| SooperKanoon Citation | sooperkanoon.com/63758 |
| Court | Income Tax Appellate Tribunal ITAT Mumbai |
| Decided On | Feb-10-1989 |
| Judge | M Ajinkya, B S J.P. |
| Reported in | (1989)31ITD142(Mum.) |
| Appellant | income-tax Officer |
| Respondent | Montedison of Italy |
2. The main ground in the departmental appeals, which is common for both the years, is that the learned Commissioner of Income-tax (Appeals) erred in holding that all the payments received by the assessee-company from Fertilizer Corporation of India, Indian Petrochemicals Corporation, National Fertilizers Ltd., J.K. Synthetics Ltd. and Hindustan Fertilizer Corporation under different contracts are in the nature of technical service fees covered under Section 9 (1)(VH) and are therefore to be excluded from taxation.
3. Certain facts in this regard require to be stated. The assessee is a non-resident company incorporated in India. One M/s. Technimont was a subsidiary company of the assessee-company M/S. Montedison. This subsidiary company merged with the assessee-company on 4-10-1978. The accounting year of the assessee-company for the years under appeal is the year ended 31st March. M/s. Technimont had entered into agreements with certain public sector undertakings and M/s. J.K. Synthetics Ltd. for supply of technical know how and for rendering technical services.
All the liabilities and rights of M/s. Technimont were taken over by the assessee-company. During the accounting year ended 31-3-1979 the assessee-company received in terms of the various agreements a total amount of Rs. 1,08,68,427 from the various public sector under-, takings and from J.K. Synthetics Ltd. as per the following details-----------------------------------------------------------------------------Name of the Payers Amount in Lit.
Amount in Rs. 1 2----------------------------------------------------------------------------(a) Fertilizer Corporation Similarly, the company received during the year ended 31-3-1980 royalty of Rs. 1,96,53,025 and technical fees from J.K. Synthetics Ltd. of Rs. 36,48,599 amounting in all Rs. 1,33,01,624. The Income-tax Officer considered the payments received from the various collaborators of the assessee-company in terms of the agreements entered into and came to the conclusion that all the payments received by the assessee-company were in respect of assistance given by the assessee through its technical personnel working in plants located in India. The Income-tax Officer reached the conclusion that the services were rendered by the assessee in India although the payments were received by the assessee outside India. He held that only in respect of Nangal Expansion Project the amount of Rs. 20,80,030 lire representing the know-how engineering as per article 3 could be said to be consideration for the services rendered outside India. The Income-tax Officer therefore decided that this amount will not be deemed to have accrued or arisen in India and excluded it from the computation of total income. He, however, held on an interpretation of various preambles and terms & conditions of the agreements that the payments received by the assessee fell within the definition of the term 'royalty' given in Explanation 2 to Clause (vi) of Sub-section (1) of Section 9 of the Income-tax Act. He called out the definition of 'royalty' incorporated in that section in the body of the order and held that the total payments received by the company except the payment on account of knowhow engineering would be taxed under the head Royalty. He, however, allowed deductions of expenses limited to 20% under Section 44D.4. The assessee took the matter in appeal to the Commissioner of Income Tax (Appeals). The CIT (Appeals) held that in the assessment years under appeal the appellant had only received technical assistance fees as provided in the service agreements for the persons deputed to India and accepted the claim of the assessee that all payments related to contracts entered into prior to 1-4-76 and therefore were not taxable under the proviso to Section 9(1)(vii). It was argued before the CIT (Appeals) that no amount was liable to tax in the hands of the appellant-company either under Section 9(1) (vi) or under Section 9(1)(vii) because the amounts were received by the appellant outside India in respect of technical services rendered by its technicians. The payment was clearly for the provision of services of technical personnel and came within the definition of "technical assistance fees": under Explanation 2 to Section 9(1)(vii). It was also argued that under proviso to Section 9(1)(vii) fees for technical services payable in pursuance of any agreement made before 1-4-76 was not taxable at all. These payments could not be considered as royalty within Clauses (i) to (iv) in Explanation 2 to Section 9(1) (vi) as separate consideration had been provided under the agreements relating to the transfer of know-how, design, documentation and engineering services relating thereto and the payments so made were not the subject matter of taxation in the years under appeal. Alternatively, it was argued that even assuming that such payments were liable to tax in India, the tax would arise on the agent of the non-resident. The salary and remuneration payable to the technicians of the assessee were not taxable as exemption certificates under Section 10 of the Act had been obtained.
5. The CIT (Appeals) considered these arguments, carefully went through the clauses of the various agreements, particularly the Sindri Modernisation Project agreement with the Fertilizer Corporation of India, Talchar & Ramagundam Plant agreement for urea and ammonia plants entered into on 8-10-69 and came to the conclusion that the lump sum payments under clauses 8.1.1 of the various agreements covered consideration both for the grant of licence and the supply of services.
These payments were, however, not under consideration in this year but the payments under clause 8.1.2, which related to the fees for assistance during the erection, start-up and performance test runs of the plant, were for consideration in the years under appeal. In respect of these fees, it was pointed out to the CIT (Appeals) that the services performed by the assessee-company were optional, i.e. they might even have been requested by the Indian company (clause 4.4.1), that the assistance was not concerned with transfer of know-how but was in the nature of supervision during start-up and test run. The CIT (Appeals) accepted this analysis and held that the payments were made for technical services given. He reached the same conclusion in respect of payments received from IPCL and in respect of payments from J.K.synthetics. Finally he held that the payments received by the assessee during the year under the different contracts were in the nature of technical services fees covered under Section 9(1)(vii) of the Act and had to be excluded from taxation in view of the proviso to that section, which takes away the applicability of that section in respect of agreement made prior to 1-4-76 and approved by the Government. It is against this finding of the CIT (Appeals) that the department has come in appeal for both the years.
6. Shri Keshav Prasad, the learned departmental representative, relied mainly on the order of the Income-tax Officer. The main force of his argument was that even if these agreements were entered into before 1-4-76, these agreements had to be considered as a whole and the amount received by the assessee during the year of account was a composite amount. Fees for the grant of licence were embedded in the year in which the erection had started and therefore in the payments received by the assessee-company, there was an element of payment which should be attributed as being towards the grant of licence. If a portion of such payment was to be treated as payment for grant of licence or for royalty, the provisions of Explanation 2 to Section 9(1)(vi) of the Act were attracted. All the activities concerning erection as well as rendering of technical services were going on simultaneously and not alternatively and therefore Shri Keshav Prasad argued that the Tribunal should do the allocation between licence fees and technical services fees and hold that the portion of such fees were taxable as royalty within Explanation 2 to Section 9(1)(vi) of the Income-tax Act.
7. Shri S.E. Dastur, the learned counsel for the assessee, argued that the short question for consideration was whether the payments received by the company were technical service fees or whether such payments were in the nature of royalty. If the Tribunal reached the conclusion that they were technical service fees, then the proviso to Section 9(1)(vii) would come into operation.
In support of his stand that the payments were in the nature of technical service fees, Shri Dastur firstly pointed out that all the agreements were approved by the Central Government. Secondly, these agreements were with six parties, five of which were public sector undertakings under the control of the Government. Thirdly, Shri Dastur argued that it was not the case of the Income-tax Officer that what was received was a composite payment, a portion of which should be allocated towards technical service fees and portion towards grant of licence or as royalty fees. The agreements did not provide for a consolidated payment. Most of the payments were made under clause 8.1.2. Shri Dastur further argued that conclusions reached by the CIT (Appeals) were so reached after careful examination of the various agreements and the payments were made in respect of services rendered at clause 4.4 of the various agreements. All the agreements were entered into prior to 1976 and therefore the payments received, according to Shri Dastur, were for technical services rendered and hence exempt under Explanation 2 to the proviso to Section 9(1)(vii) of the Act. Shri Dastur relied on a decision of the Bombay Tribunal in Lucas Industries Ltd. v. IAC [1987] 21 ITD 143 and on the decision of the Punjab and Haryana High Court in Oswal Spg. & Wvg. Mills. Ltd. v.CIT [1988] 174 ITR 354/40 Taxman 173.
9. The assessee-company entered into three different agreements with Fertilizer Corporation of India as under:- It also entered into another agreement with Indian Petrochemicals Corporation Ltd. on 14-6-72. It entered into a third agreement in respect of National Fertilizers Ltd. for Nangal Expansion Project on 1-2-73. The payments received in respect of these agreements have been accepted by the Income-tax Officer as technical service fees and have not been brought to tax. It also entered into another agreement with J.K. Synthetics Ltd. on 29-4-74. We find that the CIT (Appeals) has examined in grea): detail all the relevant clauses of the Sindri Modernisation Project Agreement with the Fertilizer Corporation dated 9-7-74. For the purposes of the present appeals, we find that clauses 4.4, 4.4.1 and 4.4.4 are relevant to decide one aspect of the issue.
These clauses read as under: - 4.4 Supervision during erection, start-up and performance test runs of the PLANT. 4.4.1 If requested by FCI, TCM shall make available competent personnel to assist FCI during erection of PLANT. 4.4.4 For the work referred to under this clause 4.4, the rates and other conditions of Exhibit-2 shall apply.
Thus the services that were rendered were for supervising during erection, start-up and performance test runs of the plant. Secondly, it was clear that the Indian collaborator had the option to request the assessee to make available competent personnel to assist them during the erection of the plant and clause 4.4.4. clearly stated that for the work referred to in clause 4.4 the rates and other conditions of exhibit 2 shall apply. Now the payments, which were made for grant of licence, were described in clause 8.1.1 and such payments were received by the assessee in the earlier year.
As consideration for the grant of licence and the supply of Services for the PLANT as provided in the AGREEMENT, FCI shall pay to TCM the fee of 518 (five hundred fifty one) (sic) million Italian Lire consisting of (a) 151 (one hundred fifty one) million Italian Lire for the grant of licence, as provided for under Article 2.
(b) 196 (one hundred ninety six) million Italian, Lire for the supply of the technical know-how as provided for under Article 3.
(c) 171 (one hundred seventy one) million Italian Lire for the supply of technical collaboration as provided under 4.1 and 4.2.
Clause 8.1.2 provided that in addition to the fees referred to in clause 8.1.1 FCI would make payments provided for in the exhibit 2 and comply with provisions contained therein and the exhibit 2 contained the rates at which the personnel of the assessee were to be paid. The CIT (Appeals), on the reading of these clauses, came to the conclusion that the technical assistance fees payable under this contract are for supervision and erection and commission of the equipment and machinery supplied and so it is undisputably technical assistance fees and not royalty. Shri Keshav Prasad tried to argue that the payments made under clause 8.1.2 included an element of services mentioned in clause 8.1.1.
We find it difficult to accept this argument. The payments of fees under clause 8.1.1 in respect of this contract considered as a typical contract were for grant of licence and such payments were independent of or different from the payments, which the assessee received in terms of exhibit 2 for the services rendered by its personnel, which were essentially technical service fees. The payments made in terms of clause 8.1.1 were clearly identifiably, they were in fact received in earlier year and no portion of the payments received in this year contained any of the types of payments for grant of licence contemplated under clause 8.1.1, which, as is rightly clarified by the CIT (Appeals), were received in the earlier year. As pointed out by the CIT (Appeals), the lump sum payment under clause 8.1.1 covers the consideration payable for the grant of licence and for supply of services but these payments were not received in this year. What was received in this year was under clause 8.1.2. These fees were optional, i.e. they could have been requested by the Indian company and these fees were paid for services rendered for supervision during plant construction and erection, supervision during start-up and guarantee test runs and technical assistance after the plant test runs. In any or all of these cases, they were essentially in the nature of technical service fees covered by Explanation to proviso to Section 9(1) (vii) and were exempt since the agreements were entered into prior to 1-4-76.
10. The CIT (Appeals) has also examined the agreement dated 14-6-72 entered into with Indian Petrochemicals Corporation. Here again he found that a separate consideration was provided in the agreement based on the daily rates for the technicians deputed to India for the technical assistance for supervision during erection, commissioning of the plant and performance of test runs. It was specifically provided that the responsibility for the engineering design shall be that of the IPCL and that the contract did not concern or cover the operation and maintenance labour in general. In clause 4.5 of that agreement, it was provided that the experts will be provided in the plant operation and maintenance after the plant is commissioned, if requested by the IPCL.
According to the CIT (Appeals), the agreement with J.K. Synthetics dated 29-4-74 for setting up the plant was on identical terms.
Therefore, the CIT (Appeals) held that the conclusions arrived at by him regarding fees received from the Fertilizer Corporation of India were applicable to the payments received under the contract with the IPCL as well as with J.K. Synthetics. The CIT (Appeals) then examined the contract with the National Fertilizers relating to Nangal Expansion Project where the clauses were slightly different. He found that the payments in terms of article 8.1.1 were as under : - (a) Italian Lire 151,515,000 for the grant of licence as provided for under Article 2.
(b) Italian Lire 238,000,000 for the supply of technical know-how as provided for under Article 3 (c) Italian Lire 208,000,000 for the checking of engineering design drawings and data sheets as provided for under clause 4.2 (d) Italian Lire 423,000,000 for the supply of technical services under 4.1, 4.3 and 4.4.
He felt that these payments were composite payments and considered whether any portion of such payments should be treated as royalty under Section 9(1) (vi) of the Act as pertaining to the imparting of information concerning the working or use of the design or process etc.
but it was pointed out to him that so far as the payments in this year are concerned, they are exclusively for the assistance after the plant had been erected and had been commissioned. The work had been started on the plant on 20-6-75, the date of mechanical completion, was 14-11-77 and the start-up commencement date was 15-11-77. Since these dates did not fall during the previous year relevant to the assessment year under consideration, he held that the payments received during the previous year would be in the nature of technical assistance fees falling under Section 9(1)(vii)of the Act.
11. Since in the course of the hearing it appeared to us that the reasoning given by the CIT (Appeals) was not quite correct, we ourselves examined the terms of the Nangal Expansion Project and the payments received by the assessee during the year in respect of this project. Such examination revealed that the payments received by the assessee during the fiscal year ended 31-3-79 in respect of the Nangal Expansion Project were as under : -----------------------------------------------------------------------------------Date of 1-4-78 - 31-3-79 1-4-78- 31-3-80 RemarksPayment----------------------------------------------------------------------------------10-10-78 (Lit. 38,951,500 Lit.
= Licence + Know- 20,800,000 How Engineering Lit. 59,751.500 Lit.
= L+ KH + E TOTAL30-3-79 Lit. 64,231,649 Techn. Assistance4-12-79 Lit. 79,151,274 Techn. Assistance4-12-79 " 67,718,865 Techn. Assistance4-12-79 " 7,00,060 Techn. Assistance Lit. 64,231,649 Lit. 153,970,199 Techn. Assistance TOTALS Lit. 123,938,149 Lit.153,970,199 GRAND TOTALS---------------------------------------------------------------------------------- Shri Dastur pointed out that the rupee equivalent of 20.800 Lire were exempted by the Income-tax Officer but the rupee equivalent of 38.951.5Q Lire, he admitted, contained 10% of the licence fees payable for obtaining the licence to which reference was made by the CIT (Appeals) and which were received in the accounting period. The rest of the payments received on 4-12-79 in the fiscal year ended 31-3-80 were for technical assistance fees. We find that the lump sum royalty that was provided for in terms of article 8 on page 18 of the contract consisted of two items of 151.515.000 Itlian Lire and 238 million Italian Lire together amounting to 389.515.000 Italian Lire. 10% of this amount was received during this year and we are satisfied that this payment is in the nature of a royalty, prima facie coming within the meaning of Explanation 2 to Section 9(1)(vi) of the Income-tax Act.
Shri Dastur, however, argued that even while he admitted that this portion of the payment received in respect of the Nangal Expansion Project was in the nature of royalty, it was still exempt in view of the proviso to Clause (vi) of Section 9(1), which read as under:- Provided that nothing contained in this clause shall apply in relation to so much of the income by way of royalty as consists of lump sum consideration for the transfer outside India of, or the imparting of information outside India in respect of, any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process or trade mark or similar property, if such income is payable in pursuance of an agreement made before the 1st day of April, 1976, and the agreement is approved by the Central Government.
Shri Dastur argued that the payment by way of royalty of 38.915.000 Lire received during the relevant accounting year forming part of the licence fees was exempt because if consisted of a portion of lump sum consideration for transfer outside India of technicians and drawing in pursuance of an agreement, which was entered into on 1-2-73, i.e. long prior to 1st day of April, 1976 and which was approved by the Central Government. We are inclined to accept this argument of Shri Dastur after examination of the relevant provisions of the Nangal Expansion Project. And for this reason and not for the reasons stated by the learned CIT (Appeals), we would hold that the amounts received from the National Fertilizers during the year are not exigible to tax although a portion of such payments is in the nature of royalty but in respect of which exemption under proviso to Section 9(1)(vi) is available to the assessee. It is not necessary to go into the authorities, which were cited at the time of the hearing, since we have based our finding on the examination of various documents and agreements filed before us in the course of the hearing. We would therefore confirm the order of the CIT (Appeals) for both the years, though in respect of the finding of the CIT (Appeals) in so far as they relate to the Nangal Expansion Project, we will confirm the conclusions reached by him for the reasons other than those mentioned by him in the body of the order. In the result, both the appeals of the department are dismissed.
12. We will now turn to the cross objections of the assessee. In the cross objections the assessee has stated that the CIT (Appeals) has not dealt with other issues like levy of interest under Section 217 and the assessee submits that in case the Tribunal comes to the conclusion different from the one arrived at by the learned CIT (Appeals), then the other grounds not adjudicated upon by the learned CIT (Appeals) will have to be looked into and for the examination of these grounds the matter may be sent back to the CIT (Appeals).
13. Since we have confirmed the order of the CIT (Appeals) on the main issue, we do not think the issues raised in the cross objections survive for our consideration. Consequently the cross objections are dismissed.