consultancy and supervisory services and it did not carry on construction, installation or assembly project which are referred to in the definition of permanent establishment in the Treaty. He pleaded that supervisory activity is included only in the subsequent Treaty dated 8-3-1989. It is also pleaded that at any rate, it was not the contention of either the Assessing Officer or the CIT(Appeals) that the assessee had a permanent establishment in India and this is evident from the assessment orders passed for the years 1982-83 and 1983-84, copies of which have been furnished before us. It is also pleaded that it would be beyond the jurisdiction of the Tribunal tq raise a new controversy and in this context, the learned counsel for the assessee has relied upon the decisions of the Hon'ble Calcutta High Court in the cases of R.L.
Rajgharia v. ITO [1977] 107 ITR 347 and ITO v. R.L. Rajghoria [1979] 119 ITR 872.
12. The next limb of the argument of the learned counsel for the assessee is that the services rendered by the Denish Company cannot be regarded as management charges because firstly, the question of management arises only after the plant is set up whereas the agreement between the Denish company and the Indian concern is only about the erection, construction and commissioning of the Ammonia plant. The assessee has no place in the affairs of the Indian concern after the plant is commissioned. Secondly, even though the payments under Article 4.06 of the agreement are described in Article 1.01, item (xiii) as Construction Management services, the assessee was only supervising construction work. It is pleaded that the label given to the services does not determine the nature of the services. In this context, reliance is placed upon the decision of the Apex Court in the case of Continental Construction Ltd. v. CIT [1992] 195 ITR 81/60 Taxman 429.
According to the learned counsel for the assessee, the litmus test to decide the nature of the services in question is whether those services can be rendered by a M.B.A. even if from Harvard or only an Engineering graduate can render those services. According to him, in the present case, only the latter category could have delivered the goods. It is also pleaded that the definition of management implies the existence of control and the assessee has no control over the affairs of the Indian company or even erection and construction of the Ammonia Plant. He invited our attention to the definition of Manager and Managing Agent in Section 2(24) and 2(25) of the Indian Companies Act, 1956. Finally, he relied upon the decision of the Tribunal in the case of ITO v.Rheinbraun Consulting GmbH[IT Appeal No. 1145 (Bom.) of 1985] for the assessment year 1980-81 and Swedish Telecomes International AB v.Asstt. CIT [IT Appeal No. 7506 (Bom.) of 1991] for the assessment year 1988-89 which lay down that the element of final control is a pre-requisite to characterise a management charge. It is also pleaded that the Assessing Officer had changed his mind for the assessment year 1984-85 and has called the. payments in question as management charges whereas in the earlier years, he decided them only as technical service charges. It is pleaded that an assessing authority or the Tribunal should not come to a conclusion contrary to that arrived at earlier on the same facts. In this context, reliance is placed upon the decisions of the Hon'ble Bombay High Court in the cases of HA. Shah & Co. v. CIT [1956] 30 ITR 618 and CIT v. Shree Nirmal Commercial Ltd. [1995] 213 ITR 361 (FB).
13. The learned D.R. pleaded that firstly, it cannot be held that technical service charges are an integral part of industrial or commercial profits mentioned in Article 111(1) of the Treaty simply because they are not, unlike royalties or management charges under Article 111(3) of the Treaty, excluded from the scope of Industrial or Commercial profits. He has pleaded that whatever is not specifically excluded cannot be regarded as included in industrial or commercial profits. He has mentioned that certain Treaties exclude even capital gains but that does not mean that where capital gains are not so excluded, they form a part of industrial or commercial profits. As an instance of where capital gains are excluded, he invited our attention to Article VII(6) of the Treaty with Belgium which is at page 981 of Kanga & Palkhivala, Seventy Edition. He has also pleaded that Article III of the Treaty with Denmark has to be read in the light of Article XVII which reads as follows :- Article XVII(1) : The laws in force in either of the territories will continue to govern the assessment and taxation of income in the respective territories except where express provision to the contrary is made in this Agreement.
As no specific provision is made under the Treaty for taxation of technical services, it is pleaded that the provisions of Section 9(1)(vii) of the Income-tax Act, 1961 which is a deeming provision and also gives an extended definition of fees for technical services will come into operation and the payments received by the assessee in question are accordingly taxable in India. He has also invited our attention to Explanation 2 to Section 9(1)(vii) which ropes in consideration received for managerial services as fees for technical services. The contention made out is, whether the payments received by the assessee-company are fees for technical services or fees for managerial services, they are to be regarded as fees for technical services and as they are not part of industrial or commercial profits, they have to be taxed in India irrespective of the fact whether the assessee has a permanent establishment in India or not.
14. The learned D.R. also pleaded that the Assessing Officer has not given any finding whether the assessee had a permanent establishment in India or not and so, this question can still be agitated at the level of the Tribunal. He has pleaded that a disallowance can be upheld by the Tribunal on a ground different from that given in the order. In this context, he relied upon the decision of the Hon'ble Calcutta High Court in the case of Steel Containers Ltd. v. CIT [1978] 112 ITR 995.
He has also pleaded that the Tribunal can permit new grounds to be raised before it and that it has even the power of enhancement. For this proposition, he has relied upon the decision of the Hon'ble Rajasthan High Court in the case of CIT v. Pratapsingh [1987] 164 ITR 431. So, it is pleaded that under the definition of permanent establishment given under Article 11(1)(h) of the Treaty the place of work of the assessee, ie., the Ammonia Plant erected itself becomes the permanent establishment. He invited our attention to Article 11(1)(h) and the relevant portion reads as follows :- (h) the term 'permanent establishment' means a fixed place of business in which the business of the enterprise is wholly or partly carried on : (aa) the term 'fixed place of business' shall include a place of management, a branch, an office, a factory, a workshop, a warehouse and a mine, quarry of other place of extraction of natural resources; (bb) an enterprise of one of the territories shall be deemed to have a fixed place of business in the other territory if it carries on in that other territory a construction, installation or assembly project or the like.
So, it is pleaded that the assessee did have a permanent establishment in India during the relevant period and even if the payments in question are received for technical services and such receipts are part of industrial or commercial profits of the assessee, they are still taxable in India as the assessee has a permanent establishment in India in terms of the extended definition of this term in the Treaty.
15. The learned D.R. also pleaded that without prejudice to the above arguments, the receipts in question can still be brought to tax in India on the ground that they are of the nature of management charges.
He has no quarrel with the proposition of the learned counsel for the assessee that a label does not determine the nature of the receipts.
His contention is that the services rendered by the assessee are substantially of the nature of management. It is pleaded that even a technical service can be a management service. In this context, he has stressed that Article 2.11 of the Agreement dated 15-2-1981 between the assessee and the Indian concern itself describes services rendered by the assessee as construction management services. We have already extracted this Article hereinabove. It is stressed that under this Article, the Consultant had to provide services "for the management of all activities relating to civil works, erection, etc. etc..." 16. The learned D.R. also refuted the charge that the Assessing Officer arbitrarily changed his mind in respect of the nature of the receipts in question in the assessment year 1984-85 whereas in the earlier assessment years, he treated the same as fees for technical services.
The learned D.R. supported the stand of the Assessing Officer on the ground that while framing the earlier assessments, the Assessing Officer did.not analyse all the provisions of the agreement. The agreement is bulky running into a couple of hundreds of pages and it is understandable that the earlier Assessing Officer missed some relevant provisions. So, he supported the action of the CIT(Appeals) in upholding that the amount of Rs. 99,97,462 is of the nature of management charges.
17. In reply, the learned counsel for the assessee pleaded that fees for technical services are part of business profits. As the assessee is in the business of rendering technical services, the receipts in question will have to be held as part of industrial or commercial profits. He has also pleaded that the Hon'ble Bombay High Court in the case of CIT v. Cilag Ltd. [1968] 70ITR 760 has held that even royalty is part of business income. Similarly, receipts for supply of know-how on a licence basis are also held to be part of business income by the Bombay High Court in the case of CIT v. Gilbert & Barker Mfg. Co.
[1978] 111 ITR 529. It is also pleaded that Section 44D of the Income-tax Act, which is a special provision for computing the income by way of royalty or fees for technical services figures in Chapter IV-D relating to computation of business income and so, even as per the terms of the Income-tax Act, fees for technical services are part of industrial or commercial profits. The learned counsel for the assessee also explained that the Treaty gives a wide meaning to business profits and so, even capital gains are occasionally excluded for separate treatment in some Treaties. In other words, it cannot be inferred that technical service charges are not part of industrial or commercial profits simply because there is no separate treatment for them. If they are not part of industrial or commercial profits, the learned counsel queried as to why some Treaties exclude technical service charges while others do not. At any rate, it is pleaded that this question stands settled by the decision of the Tribunal (Special Bench) and other Benches cited (supra).
18. On the question whether the assessee has a permanent establishment, it is pleaded that the decisions cited by the learned D.R. are distinguishable on facts. According to the learned counsel for the assessee, this issue is not before the Tribunal and the Tribunal cannot go into this question. In this context, he invited our attention to the decision of the Hon'ble Bombay High Court in the case of CIT v.Hazarimal Nagji & Co. [1962] 46 ITR 1168 in which it was held that a respondent can support the order of the lower court on fresh grounds, provided such grounds do not require a further investigation into facts which are not already on record. In other words, it is pleaded that the question whether the assessee has a permanent establishment in India or not requires a further investigation into facts which are not on record and so, this question cannot be agitated at this stage. He has also invited our attention to the decision of the Hon'ble Bombay High Court in the case of Pokhraj Hirachand v. CIT [1963] 49 ITR 293 in which it was held that powers of the Tribunal, though wide, are not absolute and the Tribunal can consider only the subject-matter of appeal. It is stressed that for the assessment year 1982-83, the Assessing Officer did not tax the fees for technical services on the ground that the assessee did not have a permanent establishment. The assessee never had the opportunity of meeting the case that it had a permanent establishment as the history of the case proceeded on the basis that it did not have such permanent establishment. It is also pleaded that the assessment proceeded on the basis that the assessee did not have a permanent establishment as otherwise, the receipts and expenses of the establishment had to be computed which was not done. The learned counsel for the assessee finally urged us to consider what prejudice would be caused to the assessee if such a question is permitted to be raised now as in that case, the assessee would be required to proye the expenditure incurred in 1982, i e., after 1 1/2 decades. Finally, the learned counsel mentioned that there is difference between administrative management and technical management and what is involved in the present case is only technical management which is only another name for technical services and so, it is pleaded that the receipts in question cannot be brought to tax as management charges.
19. We have considered the rival submissions. Firstly, we find that we cannot go into the question whether the assessee has a permanent establishment. Assessments for the years 1982-83 and 1983-84 proceeded on the basis that the assessee did not have a permanent establishment.
Order dated 31-3-1983 for the assessment year 1982-83 reads as follows :- Shri V.K. Gupta of M/s. Vijay Deepak & Co., C.As. attended waiving notice under Section 143(2) of the Income-tax Act and the case was discussed with him. He made his submissions from time to time claiming that fees for technical services received by the assessee-company from Rashtriya Chemicals & Fertilizers Ltd. are exempt in view of the agreement for Avoidance of Double Taxation between the Governments of India and Denmark.
It may be seen that the fees for technical services were held not to be taxable and it could have been so held only if the Assessing Officer accepted the contention of the assessee that it did not have a permanent establishment. In the assessment order dated 3-1-1983 for the assessment year 1983-84, there is a specific finding that the assessee did not have a permanent establishment in India. Paras (e), (/) and (g) of this order at page 4 read as follows :- (e) The assessee-company has received a payment of Rs. 47,869.80 as per para 5 of the letter dated 23-4-1981 from National Fertilizers Ltd. to the assessee-company for carrying out detailed feasibility study for charging the converter internals and making other modification in the synthesis loop of N.F.L.'s plant at Nangal. Shri Gupta claimed that the services envisaged in Articles are of the nature of technical services and since the assessee-company does not have any permanent establishment in India the fees are not liable to tax in India. Shri Gupta's contention is accepted.
(f) The assessee has received a payment of Rs. 1,40,318.05 from Shriram Fertilizers & Chemicals as per para 2 of the letter dated 18-7-1981 for carrying out the study for the capacity of reformer section. No tax has been deducted at source. Shri Gupta's contention that the services are of the nature of technical services and are therefore not liable to tax in India as it has no permanent establishment in India is accepted.
(g) The assessee-company has received payment of Rs. 11,376.56 as per the terms of purchase order of Shriram Fertilizers & Chemicals being charges for Destructive Testing of Reformer Catalyst Tube same to determine the residual life. Shri Gupta's contention that the services are of the nature of technical services and are not taxable in India in view of the provisions of Article 111(3) of the DTA agreement since the assessee-company does not maintain any permanent establishment in India is accepted. No taxes have been deducted at source in respect of this payment.
It may be observed that the Assessing Officer has specifically accepted the contention that the assessee did not have a permanent establishment.
Turning to the order for the assessment year 1984-85, the Assessing Officer observed as follows :- The contention of the assessee is that the fees for technical services form part of industrial or commercial profits and as to whether these could be taxable would depend upon whether the assessee maintains a permanent establishment in India. In this connection, the assessee has stated that it has not maintained a permanent establishment in India. It refers to the definition as appearing in Article 11(1)(a) wherein 'permanent establishment' is defined as a fixed place of business which in turn has been defined in Article 11(1)(aa) as representing a place of management, a branch, an office, etc. It is contended that since no activities of assessee could be relating to having a permanent establishment in India in terms of such definition, the question of taxing any income by way of fees for technical-services cannot arise.
20. We are constrained to reproduce the above portion of the assessment order to bring out that, implicitly, the Assessing Officer accepted the contention of the assessee that it did not have a permanent establishment in India. Apparently, there is no finding on this issue but actually, he deviated from the stand taken earlier that the receipts in question are of the nature of fees for technical services and did not deviate from the position accepted earlier that the assessee did not have a permanent establishment in India. He also accepted the position that in the circumstances, if the receipts in question are of the nature of fees for technical services, they are not taxable because the assessee has no permanent establishment.
Accordingly, he brought the receipts to tax as management charges.
21. The CIT(Appeals) upheld the addition as management charges. He deleted the other two additions of Rs. 14,24,167 and Rs. 5,22,839 on the ground that they are of the nature of fees for technical services and so, they are not taxable in India.
22. Implicit in these deletions is the acceptance of the position canvassed by the assessee that it did not have a permanent establishment in India. The grounds taken by the department before us also do not raise the issue whether the assessee has any permanent establishment in India. In the circumstances, we agree with the contention of the learned counsel for the assessee that it would be beyond the jurisdiction of the Tribunal to go into the question whether the assessee has a permanent establishment for determining the taxability of the receipts in question. The cases cited by the learned D.R. in this regard are distinguishable because they do not lay down the proposition that even in a matter accepted by the Revenue authorities the department can be permitted to agitate the issue before the Tribunal. So, on the basis of the cases cited by the learned counsel for the assessee and mentioned supra, we hold that the question whether the assessee has a permanent establishment cannot be raised before the Tribunal.
23. We may, however, add that under Article 3.13 of the agreement dated 15-2-1981, the Indian company had undertaken to provide certain site facilities and office accommodation to the assessee. Whether this amounts to maintenance of a permanent establishment in India is a question, which does not seem to have been considered by the department. But-as already mentioned, this issue is beyond the purview of the jurisdiction of the Tribunal in deciding this appeal.
24. We also hold that fees for technical services are part of industrial or commercial profits mentioned in Article 111(1) of the Treaty between Denmark and India. This issue stands settled by the decision of the Tribunal (Special Bench) in the case of Siemens Aktiengeselbchaft (supra). The relevant portion of the head note of this decision reads as follows :- Therefore, a definition introduced in the Act, solely as an Explanation to Section 9(1) cannot have any impact in interpreting the scope of the terms used in article III. This being the case, industrial or commercial profits of the assessee in India would not be taxable unless such industrial or commercial profits are of the nature of income which falls under Article 111(3).
The above view is supported by the decisions of the Tribunal in the cases of G. U.J. Jaeger GmbH (supra) and Atlas Copco AB of Sweden (supra). This view is also supported by the decisions of the Tribunal in the cases of Rheinbraun Consulting GmbH (supra) and Swedish Telecoms International AB (supra). In the latter case, it is observed as follows :- It was held by the Tribunal in the case of ITO v. Reinbraun Consulting GmbH (supra) that technical consultancy fee may not be industrial profit, but it was definitely a commercial profit. We find ourselves in respectful agreement with this decision and hold accordingly.
We hold that fees for technical services are included in industrial or commercial profits mentioned in Article 111(1) of the Treaty and as such, they are not taxable in India unless they are derived from a permanent establishment maintained by the assessee in India. As we have already held that it is an accepted position of the department that the assessee did not have a permanent establishment in India and we have negatived the efforts of the learned D.R. to raise this question at this stage apparently taking a clue from certain queries raised by the Bench during the hearing, we have to hold that the receipts in question cannot be taxed in India to the extent they are of the nature of technical service charges.
25. That leaves us the question whether the receipts in question are of the nature of management charges. In the appeal, by the assessee, we are concerned with the amount of Rs. 99,97,462. We do not agree with the learned counsel for the assessee that the department cannot go into the question whether this amount is of the nature of management charges simply because in the earlier years, similar receipts were held to be fees for technical services and were exempted from tax. While there should not be an arbitrary change of opinion by the Assessing Officer on the same facts, the assessee cannot also be allowed to take advantage of an error committed by an earlier Assessing Officer or an undue leniency shown by him. In the present case, in the earlier years, the Assessing Officer did not examine the issue whether the receipts in question are also of the nature of management charges. The present Assessing Officer has done this and to our mind, he cannot be faulted for that. We have already reproduced the relevant provisions of the agreement between the assessee and the Indian concern. While the services rendered by the assessee are enumerated in Article 1.01 of the agreement and there are 25 different types of services, the fees to be received are enumerated in Article 4 and the fees are to be received only under 8 heads. So, there is no one to one co-relation between the types of services and the heads in which the fees are received. During the hearing, the learned counsel for the assessee has, in response to a query from the Bench expressed his inability to establish an except co-relation between the provision of services and the 8 heads enumerated under Article 4 of the agreement.
26. Now the question is whether the amount of Rs. 98,97,462 is received as fees for technical services or as management charges. We do not agree with the learned counsel for the assessee that the amount is exclusively for technical services. We are of the view that there is a component of management charges in this amount. We do not agree with the argument of the learned counsel for the assessee that there can be no management charges till the plant is set up. Possibly, there is a greater need for management before the plant is set up than after. We also do not agree that because the ultimate control of the affairs is with the owner, there can be no management services rendered by the assessee. The ultimate control may lie with the owner and in most cases it does so lie. That does not mean that the Consultant cannot provide management services for the owner. The definition of Manager and management given in the Companies Act in Section 2 are also not, to our mind, conclusive of the matter.
27. The learned counsel for the assessee has referred to certain definitions of the word "Management" in Oxford English Dictionary, but we find that some of the definitions do not postulate control. For example, even conduct of affairs is given as one of the meanings of the word "Manage" (item 5). We are also of the view that the two decisions relied upon by the learned counsel for the assessee, i e., the decision in the case of Rheinbraun Consulting GmbH (supra) and Swedish Telecoms International AB's case (supra) proceeded on their own facts and are distinguishable. The services rendered by the assessee in the case of Rheinbraun Consulting GmbH (supra) are given in para 8 of the order of the Tribunal which reads as follows :- 8. The assessee had to scrutinise advise and assist in preparing project report and tender documents and in the matter of lay-out.
The project report, tender documents, etc., had to scrutinise and furnish technical advice thereon. Data drawings pertaining to the mine field are to be examined by the assessee. Provision has been made for giving assistance and technical advise in the matter of many field operations to be conducted at the mining area. The assessee was also to scrutinise and give advise on financial analysis. All the data and other things had to be provided by the NLC to seek the technical advise by the assessee. Clause (4) says that the assessee had to depute personnel to work at Neyveli who are competent for the consultancy work.
15. This is also not a case of management charges. The assessee has no control over the industrial undertaking of NLC. The assessee was not managing any of the affairs of the NLC in their new set-up of a second lignite mine. They were only to oversee the operations of the NLC and give technical advise and assistance in matters specified in the agreement. The nature of work expected of the assessee can in no wise be called management work.
The decision in the case of Swedish Telecoms International AB (supra) only followed the ratio of the earlier decision of the Tribunal in the case of Rheinbraun Consulting GmbH (supra).
28. We find that the services rendered by the assessee go far beyond the services rendered by the assessees in the earlier two cases decided by the Tribunal. Firstly, the assessee had an overall responsibility for the installation and erection of the Ammonia Plant. It has not only provided licence and technical documents and designs but also provided procurement services and construction management services. Article 2.11 of the agreement which we have reproduced hereinabove gives the different types of services rendered by the assessee and under this Article, the assessee is in charge of management of all activities specified therein. It has even given the performance guarantee under Article 2.13. It has given the net work schedule under Article 2.06 and under Article 2.23, it is responsible for the work of the sub-contractors who are appointed on its recommendation and under Article 2.24, the assessee has to assist the owner in achieving an overall co-ordination of all work connected with the project. Under this Article, it had to lay down the priorities and key datas required to be included for various activities. It is not necessary to summarise the various provisions of the agreement. A copy of the agreement is at pages 18 to 181 of the assessee's paper book. On a reading of this agreement, we art; of the view that a portion of the services rendered by the assessee can be categorised as management charges. Direction, co-ordination and setting up of priorities are generally considered to be functions of management and on a reading of the agreement, we are left with the impression that the assessee has discharged partly such functions. So, we are of the vievy that a portion of the receipt of Rs. 99,97,462 can be considered to be of the nature of management charges.
The learned counsel for the assessee pleaded that not more than 5 per cent of the receipts can be held as management charges. We are of the view that this percentage is too small. Considering the multiplicity of non-technical services rendered by the assessee we hold that about 10 per cent of the receipts of Rs. 99,97,462, i e., roundly Rs. 10,00,000 is of the nature of management charges. The assessee gets a relief of Rs. 89,97,462. The appeal is partly allowed.
29. In the appeal by the Department, no new arguments have been advanced either by the learned D.R. or by the learned counsel for the assessee. It is accepted position by both sides that this appeal may be decided in the light of the arguments advanced in the context of the appeal by the assessee, discussed hereinabove.
30. We have already reproduced the grounds taken by the Department at the beginning of this order. The CIT(Appeals) deleted an amount of Rs. 14,24,167 on the ground that this represented fees for technical services. We have already held above in the context of assessee's appeal that there is no one to one co-relation between the 25 types of services rendered and the 8 heads under which the fees were received in terms of the agreement dated 15-2-1981. We have held that 10 per cent of the receipt of Rs. 99,97,462 is of the nature of management charges.
We are of the view that even the receipts of Rs. 14,24,167 contain a component of management charges. The functions of directing, setting up of priorities and co-ordinating are discharged even in respect of pre-commissionirtg and commissioning of the plant. Accordingly, we hold that 10 per cent of the amount of Rs. 14,24,167 can be regarded as management charges. We hold accordingly. The first ground is allowed to this extent.
31. As regards the second ground, an amount of Rs. 5,22,839 is received by the assessee under the terms of the agreement dated 19-7-1982 entered into by it with the same Indian concern, i e., Rashtriya Chemicals and Fertilizers Ltd. for the setting up of an Ammonia/cracking unit. Article 2.4 of this agreement reads as follows :- 2.4. HTAS shall provide technical advisory services to Owner in India as and when required for the technical co-ordination of the process and utility units for the Project. HTAS shall review and make recommendations to Qwner on the basic design features and operating manuals for these units in a manner to be agreed upon with Owner with the object of ensuring the most efficient technical integration of these units within the Project and with the Ammonia Plant. This shall also include supervision of detailed engineering of Ammonia Synthesis Unit. HTAS shall depute subject to the General Conditions specified in Appendix VII to this Agreement senior engineers to Owner's offices to provide the aforesaid technical advisory services.
Article 4.2 under which the amount in question of Rs. 5,22,839 was received reads as follows :- For the technical advisory services for technical coordination as specified in Sub-clause 2.4 of this Agreement, Owner shall pay to HTAS a gross lump sum fee of D. Kr. 2,375.000 Danish Kroner (two million three hundred and seventy-five thousand) for 18 (eighteen) man-months of ex-patriate engineers.
32. We find that this agreement is only a kind of extension for the earlier agreement dated 15-2-1981. We agree with the CIT(Appeals) that the services rendered in respect of the payment of Rs. 5,22,839 are almost exclusively technical in nature and hold that the CIT(Appeals) was correct in deleting this amount. The ground is rejected. The appeal is partly allowed.
33. In the result, the appeal of the assessee and that of the Revenue are partly allowed.