Karnataka High Court
Aeg Aktiengesllschaft vs Commissioner Of Income-Tax on 17 March, 2004
Equivalent citations: [2004]267ITR209(KAR), [2004]267ITR209(KARN)
Author: P. Vishwanatha Shetty
Bench: P. Vishwanatha Shetty, Ajit J. Gunjal
JUDGMENT P. Vishwanatha Shetty, J.
1. On the application made by the applicant --M/s. AEG Aktiengesllschaft (hereinafter referred to as "the assessee"), under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), the Income-tax Appellate Tribunal, by means of its order dated September 15, 1994, has referred the questions of law mentioned hereinbelow as arising out of the order dated August 24, 1993, made in I. T. A. No. 791/ Bang of 1987 by it. The questions are :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the engineering fees received/receivable by the assessee was in the nature of fees for technical services in accordance with the definition of 'fees for technical services' as given in Clause (4) of Article VIIIA of the amended Double Taxation Avoidance Agreement between the Republic of India and the Federal Republic of Germany ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the engineering fees received/receivable by the assessee could also be considered as falling within the definition of 'fees for technical services' even in terms of the provisions of Section 9(1)(vii) of the Income-tax Act, 1961, and that the restrictive clause in Explanation 2 to the said Clause (vii) of Section 9(1) of the Income-tax Act would not apply to the present case ?
3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the present case would be covered by Article VIIIA of the amended Double Taxation Avoidance Agreement between the Republic of India and the Federal Republic of Germany and not by Article III of the said agreement ?"
2. The facts in brief :
The assessee is a non-resident company incorporated in the Federal Republic of Germany. It does not have any permanent establishment of doing business in India. It entered into an agreement with Metallurgical Engineering Consultants (India) Ltd. (hereinafter referred to as "the MECON") and Rashtriya Ispat Nigam Ltd. (hereinafter referred to as "the RINL"). RINL is the parent company of Vishakapatnam Steel Plant. RINL wanted to set-up a light and medium merchant mill (hereinafter referred to as "the LMMM") at Vishakapatnam. The contract for the said work was awarded to MECON, which subsequently entered into a number of contracts with sub-contractors for performing the job. One such contract was between MECON and the assessee for the supply of electrical portions of the merchant mill. There was an agreement entered into between Vishakapatnam Steel Plant and MECON and another agreement entered into between MECON and the assessee. The contract entered into between the Vishakapatnam Steel Plant and MECON provided for direct payment by Vishakapatnam Steel Plant to the foreign sub-contractors, after certification and authorisation made by MECON and such payments, according to the contract, were to be considered as payments made to MECON by Vishakapatnam Steel Plant. The subject matter of dispute in this reference relates to the payment made by MECON to the assessee for the assessment year 1984-85. Before the Assessing Officer, on behalf of the asses-see, it was claimed that the engineering fees received by the assessee would be the fees for technical services and therefore, Article VIIIA(4) of the amended Agreement for Avoidance of Double Taxation (hereinafter referred to as "the DTA Agreement"), between India and Federal Republic of Germany would be applicable to the case ; and even if such technical services were given in India, since the payments were made to the resident of Germany in Germany and also by the German Bank, the taxability on the fees would arise only in Germany ; and since the assessee was not having any permanent establishment in India, there is no taxable liability on the part of the assessee in India in accordance with Article III read with Article VIIIA(5) of the amended DTA agreement between the two countries. It was further contended on behalf of the assessee that since the no objection certificate was also granted by the Income-tax Officer, Vishakapatnam, for deduction of tax in respect of remittances of the engineering fees without deduction, the assessee is not liable to pay the tax. However, the Assessing Officer, on consideration of the contentions of the assessee in detail, negatived all the contentions raised by the assessee by means of his order dated November 28, 1986, a copy of which has been produced as annexure A to this reference. The Assessing Officer found that since the German Bank was working merely as an agent of the Indian resident MECON/RINL, the payment although made in Germany, would be considered to have been made by the Indian party and would therefore be squarely covered by the deeming provisions of Clause (6) of Article VIIIA of the amended DTA Agreement. He further held that the exemption claimed was not applicable to the assessee and the payment for engineering fees was the payment made towards fees for technical services and as such was governed by the amended DTA Agreement entered into between the two countries, which had come into effect for the assessment year 1984-85 in accordance with Article XVI of the amended DTA Agreement. The grievance made by the assessee challenging the correctness of the order of assessment did not find favour in the appeal filed by it before the Commissioner of Income-tax (Appeals) (hereinafter referred to as "the Commissioner (Appeals)"). He took the view that the assessee had undertaken electrical contract for LMMM and in this connection it had prepared certain documents and drawings which were handed over to the Indian company and for the said purpose the assessee had received the consideration ; and the consideration so received for rendering technical services will be the fees for technical services within the meaning of Explanation 2 given to Section 9(1)(vii) of the Act although the technical documentation might constitute a "plant". Further, the Commissioner (Appeals), after referring to Articles VIIIA(2) and VIIIA(4) of the amended DTA Agreement found that the income of the assessee received by way of fees for technical services has to be treated only as coming within the scope of Section 9(1)(vii) and not under Section 9(1)(i) of the Act and Article VIIIA(4) of the amended DTA Agreement. The second appeal filed by the assessee was also unsuccessful. The Tribunal, while holding that if there is a conflict between national tax law and the amended DTA Agreement between the two countries, the provisions of the latter would prevail over the national taxation law, took the view that the payments received by the assessee have got to be considered as fees for technical services rendered by the assessee to the Indian concern and it is in consonance with the terms set out in the amended DTA Agreement. To come to this conclusion, the Tribunal took into account that the amended DTA Agreement provides for two different payments and the payment, which is the subject-matter of dispute, has been clearly termed in the agreement as "engineering fees". It also further took the view that since the burden was on the assessee to prove its contention that the payments made were not for technical services and the assessee had failed to discharge the burden, the engineering fees, as stipulated in the agreement really represented the engineering fees only and therefore such fees paid were in accordance with Article VIIIA of the amended DTA Agreement entered into between the two countries and also in terms of Section 9(1)(vii) read with Explanation 2 given to the said section. The Tribunal also negatived the contention of the assessee that the payments were covered under Article III of the amended DTA Agreement and as such were exempt from tax. On this, the Tribunal held that Article VIIIA of the amended DTA Agreement being specifically applicable for royalty and fees for technical services, it would prevail over Article III dealing with business profits in cases where the payment is clearly of the nature of fees for technical services. The Tribunal also negatived the contention of the assessee that the payments were assessable only on accrual basis and the payments accrued during the relevant assessment year alone was liable for tax. The Tribunal, relying upon the decision of the Madras High Court in the case of CIT v. Standard Triumph Motor Co. Ltd. [1979] 119 ITR 573 and the decision of the Supreme Court in the case of Standard Triumph Motor Co. Ltd. v. CIT , observed that so far as the non-resident assessee is concerned, accrual and receipt become synonymous and in the case of the assessee, the assessee has been taxed on actual receipt basis, in a year to year manner, and therefore the question of accrual of the income in India would be irrelevant to the issue of taxation on technical services received by the assessee. The additional contention of the assessee that the designs and drawings supplied had to be treated as* plant and machinery and could be termed as "engineering fees", was negatived by the Tribunal on the ground that no evidence was produced by the assessee to support such a contention. In the light of the conclusions referred to above, the Tribunal rejected the second appeal. In this background, as noticed by us earlier, the questions referred to above are before us for our opinion.
3. Sri G. Sarangan, learned senior counsel appearing along with Sri S. Parthasarathy, firstly, contended that the conclusion reached by the Tribunal that the engineering fees received by the assessee were in the nature of fees for technical services in accordance with the definition of fees for technical services as given in Clause (4) of Article VIIIA of the amended DTA Agreement entered into between the two countries is totally erroneous in law. In support of this contention, he referred to us several stipulations in the amended DTA Agreement. Secondly, he submitted that the Tribunal has also seriously erred in law in taking the view that the engineering fees received/receivable by the assessee could also be considered as falling within the definition of "fees for technical services" in terms of the provisions of Section 9(1)(vii) of the Act and that the restrictive clause in Explanation 2 to Clause (vii) of Section 9(1) of the Act would not apply to the case of the assessee. Finally, he submitted that the Tribunal also has erred in law in holding that the case of the assessee would be covered by Article VIIIA of the amended DTA Agreement entered into between the two countries and not by Article III of the said agreement. To buttress the submissions made by him he referred to us Sections 9 and 90 of the Act and also the relevant stipulations in the amended DTA Agreement. According to learned counsel, what has been supplied by the assessee were the plants, designs and drawings for the purpose of assembly of the project undertaken by the assessee and therefore the services rendered for the purpose of running of the unit cannot be considered as technical services. According to him "drawings" are goods and part of the other plant and therefore there is no technical service rendered by the assessee. Sri Sarangan also submitted that if the Agreement exempts the assessee and the Act does not, the Agreement will prevail ; and if on the other hand the Act is beneficial to the assessee as against the stipulations in the amended DTA agreement, the Act applies and not the amended DTA Agreement. It is also his submission that if there is no liability under Section 9(1)(vi) or (vii), the assessee cannot be made liable by reading the amended DTA Agreement only. He pointed out that the approach of the Tribunal that since there are two agreements entered into between the parties, it cannot look into the nature of the agreement, is erroneous in law. He further contended that the drawings and designs supplied by the assessee were only a portion of the entire project and therefore the same should be treated as "plant and machinery". In substance, it is his contention that the technical services and engineering fees received by the assessee should be treated as drawings and designs and consequently as plant and machinery, etc. He referred to us the decision in the case of Associated Cement Companies Ltd. v. Commr. of Customs ; in the case of Commr. of Customs v. Parasrampuria Synthetics Ltd. ; in the case of CIT v. Standard Triumph Motor Co. Ltd. [1979] 119 ITR 573 (Mad) ; in the case of Scientific Engineering House (Pvt.) Ltd. v. CIT ; in the case of CIT v. Davy Ashmore India Ltd. ; in the case of CIT v. Klayman Porcelains Ltd. ; in the case of Habib Hussein v. CIT [1963] 48 ITR 859 (Bom) ; in the case of CIT v. Ruti Machinery Works Ltd. ; in the case of CIT v. Koyo Seiko Co. Ltd. ; in the case of Ceat International S.A. v. CIT [1999] 237 ITR 859 (Bom) ; in the case of International Operating Services Ltd. v. CIT ; in the case of CIT v. Energomach Exports ; in the case of Arabian Express Line Ltd. of United Kingdom v. Union of India and in the case of CBDT v. Oberoi Hotels (India) Pvt. Ltd. .
4. However, Sri M.V. Seshchala, learned counsel appearing for the Revenue, strongly supporting the conclusion reached by the Tribunal pointed out that the questions referred require to be answered against the assessee and in favour of the Revenue. It is his submission that the provisions contained in Section 90 of the Act and the amended DTA Agreement entered into between the two countries, intend to protect the assessee who earns income so that he is not doubly taxed in two or more countries. According to him, for the purpose of taxation, in order to bring the gross income to tax which has been received by the assessee, what is required to be considered is the charging section and also provisions in Article VIIIA of the amended DTA Agreement. He admitted that if there is conflict between Section 9 of the Act and Article VIIIA of the amended DTA Agreement, Article VIIIA of the amended DTA Agreement would prevail. In this connection he also drew our attention to Circular No. 333, dated April 2, 1982 (see [1982] 137 ITR (St.) 1).
5. Before we proceed to consider the questions referred to us by the Tribunal on the merits, it is useful to refer to the relevant provisions of the Act and the provisions in the amended DTA Agreement entered into between the two countries. Sub-section (2) of Section 5 of the Act sets out the income of a nonresident. The said provision reads :
"5. Scope of total income.--(1) . . .
(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which--
(a) is received or is deemed to be received in India in such year by or on behalf of such person ; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year.
Explanation 1.--Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance-sheet prepared in India.
Explanation 2.--For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India."
6. Section 9 of the Act sets out the income which is deemed to accrue or arise in India. The relevant portions of Section 9, which may be useful for our purpose, is extracted, which reads as hereunder :
"9. Income deemed to accrue or arise in India.--(1) The following incomes shall be deemed to accrue or arise in India--
(i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India :
Explanation.--For the purposes of this clause-- . . .
(b) in the case of a non-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in India for the purpose of export ;... (vi) income by way of royalty payable by--. . .
(c) a person who is a non-resident, where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India :
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. . . .
(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 utilised 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 utilised in a business or profession carried on by such person in India or for the purposes 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 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, 'fees for technical services' means any consideration (including any lump sum consideration) for the 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 or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head 'Salaries'."
7. Chapter IX of the Act provides for double taxation relief. Section 90 of the Act confers power on the Central Government to enter into any agreement with the Government of any country for granting relief from payment of double tax both under the Indian law and under the foreign law. In terms of the provisions contained in Section 90 of the Act, a double taxation agreement dated February 24, 1983, came to be entered into between the Republic of India and the Federal Republic of Germany. Clauses (4) and (6) of Article VIIIA of the amended DTA Agreement and Article III of the said agreement read as follows :
"Article VIIIA. (4) The term 'fees for technical services' as used in this article means payments of any kind to any person, other than payments to an employee of the person making the payments, in consideration for services of a managerial, technical or consultancy nature, including the provision of services of technical or other personnel. . . .
(6) Royalties and fees for technical services shall be deemed to arise in a contracting State where the payer is that State itself, a land, a political sub-division, a local authority or a resident of that State. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a contracting State or not, has in a contracting State a permanent establishment in connection with which the obligation to make the payments was incurred and the payments are borne by that permanent establishment, then the royalties or fees for technical services shall be deemed to arise in the contracting State in which the permanent establishment is situated.
Article III. (1) The profits of an enterprise of a contracting State shall be taxable only in that State unless the enterprise carries on business in the other contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment.
(2) Subject to the provisions of paragraph (3), where an enterprise of a contracting State carries on business in the other contracting State through a permanent establishment situated therein, there shall in each contracting State, be attributed to that permanent establishment, the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment.
(3) In the determination of the profits of a permanent establishment, there shall be allowed as deductions, expenses which are incurred for the purposes of the business of the permanent establishment including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere, and according to the domestic law of the contracting State in which the permanent establishment is situated.
(4) In so far as it has been customary in a contracting State to determine the profits to be attributed to a permanent establishment on the basis of an apportionment of the total profits of the enterprise to its various parts, nothing in paragraph (2) shall preclude that contracting State from determining the profits to be taxed by such an apportionment as may be customary ; the method of apportionment adopted shall, however, be such that the result shall be in accordance with the principles contained in this article.
(5) No profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise.
(6) For the purposes of the preceding paragraphs, the profits to be attributed to the permanent establishment shall be determined by the same method year by year unless there is good and sufficient reason to the contrary.
(7) Where profits include items of income which are dealt with separately in other articles of this agreement, then the provisions of those articles shall not be affected by the provisions of this article."
8. We will now proceed to consider each of the questions referred to us by the Tribunal, on the merits. As noticed by us earlier, the Tribunal has taken the view that if there is a conflict between the provisions of the Act which provide for liability to pay tax under the Act and the amended DTA Agreement, the provisions contained in the amended DTA Agreement must prevail. We do not find any error in the said conclusion reached by the Tribunal. Reading of Section 90 of the Act makes it clear that the power is given to the Government of India to enter into an agreement with any country for the purpose of granting relief in respect of the income on which tax has been paid both under the Indian Income-tax Act and the Income-tax Act in that country or for the avoidance of double taxation of income under the Act and under the corresponding law in force in that country and for various other purposes. Further, Sub-section (2) of Section 5 of the Act provides that the total income of any previous year of a person, who is a non-resident, would include the income set-out in the said provision, subject to the provisions of the Act. Therefore, when the amended DTA Agreement is entered into between the two countries providing for avoidance of double taxation, in our view, it is reasonable to take the view that the provisions contained in the amended DTA Agreement would prevail over the provisions contained in the Act, so far as the liability of a non-resident Indian is concerned. Our view also gets support from Sub-section (2) of Section 90 of the Act. The said sub-section specifically provides that when an agreement is entered into by the Government of India with other countries outside India under Sub-section (1) for granting relief of tax, or, as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of the Act would apply to the extent they are more beneficial to the assessee. Therefore, when Sub-section (2) of Section 90 of the Act itself specifically provides that between the stipulations provided in the amended DTA Agreement and the Act, the provisions of the Act, to the extent they are more beneficial to the assessee, should apply, as rightly pointed out by the Tribunal, if the provisions of the amended DTA Agreement are more beneficial to the assessee, the same have to prevail over the provisions of the Act. Our view is also supported by the decision of Calcutta High Court in the case of Davy Ashmore India Ltd. [1991] 190 ITR 626 wherein the court at page 630 of the judgment has observed thus :
"In determining the liability of a non-resident company, if there is any Agreement for Avoidance of Double Taxation entered into under Section 90 of the Income-tax Act, 1961, the said agreement must prevail over the provisions of the Income-tax Act; otherwise, there was no point in entering into any agreement for avoidance of double taxation. Whenever any specific arrangement or agreement has been made regarding the taxability of any income under the Agreement for Avoidance of Double Taxation, such arrangement or agreement will necessarily prevail over the provisions of the statute"
9. Now, we proceed to consider the first question. The Tribunal, on examination of the stipulations in the amended DTA Agreement entered into between the assessee and MECON, has found that the engineering fees received/receivable by the assessee were in the nature of "fees for technical services" in accordance with the definition of fees for technical services as given in Clause (4) of Article VIIIA of the amended DTA Agreement entered into between the two countries. To come to the said conclusion, the Tribunal at paragraph 7.2 of the order, has observed as follows :
"7.2 Since so far as the definition of 'fees for technical services' is concerned, we have to be guided by the abovementioned article of the Double Taxation Avoidance Agreement only, we must come to the conclusion that in the instant case, the payments having been made in consideration for services of a technical nature, the said payments have got to be considered as fees for technical services rendered by the asses-see-company to the Indian concern. This definition is more or less in conformity with Explanation 2 to Section 9(1)(vii) of the Income-tax Act, 1961. However, the restrictive clause as found in the said Explanation does not appear in the definition as found in the DTA Agreement. In any case, the restrictive clause cannot be considered to apply to the present case inasmuch as the assessee cannot be considered to have undertaken any project for construction or assembly in India. It is the assessee's own version that the assessee merely took part by way of a sub-contractor and supplied certain drawings, designs and documentations to the Indian company."
10. Further, at paragraph 8 of the order, the Tribunal has observed that since the agreement provides for two different payments and the payments under consideration have clearly been termed in the agreement as "engineering fees", there is no reason for it to think otherwise than that the payment was actually made was not in the nature of "fee paid for technical services". It has also found that since the burden is on the assessee to show that the payments made were not for technical services and the assessee has failed to discharge the burden by showing that what is apparent in the agreement between the two parties is not the real state of affairs ; and the "engineering fees", as stipulated in the agreement, really represented the "engineering fees" only and therefore, such fees, in accordance with Article VIIIA of amended DTA Agreement must be considered as payments made for technical services. Thus, the Tribunal affirmed the finding recorded by the Commissioner (Appeals) and the Assessing Officer. We do not find any error in the said conclusion reached by the Tribunal. It is necessary to point out that the return filed by the asses-see shows that the assesee itself has shown it as "engineering fees". The Tribunal negatived the contention of the assessee that the engineering fees paid should be treated as plant and machinery as the drawings and designs were prepared outside India and delivered outside India. In our view, the decision in the case of Scientific Engineering House Pvt. Ltd. relied upon by Sri Sarangan is of no assistance to him. In that decision, the Supreme Court, on interpretation of relevant terms in the two agreements, and more particularly Clauses 3 and 6 of the agreement which came up for consideration, took the view that the payments made were really for rendition of documentation services which was the main service to be rendered by the foreign collaborator and it was not an incidental service and the payment made could be regarded as being mainly for and by way of purchase price of the drawings, designs, charts and all other documents comprised in the documentation service specified in Clause 3 of the agreement. This is clear from the observation made by the court which reads as hereunder (page 92) :
"Turning to the first question, having regard to the relevant terms of the two agreements, we find it very difficult to accept the view concurrently expressed by the Tribunal and the High Court that the 'documentation service' undertaken to be rendered by the foreign collaborator to the assessee was incidental or that the payment of Rs. 1,60,000 could not be regarded as being mainly for and by way of purchase price of the drawings, designs, charts, plans and all the documents comprised in 'documentation service' specified in Clause 3 of the agreements. Such a view as will be shown presently runs counter to the express language contained in Clauses 3 and 6 of the agreements."
11. That is not the position here. In the present case, the assessee has undertaken the electrical contract for light and medium merchant mill and in that connection, it had prepared certain documents and drawings which were handed over to the Indian company--MECON. It is necessary to point out that separate payments were made towards drawings and designs. It cannot be disputed that depending upon the nature of the work entrusted, the nature of technical services rendered also varies. Therefore, it cannot be laid down in strait-jacket formula what could be considered as technical services which can have universal application. We are also unable to accede to the submission of Sri Sarangan that since the manufacture of equipment has to be in accordance with the design and drawing and without design and drawing no erection can be done and therefore the design, drawing technical data, etc., should be treated as cost of plant and machinery and have to be added to the cost. Even for the purpose of manufacture of equipment, technical services may have to be given. As noticed by us earlier, the format or the method of technical services may vary depending upon the nature of the work undertaken or entrusted. It is for the parties to agree upon what should be the nature of technical assistance or service to be rendered. In a given case, supply of design and drawing also could be in the nature of technical services. Supply of design and drawing cannot, in all circumstances, be treated as cost of plant and machinery. In a matter where installation of sophisticated machinery or where the manufacturing process is involved through the machinery, in that case, the supply of necessary designs and drawings, which would enable the working of the machinery, in our view, can be considered as technical services rendered. Just as information or advice tendered by a lawyer either could be oral or writing, in our view, supply of technical services in the nature of printed documents by way of design, chart or drawing and depending upon the nature of the services rendered, can be treated as "technical service". Ultimately, the question is how the parties have understood with regard to the nature and purpose for which the payment is made. In the instant case, as rightly concluded by the Tribunal and the subordinate authorities, the engineering fees paid have to be understood as "payment made for technical services". The decisions in the case of Associated Cement Companies Ltd. ; Parasrampuria Synthetics ltd. ; Klayman Porcelains Ltd. ; Neyveli Lignite Corporation Ltd. and in the case of Energomach Exports , relied upon by Sri Sarangan, in our view, will not be of any assistance to him.
12. In the case of Associated Cement Companies Ltd. one of the questions that came up for consideration before the Supreme Court was, whether the drawings, diskettes, manuals, imported to India specified in the Customs Act and the Tariff Act are statutorily regarded as goods attracting a specified rate of customs duty on their import to India. The court took the view that they are "goods". This is clear from the observation made by the court in paragraphs 30 and 31 of the judgment. Further, the court also took the view that in the light of the provisions contained in the Customs Act and the Tariff Act that when technical material is supplied in the form of drawings or manuals, they are "goods" liable for payment of customs duty on the transaction value in respect thereof. There is scope for splitting the engineering drawing into intellectual input, on the one hand and the paper or material on which it is inscribed, on the other. This is clear from the discussion made by the court at paragraphs 43, 44 and 49 of the judgment. The observation made in the said judgment is of no assistance to the assessee to support its contention that the supply of drawings, designs, charts, etc., are plant and machinery, and as such are not in the nature of technical services rendered.
13. Similar is the position in the case of Parasrampuria Synthetics Ltd. , relied upon by Sri Sarangan. In the said case, the assessee imported certain printed drawings, designs and plans under an agreement for transfer of technology for the purpose of setting up a plant to manufacture polyester, polyester filament yarn and polyester staple fibre. It was the case of the assessee that the goods so imported were covered under serial No. 10 of the Notification No. 25/95 Cus., dated 16th March, 1995, wherein the printed books including covers for printed books and printed manuals including those in loose-leaf form with binder attracted "nil" duty. However, the Department took the view that the goods were covered under item No. 15 of the said notification attracting 10 per cent. duty and on that basis imposed duty and also levied penalty. The Supreme Court while considering the question that the goods imported by the assessee in the form of drawings, designs and plans for transfer of technology for the purpose of setting up a plant to manufacture polyester, polyester filament yarn and polyester staple fibre were not goods covered by serial No. 10 of the notification but were covered under item No. 15 of the notification, took the view that the goods imported have none of the characteristics of a book known in common trade parlance and they fall within the definition of a "plant". In our view, the observation made by the court for the purpose of considering the question whether the printed drawings, designs and plans imported would attract customs duty, is of no assistance to Sri Sarangan to support his contention that the drawings, designs and charts in the present case also would fall within the meaning of plant and machinery.
14. The decision in the case of Klayman Porcelains Ltd. relied upon by Sri Sarangan is also of no assistance to him. In the said case, the question that came up for consideration was with regard to the nature of "royalty". While considering the said question, having regard to the relevant terms in the agreement and in the background of the finding recorded by the Tribunal, the Andhra Pradesh High Court took the view that the consideration was paid for construction/installation of kiln ; and in the light of the said conclusion, the court took the view that it was unable to take the view that the amount was paid for imparting any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property falling under Clause (ii) of Explanation 2 or for imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill within the meaning of Clause (iv) of Explanation 2 of Section 9(1)(vi) of the Act. This is clear from the observations made at the concluding part of the judgment wherein the court has observed thus (page 740) :
"A close reading of the second type of works as well as the other terms of the memorandum, leaves no doubt in our mind that the consideration was paid for construction/installation of kiln. Hence, we are unable to say that the amount was paid for imparting any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property falling under Clause (ii) of Explanation 2 or for imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill within the meaning of Clause (iv) of Explanation 2."
15. In the case of Neyveli Lignite Corporation Ltd. , on examination of the terms of the contract, the Madras High Court took the view that there was no transfer or licence of any patent invention, model or design and the design referred to in the contract is only the design of the equipment required to be manufactured by the supplier abroad and supplied to the purchaser. In the light of the Explanation regarding royalty given under Explanation 2 to Section 9(1)(vi) of the Act, the court took the view that in a contract for the design, manufacture, supply, erection and commissioning of the machinery which does not involve licence of the patent concerning the machinery, or a copyright of the design, mere supply of drawings before the manufacture is concerned to ensure that the buyer's requirements are fully taken care of ; and the supply of a diagram and other details to enable the buyer to operate the machines ; and also to assure the buyer, that the machines will perform to the specification required by the buyer, such supply should be considered as only incidental to the performance of the total contract which includes design, manufacture and supply of the machinery and the price paid by the assessee to the supplier in such circumstances should be treated only as a total contract price which covers all the stages involving supply of machinery from the stage of designing to the stage of commissioning. In that background the court took the view that no licence of any patent is involved and "Sub-clause (vi) and also (vii) of Section 9(1) of the Act" could have no application as the design was only preliminary to the manufacture and integrally connected therewith.
16. In the case of Energomach Exports , the question that came up for consideration before this court was whether rendering of services for erection of the machinery sold by the assessee-company to the Karnataka Power Corporation and making the machinery function by deputing engineers and offering technical services amounts to transaction involved in business connection. After considering what is meant by "business connection", the court observed thus (page 452) :
"In the present case, the foreign company has no share or interest in the management of the Indian company. The foreign company has sold the machinery to the Indian company and for installation of the said machinery and plant supplied technical personnel and technical services until the machinery starts functioning and production. Thereafter, the services of the technical personnel in the Indian company will cease and the Indian company is not responsible to the foreign company. Except to complete the terms of the agreement entered into for the purchase of machinery there is no other interest of the foreign company in the Indian company. Therefore, it cannot be said that there is any business connection or the salary and other expenses paid to the technical personnel will amount to the expenses incurred in business connection."
17. Therefore, we are of the view that the said decision is also is of no assistance to Sri Sarangan to support his contention.
18. As noticed by us earlier, technical services rendered varies depending upon the nature of the work undertaken and the nature of the services received. If the parties have treated certain services as technical services and remuneration was fixed for the said services, it is not open to the assessee, at a later stage, to contend that the remuneration received was not by way of "fees for technical services" rendered. In the agreement entered into between the asses-see and MECON, "engineering fee" is separately set out. If all the authorities below have, on consideration of the claim of the assessee and reading of the agreement as a whole, recorded a finding that the remuneration received by the assessee was by way of "fees for technical services" rendered, we do not find any justification to take a view different from the one taken by them. We do not find any error much less an error of law in the conclusion reached by the Tribunal and the subordinate authorities that the payment in question made relates to "technical services". Therefore, the first question referred to us is required to be answered against the assessee and in favour of the Revenue.
19. With regard to the second question also, we are of the view that there is no error in the conclusion reached by the Tribunal that the "engineering fees" paid were for technical services as contemplated under Section 9(1)(vii) of the Act. In our view, the provision contained in Clause (6) of Article VIIIA of the amended DTA Agreement entered into between the two countries, is similar to the provisions contained in Section 9(1)(vii) of the Act. No doubt, it is true that the restrictive clause as found in Explanation 2 given to Section 9(1)(vii) of the Act does not appear in the definition as found in the amended DTA Agreement entered into between the two countries. However, it is necessary to point out, as rightly found by the Tribunal, the restrictive clause given to Explanation 2 of Section 9(1)(vii) of the Act cannot be considered to apply to the facts of the present case, inasmuch as the assessee cannot be considered to have taken any project for construction or assembly in India. It is only payments made for any construction, assembly or like project undertaken by the assessee, which are excluded from the purview of income received by way of fees for technical services as set out in Section 9(1)(vii) of the Act. It is true, as contended by Sri Sarangan, that if the provisions contained in the taxing statute are more beneficial to the assessee than the terms contained in the amended DTA Agreement, then the provisions contained in the taxing statute will prevail and the benefit contained in the Act must be extended to the assessee. However, in the instant case, as rightly noticed by the Tribunal, we do not find any contradiction between the provisions contained in the taxing statute and the terms contained in the amended DTA Agreement. The terms provided in the amended DTA Agreement are consistent with the provisions contained in Section 9(1)(vi) of the Act. Therefore, the assessee cannot take assistance from the provisions contained in Section 9(1)(i) of the Act.
20. We also do not find any merit in the submission of Sri Sarangan that the manufacture of the equipment is required to be made in accordance with the design and drawing and without design and drawing, no erection can be done or the equipment operated, and therefore, the design, drawing and chart, etc., should be treated as plant and machinery and are required to be added to the cost. It is necessary to point out that this was not the case pleaded before the Assessing Officer. The assessee cannot be permitted to make out a new case, which was not pleaded before the Assessing Officer. Further, as noticed by us earlier, if the object of the preparation of designs and drawings is to bring home the point as to how the manufactured equipment is required to be erected, the same should also be considered as technical advice rendered. The technical service rendered cannot be given a restricted meaning to understand only as oral advice given, etc. It could, as noticed by us earlier, be in the nature of preparation of designs and drawings. So long as the parties have treated it as technical advice, the parties are bound by it and when the question of liability to pay tax arises, the assessee cannot be permitted to turn around and say that the supply of designs, drawings, etc., are part of plant and machinery and must be added to the cost. Since the contract in question deals with the execution of several works, merely because the provision is made for security deposit/guarantee or provision for levy of liquidated damages for execution of the project, in our view, that is of no assistance to support the contention of Sri Sarangan that the payments were not made for rendering the technical services. As noticed by us earlier, the Tribunal has negatived the claim of the assessee that the payment made to the assessee by MECON should be construed towards the plant and machinery supplied by it on the ground that undisputedly there is a separate provision made in the agreement for making payment by MECON to the assessee towards cost of plant and machinery. The Tribunal also has not accepted the plea that a separate provision for payment towards plant and machinery and for engineering services was made in the agreement only for the sake of convenience. In this connection, it is useful to refer to the observation made by the Tribunal at paragraph 8 of the order, which reads :
"8. The other contention of the assessee that the payments under consideration represented supplemental payments towards cost of the plant and machinery supplied by it may also be examined by us now. It is an admitted fact that there is a separate provision for making of payment by the Indian company to the assessee towards such cost of plant and machinery. The representative of the assessee has merely stated that for the sake of convenience only the supplemental payment for that purpose was stipulated as engineering fees in the contract between the two parties. The said representative has not, however, come up with any concrete reasons or evidence in support of this particular contention. Since the agreement shows two different payments and the payment under consideration has clearly been termed in the agreement as 'engineering fees', there is no reason for us to think otherwise that this payment is also actually supplemental to the other payment. In any case, the onus lies heavily on the assessee to prove its contention in this regard by showing that what is apparent in the agreement between the two parties is not the real state of affairs. The assessee has not undertaken any care to discharge its onus. In the face of such facts and circumstances, we must come to the conclusion that the engineering fees as stipulated in the agreement really represented engineering fees only, and therefore, such fees in accordance with Article VIIIA of the amended Double Taxation Avoidance Agreement between the two parties or even in terms of Section 9(1)(vii) read with Explanation 2 to the said section."
21. We do not find any error in the said conclusion reached by the Tribunal. We have no hesitation to approve the conclusion reached by the Tribunal that the engineering fees paid to the assessee were for technical services as contemplated under Section 9(1)(vii) of the Act. In the light of the above conclusion, the second question referred to us by the Tribunal is required, unhesitatingly, to be answered against the assessee and in favour of the Revenue.
22. Now, the only question that remains to be considered is whether the Tribunal was right in taking the view that the case is covered by Article VIIIA of the amended DTA Agreement entered into between the two countries and not by Article III of the said agreement ? The Tribunal, while repelling the contention of the assessee that the payment made to the assessee was covered under Article III of the amended DTA Agreement and as such exempt from tax, has held that since Article VIIIA of the amended DTA Agreement being specifically applicable to "royalties" and "fees for technical services", the same would prevail over Article III dealing with "business profits". The Tribunal has found that since the payment made is clearly in the nature of "fees for technical services", it is not possible to take the view that the payments received are not liable to tax on the ground that the payment was covered under Article III of the amended DTA Agreement. We do not find any error in the said conclusion reached by the Tribunal on this aspect of the matter. As rightly pointed out by the Tribunal, when there is a special provision dealing with a special type of income, such a provision should be understood as excluding a general provision dealing with income accruing or arising out of the business connection. In our view, since Section 9(1)(vii) of the Act comprehends income by way of fees received for technical services rendered as a result of business connection or otherwise, it is not possible to apply the provisions of Section 9(1)(i) of the Act merely because the said section stood excluded as a result of the provision. In our view, we are also supported by the decision of the Madras High Court in the case of CIT v. Copes Vulcan Inc. . In the said decision it is observed as follows (headnote of Taxman) :
"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 Section 9(1)(vii) would comprehend the income by way of fees for technical services rendered as a result of business connection or otherwise, it is not possible to apply the provision of Section 9(1)(i) merely because Section 9(1)(vii) stood excluded as a result of the provision. Therefore, the income by way of fees for technical services either arising out of business connection or not would have to be treated as coming only under Section 9(1)(vii) and not under Section 9(1)(i)."
23. Therefore, in the light of the discussion made above, the third question is also required to be answered against the assessee and in favour of the Revenue.
24. In the light of the discussion made above, we are of the view that all the questions referred to us by the Tribunal are required to be answered against the assessee and in favour of the Revenue. Accordingly, they are answered and this reference is disposed of. However, no order is made as to costs.