High Court Of Andhra Pradesh
CIT vs. Sundwiger Emfg & Co.
Sections 5(2), 9(1)(i), 9(1)(vii)
Asst. Year 1980-81, 1981-82, 1982-83
B. Sudershan Reddy & C. Venkata Ramulu, JJ.
Case Refd. No. 258 of 1991
4th February, 2003
Counsel Appeared
J.V. Prasad, for the Applicant : N.R. Siva Swamy & P. Sreenivasa Reddy, for the Respondent
JUDGMENT
C. Venkataramulu, J. :
The facts leading to the present revision case are as under : M/s Mishra Dhatu Nigam Limited, (hereinafter referred to as “Midhani”) invited tenders and placed orders with non-resident companies for supply of different types of capital equipments in connection with setting up of special metal and alloy projects. Midhani entered into individual contracts with various companies. The general contract stipulations are identically worded in all the contracts, the only difference being item of capital equipment to be supplied, the consideration to be paid and the terms of payments thereof, etc.
The preamble of the contract for supply of capital equipment states that the supplier “agrees and undertakes the design, manufacture, inspection, testing, sea/road/rail-worthy packing, sale, delivery FOB, and furnishing performance guarantee, etc.”
The Part-I of the contract furnishes the technical specifications of the combined drawings, etc., machines to be supplied by Schumag Gmbh. Part-II of the contract deals with the mode of payment, the security deposit, shipping instructions, nature of shipping documents to be furnished, insurance and all the equipments shall be guaranteed by the contractor for workmanship and material and satisfactory performance in accordance with the relevant clauses of the invitation to tender and general conditions of contract. Further a separate contract was also entered into between the parties for providing technical services covering supervision of erection, startup, putting into commission, etc. For the purpose of providing the technical services the non-resident had to send on deputation their employees, who are specialists to India. The relevant clause is as under : “For the deputation of the specialists according to cl. 2.0 above, the purchaser will reimburse the contractor at the rate of DM 475 (Deutsche Marks four hundred seventy-five only) per specialist per working day of stay at purchaser’s plant site towards the expenses incurred in West Germany by the contractor in respect of the specialists including their salary, social charges and all other incidental expenditure.”
Apart from the payment of DM 475 per day, the Midhani has to meet the expenses of travel, living and out of pocket expenses of the specialists coming to India. It was also further agreed that all payments to the contractor and the specialists under the contract shall be without deduction of taxes, assessments, duties, etc., which may be imposed by the Government of India or the State Government or other local bodies and such taxes, assessments, duties, fees or other charges leviable shall be assumed and paid by the purchaser only. As per the contract, the non-resident had supplied Midhani the cutting and polishing machine and some of the employees had come to India in connection with the commissioning of the machine. Thus, the experts did come and stay in India for few days and after their work was over, they left India. In connection with the remittances to the non-residents under the contracts referred to above, Midhani approached the AO for clearance certificate. The AO was of the view that the amounts to be remitted towards technical fees is taxable under s. 9(1)(vii) of the IT Act. Midhani agreed, under protest, for payment of taxes and also paid the tax accordingly. The AO issued no-objection certificate for all the remittances after Midhani had paid the necessary tax under s. 195, with regard to the taxability of the income of the non-resident, under the IT Act, purported to have accrued under the supplemental contract.
Midhani had filed returns on behalf of all the above non-residents for the asst. yrs. 1980-81, 1981-82 and 1982-83. The non-residents represented by Midhani and the returns were signed by the Managing Director of Midhani, as agent of non-resident companies. Nil income had been furnished in all the returns and claim was made for refund of the TDS under s. 195. The AO reiterated his stand and completed the assessments holding that the amount paid by Midhani to the non-residents was technical fees taxable under s. 9(1)(vii) of the IT Act and the assessments did not result in any demand or refund.
Aggrieved by the order passed by the AO, in the case of non-resident companies represented by Midhani, appeals have been filed before the CIT(A). The CIT(A) held that the contracts were only for purchase of two machines along with various accessories and spares, and for setting up of the machinery in India, the non-residents had to depute their employees and the amount remitted by Midhani was “towards reimbursement of expenses”. The reimbursement was made as per the terms of ‘supplemental contract’ which required the non-resident to provide necessary services for supervision of the erection, start-up etc., of the machinery supplied. The CIT(A) after referring to Expln. (2) to s. 9(1)(vii) observed that such payments would not be considered as technical fees. He also held that there was no business connection between the non-residents and Midhani that the services rendered by technical personnel were connected with the effective fulfilment of the contract of sale and were merely incidental to such contract for sale. He also relied on the decision of this Court in CIT vs. Visakhapatnam Port Trust (1984) 38 CTR (AP) 1 : (1983) 144 ITR 146 (AP). Accordingly, held that the remittance and the reimbursement of expenses could not be considered under s. 9(1)(vii) of the Act. The matter was carried in appeal to the Tribunal. The Tribunal was in full agreement with the findings of the CIT(A) and further observed that the machinery supplied by non-residents were not ordinary machines, but were designed to the required specifications and manufacture was made in the foreign country and after it was tested, it was shipped to India. After reaching India, the machinery had to be again assembled, erected and commissioned. Being sophisticated machineries, they required experts’ assistance in assembling, erection, start-up and commissioning. The responsibility for this was squarely rested on the non-residents as per para 2.13 in Part-II of the contract. Further the supplemental contract was accordingly entered into for deputing the services of specialists. This supplemental contract nevertheless flowed from Part-II of the main contract. No doubt the preamble of the supplemental contract referred to the services of the employees as technical services. When once this basic pattern of the contract is understood, no income accrued in India under s. 5(2). The sale was completed in the foreign country, and hence, there was no business connection within the meaning of s. 9(1)(i).
7. The Tribunal also considered the provisions of s. 9(1)(vii) and felt that there was no service rendered by the technicians, which could be considered to come under Expln. 2. However, the Tribunal concluded that the returns filed by Midhani are non est in law, and as such, the CIT(A) could not have entertained an appeal against non est returns and the appellate authority such as to the admissibility of the appeal, and as such, it was of opinion that the entire matter should go back to the CIT(A) to consider the admissibility of these appeals before him in view of the findings given by them. Under these circumstances, the Tribunal filed an application under s. 256(1) of the IT Act and the same were directed to be referred to it by this Court. Thus, the questions of law referred to are as under :
“1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the contract/agreement between the non-resident and Midhani stipulating payment for the purpose of deputing technicians to India for erection, start-up, putting into commission, conducting performance tests and demonstration of performance of the machinery supplied f.o.b. by the non-resident under another contract did not bring about a business connection for the nonresident in India within the meaning of s. 9(1)(i) of the IT. Act ?
Whether, on the facts and in the circumstances of the case, Tribunal was correct in law in holding that the words in parenthesis, viz., “including the provision of services of technical or other personnel” occurring in Expln. 2 to s. 9(1)(vii) though coming under the term “fees for technical services” do not cover the fees/payments received by the non-residents for erection, start up and commissioning the machinery supplied by it f.o.b. and also that description of the services rendered in the agreement as “technical services” is not significant ?
Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the fees payable to the non- resident by Midhani under an independent contract was to be always read as coming within the contract for sale of machinery on f.o.b. basis, and further that the payment amounted only to reimbursement of expenses on the non- resident’s technicians, and also that it did not in any case amount to fees for technical services taxable under s. 5(2) r/w 9(1) (vii) of the IT Act?
Whether, on the facts and in the circumstances of the case, the Tribunal ought to have held that the independent contract stipulating payment to the non-resident for the technical services rendered for erection, start up and commissioning, etc., of the machinery supplied f.o.b. under another contract was independent of the sale consideration and consideration for such services would come within the meaning of fees for technical services under s. 9(1)(vii) of the IT Act ?
Whether, on the facts and in the circumstances of the case, the Tribunal ought to have held that the orders of the ITO and CIT(A) based on invalid returns filed by Midhani as representing the nonresidents, were non est in law and accordingly ought to have annulled the same; and consequently refrained from expressing an opinion as to the taxability or otherwise of the payments received by the non-residents, which became purely academic issue ?”
8. In this backdrop, it is necessary to quote the relevant clauses of the contract entered into between Midhani and non-resident companies, dt. 28th Aug., 1978. Preamble : “in consideration of the payments to be made by the purchaser, the contractor agrees and undertakes the design, manufacture, inspection, testing, sea/road/rail-worthy packing, sale delivery FOB and furnishing performance Guarantee, etc. In accordance with contract documents mentioned hereinafter of one number of combined drawing, straightening cutting and polishing machine, commissioning spares, tools and tackles, spares for two years operation, consumables and operating supplies etc., based on the purchaser’s Tender Enquiry No. MDN/PUR/CG/GT/054, and the contractor’s tender submitted in response thereto vide Contractor’s Offer No. MFV/Pa/Te/eea/ dt. 26th Jan., 1977 and MFG/Pa/Te/eea dt. 23rd August, 1977 including subsequent modifications as incorporated in the contract documents”. Part-I of the contract furnishes the technical specifications of the combined drawings etc., machines to be supplied by SCHUMAG GMBH as per cl. 2.1.1 of Part-II p. 2 of the contract. Part-II of the contract also deals with the mode of payment, the security deposit, shipping instructions, nature of shipping documents to be furnished, insurance, etc.
9. As per cl. 2.12.1 of Part-II of the contract, all the equipments shall be guaranteed by the contractor for workmanship and material and satisfactory performance in accordance with the relevant clauses of the invitation to tender and general conditions of contract. As per cl. 2.13 of Part-II : “A separate contract is entered into among the purchaser, the contractor and their Indian Agent’s namely, M/s Orient Engg. and Commercial Co. Ltd., Calcutta-1 for complete erection and supervision of erection, start-up putting into commission including performance tests of the equipment supplied under this contract. Notwithstanding the conclusion of the aforesaid separate contract, the contractor is solely responsible under this contract for overseeing the erection work from the commencement of the erection and completion thereof, start-up, putting into commission of the equipment and up to the satisfactory demonstration of the performance guarantee of the equipment supplied under this contract and for the performance of the equipment during the subsequent guarantee period as specified in cl. 2.12.1.1 hereof”.
In the light of this cl. 2.13 of Part-II of this contract, Midhani had entered into a supplementary contract, dt. 28th Aug., 1978 with Schumag, whereby : “The contractor shall provide technical services for the supervision of erection, start-up, putting into commission, conducting performance tests, demonstrating performance guarantee of the aforesaid equipment complete in all respects to be supplied by the contractor under the contract numbers MDN/PUR/CC/037, dt. July 1978, entered into between the purchaser and the contractor and accordingly the relevant provisions of the invitation to tender and general conditions of contract”. As per cl. 2.1 of this supplemental agreement : “in order to carry out his responsibilities and obligations under this contract, the contractor shall depute the requisite number of responsible technical personnel from West Germany who is experienced and competent in the fields of work involved under this contract (hereinafter referred to as ‘specialist’) to take residence at the plant site of Mishra Dhatu Nigam Ltd., at Hyderabad (India) upto a maximum of thirty working days…..” As per cl. 3.1 for the deputation of the specialists : “the purchaser will reimburse the contract at the rate of DM 475 Deutsche Marks four hundred seventy-five only per specialist per working day of stay at purchaser’s plant site towards the expenses incurred in West Germany by the contractor in respect of the specialists including their salary, social charges and all other incidental expenditure”. As per cl. 6.1, the expenses incurred in West Germany by the contractor in respect of the specialists will be reimbursed by the purchaser to the contractor in West Germany Deutesche Marks.
The learned counsel for the Revenue fairly conceded that having regard to the fact that the Tribunal had entertained the appeal, the question that the appeals filed by Midhani are non est does not arise. The learned counsel for Midhani, Mr. S. Swamy, also argued that the question No. 5 does not arise, since it was not put in issue at any point of time during the proceedings before the authorities. Apart from this, he submits, that the very same question had come up for consideration before the Tribunal in ITA Nos. 130 to 167/Hyd./1988, dt. 29th Dec., 1995, and it was held that Midhani has a right to file an appeal, and therefore, earlier finding that Midhani was not the agent of non-resident company and it was under a mistaken impression that it could substitute itself for the non-resident company and that the return which M/s Mishra Dhatu Nigam Ltd. have filed for non-resident company was non est was reversed. Thus, the question No. 5 can be ignored. Insofar as the question Nos. 1 to 4 are concerned, they are interconnected and overlapping, hence they may be simplified as under :
“1. Whether the assessee has income accruing and arising in India which is chargeable under s. 5 (2) of the IT Act ? If s. 5(2) is not applicable then there is any business connection and the income accrued could be deemed to be under s. 9(1)(i) of the IT Act ? Even if s. 9(1)(i) of the IT Act is not applicable, whether the provision of s. 9(1)(vii) of the IT Act are applicable ?”
The counsel for the Revenue argued that the terms of the contract clearly show that the amounts were paid as “fee for technical services”, and thus covered by s. 9(1)(vii) of the Act and the income by way of ‘fee for technical services’ be deemed to accrue or arise in India with reference to the source. He placed reliance on the judgment in CIT vs. Hindustan Shipyard Ltd. (1975) 1975 CTR (AP) 97 : (1977) 109 ITR 158 (AP) wherein the main thrust was whether the assessee has business connection with the foreign company as to attract ss. 9(1)(i) and 163(1)(b) of the IT Act and it was held that: “It is true that the polish company agreed to render certain limited services. But those services were connected with the effective fulfilment of the contract of sale and were merely incidental to the contract, usually included in all such contracts, by way of guarantee of the efficient working of the products sold. They were not services, which created an interest of the type seen in the case of CIT vs. Carborandum Co. (1973) 92 ITR 411 (Mad).” The question was answered in favour of the assessee. Thus, these decisions are noway helpful to the Revenue.
13. Further reliance was placed upon the judgment rendered in Skoda Export vs. Addl. CIT (1983) 37 CTR (AP) 77 : (1983) 143 ITR 452 (AP). This is also a case where the “business connection” was examined and the question was answered in favour of the Revenue holding that the nonresident rendering technical assistance and consultancy in the installation of plant, etc., by deputing personnel and the income received by it attributable to its activity in India, and as such, taxable through it’s resident agent.
14. Further in Bharat Heavy Plate & Vessels Ltd. vs. Addl. CIT (1979) 9 CTR (AP) 4 : (1979) 119 ITR 986 (AP) their Lordships held that : “We are of the opinion that the activities referred to in both the agreements satisfy the expression ‘business connection’. There is an element of continuity between the business of both the companies. It is not a case of a mere stray or isolated transaction as contended by the counsel for the assessee. The non-resident company having agreed to render technical co-operation for the construction of the plate and vessels plant at Visakhapatnam had also supplied the machinery, equipment and instruments and rendered technical co-operation in the erection of the plate and vessels plant at Visakhapatnam. As stated earlier, the price payable for the documentation was Rs. 30,00,000 and for consulting activity, Rs. 11,91,735. It is no doubt true that, so far as the machinery, equipment and instruments, etc., are concerned, the sales took place outside the territory of India. It is clearly mentioned in the agreement that the delivery of machinery, equipment and instruments, etc., shall be completed f.o.b. European Port, and the time of fulfilment of delivery is the date of the bills of lading. These make it clear that the goods were sold on ‘f.o.b., European Port’ basis. Hence, so far as machinery is concerned the sale took place outside the territory of India. But on a combined reading of both the agreements there is a business connection between the non-resident and the assessee. There is a real and intimate connection between the trading activity within the taxable territories and this relation amounts to a business connection through or from which income accrued or arose to the non-resident….”
15. After elaborate discussion, it was held that “whether a non-resident has a business connection in India from or through which income or profit can be said to accrue or arise within the meaning of s. 9 of the IT Act has to be determined on the facts of each case having regard to the various activity of the non-resident company”. The question was answered in favour of the Revenue. Therefore, the learned counsel for the Revenue argues that there is a “business connection”, and the reimbursement made by the Midhani attracts the provisions of the IT Act, and as such, assessable and taxable.
16. On the other hand, the learned counsel for the respondent i.e., Midhani argued that the foreign/non-resident companies have supplied the equipments of the specifications required. The specifications given by the Midhani for the purpose of assembling, erection, start-up and commissioning, the technical experts were deputed to India and such technical expertise would form part of the original agreement and amounts to one single transaction i.e., Parts I, II and the separate agreement made for the purpose of deputation of the experts. The counsel for the respondent argued that a plain reading of s. 9(1)(vii) Expln. 2 would suffice to make it clear that the services rendered by the foreign companies does fall into the exceptions made therein. Sec. 9 (1)(vii) reads as under :
“9(1) the following incomes shall be deemed to accrue or arise in India—………. (vii) income by way of fees for technical services payable by— (a) the Government; or (b) a person who is a resident, except where the fees are payable in respect of services utilized in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or (c) a person who is a non-resident, where the fees are payable in respect of services utilized in a business or profession carried on by such person in India or for the purpose of making or earning any income from any source in India : Provided that nothing contained in this clause shall apply in relation to any income by way of fees for the technical services payable in pursuance of an agreement made before the 1st day of April, 1976 and approved by the Central Government. Explanation 1 : For the purposes of the foregoing proviso an agreement. made on or after the 1st day of April, 1976 shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date. Explanation 2 : For the purposes of this clause, the “fees for technical services” mean any consideration (including any lump sum consideration) for rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction assembly, mining of like project undertaken by the recipient or consideration, which would be income of the recipient chargeable under the head ‘Salaries’.”
The counsel for the respondents further argued that the judgment cited by the Revenue are related to the assessment years prior to the introduction of s. 9(1)(vii) of the IT Act, and as such, they cannot be looked into, as that was not the law governing the field after amendment of s. 9.”
The counsel for the respondents emphatically placed reliance on Expln. 2 of the said s. 9(1)(vii) of the IT Act. He submitted that in fact there was no business connection between the non-resident company and the Midhani. The non-resident companies have only extended the technical services, which are part and parcel of the agreement between the principal and the Midhani.
17. Mr. S. Swamy, the learned counsel for the respondent placed reliance in the judgment rendered in Orissa Synthetics Ltd. vs. ITO & Ors. (1993) 115 CTR (Ori) 419 : (1993) 203 ITR 34 (Ori) wherein it was held that :
“(i) … the impugned payment could not be held to be salary within the meaning of s. 15. It appeared from an examination of the collaboration agreement that the payment was made to the seller and not to the non-resident technicians. The payment of 350 U.S., dollars per man day of time spent by the experts of the seller including days off while away from the home base was in consideration of the assistance which the seller was required to provide under art. V.1(a) of the agreement which did not in anyway concern the design and placing of orders for major plant and machinery. Hence, the payment was not chargeable as salary so far as ‘C’ was concerned. The payment sought to be made for which the permission of the IT authority had been sought was not payment to any technical expert but was a payment to ‘C’ made under art. VI for the services rendered under art. V.1(a) of the agreement….”
18. He further relied upon the judgment rendered in CIT vs. Copes Vulcan Inc. (1986) 57 CTR (Bom) 244 : (1987) 167 ITR 884 (Bom) wherein an identical question was referred to the Madras High Court, and it was held that : “For the purpose of appreciating the relevant scope of s. 9(1)(i) and s. 9(1)(vii), the proviso to s. 9 (1)(vii) cannot be looked into. As already stated, s. 9(1)(i) is general in nature and s. 9(1)(vii) refers to a particular type of income and is a special provision dealing with fees for technical services rendered by the foreign company. The technical services may be rendered as a result of a business connection or otherwise. Having regard to the language used in s. 9(1)(vii), it is not possible to construe that provision as referring to income by way of fees for technical services in cases not involving business connection. Whether there is a business connection or not, any income by way of fees for technical services should, therefore, be taken to have been covered by the provision in s. 9(1)(vii). When there is a special provision dealing with a special type of income, such a provision could exclude a general provision dealing with income accruing or arising out of any business connection. Since s. 9(1)(vii) will comprehend income by way of fees for technical services rendered as a result of business connection or otherwise, it is not possible to apply the provision in s. 9(1)(i) merely because s. 9(1)(vii) stands excluded as a result of the proviso. If such a contention as is put forward by the Revenue is accepted, then in respect of cases arising after 1st April, 1976, when the proviso will have no application, there will be two provisions operating in the same field in respect of fees for technical services. Such a construction should normally be avoided. We are, therefore, of the view that the income by way of fees for technical services either arising out of business connection or not will have to be treated as coming only under s. 9(1)(vii) and not under s. 9(1)(i)…..”
19. He further relied upon the judgment rendered in Meteor Satellite Ltd. vs. ITO (1979) 12 CTR (Guj) 206 : (1980) 121 ITR 311 (Guj), wherein it was held that : “… The novation or tripartite agreement was binding between the foreign collaborator and the petitioner and that agreement was made before 1st April, 1976. The Government had accepted that the agreement of 26th Sept. 1974, should be deemed to have been executed between the petitioner-company and the Italian company. The first instalment was for transfer of data, documentation, etc., and the second instalment was for imparting of information in respect of the specifications for designs of the machinery, which had to be selected and inspected by the foreign collaborator. The instant case was, therefore, clearly covered by the proviso to s. 9(1)(vi) and the first two instalments aggregating to five thousand sterling pounds could not be said to be income deemed to accrue or arise in India. . . .”
20. It was further submitted that the payments made by the Midhani under supplemental agreement also cannot be called ‘technical services’, as it would fall under the exception to Expln. 2 of s. 9(1)(vii) of the Act as the work undertaken was a mere assembling of machinery in India and any amounts paid towards this would not attract the provisions of IT Act and not assessable.
21. A plain and cumulative reading of the terms and conditions of the contract entered into between the principal to principal i.e., foreign company and Midhani i.e., preamble of the contract, Parts I and II of the contract and also the separate agreement, as referred to above, would clearly show that it was one and the same transaction. The one cannot be read in isolation of the other. The services rendered by the experts and the payments made towards the same was part and parcel of the sale consideration and the same cannot be severed and treated as a business income of the non-resident company for the services rendered by them in erection of the machinery in Midhani unit at Hyderabad. Therefore, the contention of the Revenue that as the amounts reimbursed by Midhani under a separate contract for the technical services rendered by a nonresident company, it must be deemed that there was a “business connection”, and it attracts the provisions of s. 9(1)(vii) of the IT Act cannot be accepted and the judgments relied upon by the Revenue are the cases where there was a separate agreement for the purpose of technical services to be rendered by a foreign company, which is not connected for the fulfilment of the main contract entered into principal to principal. This is not one such case and thus the contention of the Revenue cannot be accepted in the circumstances and nature of the terms of the contract of this case. Thus, we are of the considered opinion that no income accrued under s. 5(2) or there was any business connection, which is required under s. 9(1)(i), as there was no dealing between the nonresident and resident on principal-to-principal basis, as such, there was no business connection involved. Midhani, as one principal had entered into an agreement with another principal, the nonresident company in respect of purchasing of machinery. The supplementary contract was only by way of an abundant caution and it does not mean that the payment made is either to be taxable or will be tax-free. All that it means is, in case the payments are taxable, the same would be borne by the Midhani. The expenses met by Midhani under the supplementary contract were part of the consideration for setting up of the machinery. The expenses met cannot be viewed in isolation from the main contract and once if this is so, whether the payments were made on daily basis or not for any technical services rendered would form part and parcel of consideration for the purchase of machinery. Thus, the provisions of s. 9(1)(vii) of the IT Act would not be applicable to the facts of this case. On the other hand, such payments are exempted under Expln. 2 of s. 9(1)(vii)
of the IT Act.
Thus, the questions 1 and 4 are answered in favour of the assessee and against the Revenue.
[Citation : 262 ITR 110]
