Andhra HC (Pre-Telangana)
Commissioner Of Income-Tax vs Navabharat Ferro Alloys Ltd. on 16 June, 1999
Equivalent citations: [2000]244ITR261(AP)
JUDGMENT S.V. Maruthi, J.
1. At the instance of the Revenue, the following questions are referred by the Tribunal for the opinion of this court :
"1. Whether, on the facts and in the circumstances of the case, there is no basis to hold that there was a business connection between Nava-bharat Ferro Alloys Ltd. and the non-resident foreign company and that the latter company was in receipt of income from/through the. Indian company ? and
2. Whether, on the facts and in the circumstances of the case, there is no basis to hold that Navabharat Ferro Alloys Ltd. could not be regarded as an agent of the non-resident foreign company under Section 163 ?"
2. The facts in brief are as follows : The relevant assessment years are 1976-77 and 1977-78. The assessee-company, Navabharat Ferro Alloys Limited, hereinafter will be called the "Indian company". The Indian company entered into agreement with Energomach Export, Moscow, USSR, hereinafter called the "foreign company", for the purpose of purchasing two machines of 16.5 MVA Open Electric Arc Furnace under the first agreement dated May 28, 1971, worth about Rs. 44,14,875 and under the second agreement dated May 30, 1978, worth about Rs. 57,22,500. The foreign company undertook to depute two specialists for supervising erection of the machinery. The conditions and terms under which the specialists were deputed are that the specialists would be deputed for supervision of erection, adjustment and putting into operation of the equipment delivered ; that the period of deputation would be three months from the date of arrival in India which is free of cost, however, they should continue to stay in India till erection is completed ; that if their stay is extended beyond three months, then the Indian company shall be liable to pay at the rate of Rs. 5,317 per month towards reimbursement of further services of the specialists ; that other expenses while staying of the technicians in India is to be borne by the foreign company and that transfer expenditure from Delhi to place of work and the expenditure incurred for boarding and lodging are to be borne by the Indian company. Under the second agreement, similar terms and conditions were provided. The foreign company undertook to depute at free of cost three specialists for supervision of erection, adjustment and putting into operation the equipment delivered for a period of three months from the date of their travel to India. In case their stay is continued for more than three months, then for further services rendered by the Soviet specialists, the Indian company should pay Rs. 3,650 per month to each of the specialists. The other terms and conditions remain the same as noted in the first agreement referred to above. On the basis of the two agreements, the Income-tax Officer held that the assessee-company is liable to pay tax as it acted as an agent of the foreign company under Section 163 of the Income-tax Act and as there is business connection between the Indian company and the foreign company.
3. On appeal, the Commissioner confirmed the said order. On further appeal to the Tribunal, the Tribunal by following the judgment of this court in CIT v. Hindustan Shipyard Ltd. , held that there is no business connection between the Indian company and the foreign company. The Tribunalon an interpretation of the terms and conditions of the agreements held that except purchasing the machinery and accessories, there is no other trading activity carried on in India by the foreign company ; that the common thread of mutual interest was never there between the said two companies in this case much less was there anything to show that such interest ran through the fabric of the trading activities carried on outside and inside the taxable territory and that there is no real and intimate, connection between the Indian and foreign companies. The Tribunal further held that regarding deputation of foreign experts to supervise the erection of the plant was only incidental for effective fulfilment of the contract of sale and such clauses were usually found in all contracts by way of guarantee to the efficient working of the products sold. Under these circumstances, at the instance of the Revenue, the questions set out in earlier paragraphs are referred for opinion of this court.
4. Learned counsel for the Revenue relied on the judgment of this court in Bkarat Heavy Plate and Vessels Limited v. Addl CIT [1979] 119 ITR 986, wherein this court observed that the non-resident company had made the services of the foreign personnel available to the assessee-company within the taxable territory ; that the assessee did not take the foreign personnel as its employees nor were they paid any salary by the assessee ; that the personnel worked not merely under the control of the assessee-company and the terms of the agreement would clearly show that both the assessee and the non-resident company had control over the personnel ; that both the companies had the authority to change the composition and the number and that, therefore, this court held that there was "business connection" falling within the meaning of Section 9(1) of the Income-tax Act. Therefore, it is argued that the said judgment is squarely applicable to the facts of the present case. While dealing with the case in Bharat Heavy Plate. and Vessels Limited [1979] 119 ITR 986 (AP.), the learned judges had also referred to the case in CIT v. Hindustan Shipyard Ltd. , and found that both the cases are distinguishable on facts.
5. Since the main thrust of the argument of learned counsel for the Revenue is the judgment in Bharat Heavy Plate and Vessels Limited's case [1979] 119 ITR 986 (AP), we considered the said judgment at length. It is necessary to refer to the facts of that case. The Government of India and the Government of Czechoslovakia entered into two agreements for the delivery of machinery, equipment, instruments, spare parts and for rendering technical co-operation for the erection of the Plate and Vessels Plant at Visakhapatnam. These agreements provided for trainning of selected personnel of the assessee in CSSR for rendering consultancy services and technical assistance in the construction of the plant to the extent indicated in several articles of the agreement for preparation and supply of technical documentation, etc. Under the terms of agreement, Rs. 30 lakhs is payable for technical documentation and Rs. 11,91,735 is payable for consultation activity by the Indian company to the foreign company.
6. On a construction of the agreements, the learned judges were of the view that the activities referred to in both the agreements satisfy the expression "business connection". The learned judges also observed that it is not a case of mere stray or isolated transaction as contended by learned counsel for the assessee. It is observed that 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.
7. In our view, Bharat Heavy Plate and Vessels Limited's case [1979] 119 ITR 986 (AP), is distinguishable on the facts from the facts of the present case. In that case, the agreement contained two components--one is for payment of consideration for supply of machinery by the non-resident company and the second is for consideration payable for rendering consultation services. In other words, the non-resident company was paid certain amount for rendering consultation service, and other amount for supply of machinery. In view of the above, the learned judges held that there is "business connection" ; whereas on the facts of the present case, we find under the agreements a consolidated amount of Rs. 44,14,875 and Rs. 57,22,500 was paid as sale consideration. Except the sale consideration, there is no other payment to the foreign company. Further, under the agreement, the foreign company has also deputed personnel for the purpose of supervising the erection of the plant and machinery. However, the erection of the plant and machinery is the responsibility of the buyer and the duty of the personnel deputed by the foreign company is only to supervise. Further, the foreign company has incurred an expenditure for payment of salaries to the personnel deputed by it for their stay in India for three months and if their stay is beyond three months, it is the responsibility of the Indian company to bear the expenses for their continued stay. The agreement, therefore, discloses that the payments covered are only sale consideration and except sale consideration, nothing more is paid to the foreign company. As pointed out in CIT v. Hindustan Shipyard Ltd. , the deputation of foreign personnel for supervising the erection is only incidental. Since, the agreement provides for payment of sale consideration and nothing else, the deputation of foreign personnel is only incidental to the execution of the agreement and for effective fulfilment of the contract of sale, it cannot be said that the Indian company is an agent of the foreign company within the meaning of Section 9 of the Income-tax Act and there is no business connection between the foreign company and the Indian company within the meaning of Section 163 of the Income-tax Act. The facts of the present case are on all fours with the judgment in CIT v. Hindustan Shipyard Ltd. .
8. We, therefore, are of the opinion that the Tribunal is right in its view that there is no business connection between the assessee-company and the foreign company. In the light of the above, we answer the two questions in the affirmative and against the Revenue.