Income Tax Appellate Tribunal - Delhi
D.C.M. Ltd. vs Income-Tax Officer on 31 August, 1990
Equivalent citations: [1990]35ITD35(DELHI)
ORDER
P.J. Goradia, Accountant Member
1. This appealis directed against the order dated 31-5-1985 passed by the Commissioner of Income-tax (Appeals)-VIII, New Delhi (Shri A.S. Thind) and the effective ground raised is as under :-
The CIT (Appeals) erred in upholding that payment of Japanese Yen 2,500,000 being engineering and management fee made to M/s. Kobe Steel Ltd., Japan, is also towards technical services rendered by the foreign party in India for repair of foundation of Synthesis Gas Compressor and the same is not exempt from tax in India as per the claim of the Company under Clause 'K' of Article X of the Double Taxation Avoidance Agreement between India and Japan.
2. The assessee-company entered into an agreement dated 7-7-1984 with M/s. Kobe Steel Limited, Tokyo, Japan (Japanese firm) for repair of the foundations of Synthesis Gas Compressor and CO2Gas Compressor installed in Shriram Fertilisers and Chemical factory at Kota. The agreement was approved by the Government of India, Ministry of Chemicals and Fertilisers vide letter dated 23rd July, 1984. According to the terms of agreement, the assessee was required to make payment of Yen 30,24,000 being supervision charges and a further sum of Yen 25,00,000 towards engineering and management fee vide Clause 4.1(a) and (b) of the agreement. The payments were to be made on completion of the work. Before remittance of money no objection certificate from assessing officer was required for opening letter of credit for remittance of Japanese Yen equivalent to Yen 55,24,000. While applying for the issue of no objection certificate the assessee claimed before the Assessing Officer that no tax was required to be paid in respect of sum of Yen 25,00,000 because the said sum represented fee for services rendered outside India. Such payment, according to the assessee, was governed by Clause (k) of Article X of the Agreement for the Avoidance of Double Taxation entered into between India and Japan. The Assessing Officer, however, held that tax was payable on the entire amount on the basis of his order dated 13th February, 1985 as under :-
NO. ITC : CC : IX/84-85/181 Office of the Income Tax Officer Central Circle -IX, New Delhi.
Dated : The 12th/13th Feb., 1985.
D.C.M. Ltd., Bara Hindu Rao, Delhi.
Sir, Sub : Issue of No Objection Certificate - for remittance of Japanese Yen 6,094,267 - to M/s. Kobe Steel Ltd., Japan - Regarding -
Please refer to your letters dated 12-10-1984 and 14-12-1984 on the above subject.
Your claim is that Yen 2,500,000 is not taxable in India as this represents fee for the services rendered by the foreign party in Japan. I have examined the point and I held that payment of Yen 2,500,000 representing engineering & Management Fee is closely related with the services rendered by the technician in India. The design calculation etc., were done only with a view to undertake the repair work at Kota (India). The entire amount of Yen 6,094,267 is, therefore, taxable in India in terms of Article 10(k) of the Double Taxation Avoidance Agreement between India and Japan. You, are, therefore, required to pay tax @ 40% of the entire amount equivalent to 6,094,267 Yen at the time of remittance to the above party.
Yours faithfully, Sd/-
(Hari Menghani) Income-tax Officer Central Circle-IX, New Delhi.
3. The assessee preferred an appeal and the CIT (Appeals) held that :
(i) There was no evidence to show that in terms of the agreement any part of the work had been done in Japan.
(ii) Even otherwise the work in question would constitute an insignificant portion of the total work which had necessarily to be done in India.
4. At the time of hearing before us the learned representative of the assessee submitted that the Assessing Officer impliedly agreed with the view that some services were rendered in Japan. Factually it is not possible to hold that no services were rendered in Japan, because when such work is undertaken negotiations are always carried out, meetings are always held and in this case even designs were prepared in Japan. Again the Japanese firm had negotiated with another firm, namely, M/s. Alpha Kogyo, Japan for deputing two of their engineers in respect of the services to be rendered. Therefore, this also necessitated rendering of services in Japan. According to him, the type of services that could be rendered can be very easily appreciated from an example that when the Counsel comes to argue a case before the Tribunal necessarily preparatory work is done in the Chamber not only by way of conferences but also by way of preparing the necessary details, etc.
5. The learned Departmental representative strongly supported the orders passed by the CIT (Appeals) and submitted that on reading the Sub-clauses (e), (j) and (k) of Article X it can be said that no exemption in respect of the alleged services having been rendered in foreign country is ever envisaged or contemplated because the actual services were required to be rendered at Kota in India. Even if it is assumed for the sake of argument that some services were rendered in Japan yet the same was in connection with the work to be carried out in India and therefore, no part of the remuneration was tax free. The claim is not in accordance with intention of the agreement. Besides, the Assessing Officer has not accepted the factum of any services having been rendered in japan.
6. On considering the rival submissions and the material before us two issues arise. They are :
(1) Whether remuneration payable in respect of services rendered outside India is required to be treated as tax free in India.
(2) If yes, whether it can be said that any services were rendered in Japan for which the payment is made. Further even if any services are rendered in Japan can it not be said that this aspect was required to be ignored since they were in relation to the work carried out in India.
7. Coming to the first issue, it would be relevant to incorporate here the relevant clauses of Article X, referred to earlier and the same are as under :-
(e) Roylties and similar payments paid as consideration for the use of, or for the right to use, in one of the Contracting States, any copyrights, artistic or scientific works or equipments, patents, desings, secret processes and formulae, trademarks, cinematographic films (including films for use in connection with television) and other like properties and fees for technical services rendered in that connection, shall be treated as income from sources within that Contracting State.
(f) Profits or gains derived from the sale, transfer or exchange of the property mentioned in paragraph (e) above shall be treated as income from sources within the Contracting State in which such property is to be used.
(j) Salaries, wages, or similar remuneration or personal services as well as remuneration for professional services shall be treated as income from sources within the Contracting State in which are rendered the services for which such remuneration is paid and the services performed in ships or aircraft operated by an enterprise of one of the Contracting States shall be deemed to be rendered in that Contracting State.
(k) Fees for technical services payable to an enterprise shall be treated as income from sources within the Contracting State in which are rendered the services for which such fees are paid.
According to the learned Departmental Representative, the language of all the three sub-clauses clearly envisages the basis of taxation being the place of services rendered. For example, Clause (e). Again clauses (J) and (k) also refer to the treatment of the payment as income from sources within the contracting State in which services are rendered. Therefore, in this case since the services were rendered in India, the remuneration paid has only nexus with the services rendered in India. The learned Counsel for the assessee was of the opinion that all along it was an admitted position that Clause (k) would govern the facts of the case. It was only he who had referred to Clause (e) to distinguish the two situations viz., a case of a royalty payment and another case where separate payments were made in respect of distinct services rendered in India as well as in foreign country. In our opinion, we are entirely in agreement with the learned Counsel for the assessee that fees paid are required to be treated as income in respective States where services are rendered. In fact such has to be the intention behind the double taxation agreement between the two countries. Therefore, if it can be established that the payment is in respect of services renderd in Japan, the same is required to be taken as non-taxable in India. The difficulty may arise in a situation where it is not possible to demarcate the areas and distinguish the types of services rendered. But in this case such difficulty is not found because the assessee's case is that the payment is made in respect of preparatory work carried out in Japan as also the management fees, i. e., fees in respect of managing the whole contract by personnel sitting in Japan.
8. Coming to the second issue regarding factum of services we find from the evidences laid before us that the work did entail services to be rendered in Japan. On going through the agreement itself we find that the payments are required to be made separately for two distinct types of services to be rendered in India as also in Japan. We have already referred to Clasue 4.1 (a) which deals with supervision charges equivalent to Japanese Yen 30,24,000 based upon the visit of two supervisors for 21 days.
9. This distinction in services prima facie establishes the case of the assessee with regard to the services rendered at two different places.
9.1 The assessee has produced before the CIT (Appeals) a certificate dated 27th September, 1984, which states as under :-
Alpha Kogyo September 27,1984. The General Manager, Shriram Fertilisers & Chemicals, Kota. Dear Sir,
For repair of Compressor Foundation, the Engineering & Management fee being charged is towards the design calculations, etc., done at our office in Japan prior to undertake the repair work at your site. These design calculations included calculation of foundation load for designing the HASP (Sole Pads) and other strength calculations for the Epoxy resin used indigenously.
Keeping the different specifications of Indian material to be used in view, different recipe was prepared and repair procedure altered accordingly.
Thanking you, Yours faithfully, Sd/-
(S. Nakaura) For Alpha Kogyo K.K. The CIT (Appeals) did not give much importance to this certificate. No reasonable basis is given for rejecting the same and for holding that the services rendered are insignificant. After all who can appreciate better this aspect ? In our opinion, the CIT (Appeals) should not have rejected the certificate without giving due importance to the contents mentioned therein. We find on page 9 of the Paper Book that the proposal is given by Alpha Kogyo to M/s. Kobe Steel Ltd., Tokyo, Japan. The proposal elaborately refers to consultations and negotiations and finalisation of the plan in respect of the repair work to be carried out and appropriate preparation of the requistite designs, etc. This work has to be and is in fact carried out in Japan and only on the basis of plan and design the supervision is carried out in India. Again we find from the letter dated 5th June, 1984 written by the assessee to Ministry of Chemicals and Fertilisers informing about certificate of deduction and the emoluments agreed for payment and also the agreement in respect of use of indigenous material like Araldite, etc. It was submitted at the time of hearing that the samples of material were required to be sent to Japan and the same was required to be tested and approved in Japan and it was done. This again establishes the services rendered in Japan. Approval dated 23rd July, 1984 issued by the Ministry of Chemicals also records two different payments in respect of two different types of services.
9.2 We have, therefore, no hesitation in holding that the services were rendered in Japan which are termed as engineering and management fees. There is no dispute raised on the basis that such services cannot be qualified as eligible services in the context of language used in Clause (k) of Article X. We would, therefore, hold that payment of Yen 25 lakhs is not liable to taxation in India.
10. To the extent as above, the appellate order is modified.
11. The Assessing Officer is directed to pass appropriate order so as to give effect to our above decision.
12. In the result, the appeal is allowed.
S.S. Mehra, Judicial Member
1. Detailed order prepared by my learned brother has carefully been gone through, but it is regretted that the conclusion arrived at could not be, concurred with. The facts have already been incorporated in the order and it is not necessary to repeat the same. The issue for consideration is about the includibility or otherwise of Yen 2,50,000 said to be engineering and management fee paid to M/s. Kobe Steel Ltd., Japan.
2. The details or bifurcation of total payment is given at page 6 of the paper book, being copy of letter dated 22-2-1984. There are five items. In the present case we are concerned with item No. five, i.e., last, which deals with engineering and management fee of Yen 2,50,000. The payment was required to be made against an invoice and work completion statement within 30 days of completion of the work. Thus it is clear that this payment was vitally connected with the completion of work in India and there is no mention about any work said to have been completed or undertaken in Japan. So there is vital link between work done and payment. This is undoubtedly clear.
3. Once such link is established, Clause (k) of Article 10 of agreement between the two countries becomes relevant and operative. In terms of the said clause "Fees for technical services payable to an enterprise shall be treated as income from sources within the contracting State in which are rendered the services for which such fees are paid".
4. In view of above facts, stipulations and discussion, the above sum is positively includible and I hold accordingly.
5. In the result the appeal is dismissed.
ORDER UNDER SECTION 255(4) OF THE IT ACT, 1961 :
S.S. Mehra, Judicial Member
1. Consequent upon difference of opinion having occurred between us, the file is being placed before the worthy President for proceeding in the matter in accordance with law. The point of difference is as under :-
Whether on the facts and in the circumstances of the case inclusion of Japanese Yen 2,50,000 is legally tenable or not ?
P.J. Goradia, Accountant Member
1. Consequent upon difference of opinion, according to me, following question is required to be referred to the Third Member on the basis of facts involved in the case. Since my learned Judicial Member has not agreed to the modification of the question proposed by him, I propose the following question :-
Whether on the facts and circumstances of the case, an amount of Indian Rupees equivalent to Japanese Yen 2,50,000 is required to be treated as income liable to tax in India ?
2. Hon'ble President is requested to do the needful in the matter.
ORDER G. Krishnamurthy, President
1. This appeal filed by M/s D.C.M. Limited relating to the assessment year 1984-85 ended in a difference of opinion between the Members, who heard this appeal. Unfortunately for me the Members could not spell out what exactly was the difference of opinion between them. In the absence of an agreement on the point of difference of opinion, both the Members have stated their points of view first in regard to the difference of opinion and then the reasons for their conlcusions. According to the learned Accountant Member the point of difference of opinion was :
Whether on the facts and circumstances of the case, an amount of Indian Rupees equivalent to Japanese Yen 2,50,000 is required to be treated as income liable to tax in India ?
But the learned Judicial Member stated the point of difference of opinion to be :
Whether on the facts and in the circumstances of the case inclusion of Japanese Yen 2,50,000 is legally tenable or not ?
2. Thus my first task is to settle the point of difference of opinion before I go to express my opinion on the point of difference of opinion. I have carefully examined the points of difference of opinion, as stated by my learned Brothers to the best of my ability and I found no difference either in scope or in substance in the point of difference of opinion except for the language in which the point of difference of opinion was couched and the wrong mention of the figure, namely, instead of 25 lakhs Yen both the learned Members referred to it as 2,50,000 Yen, which was a mistake. I suppose I have the power to rectify this mistake even as a Third Member. Parties before me have agreed that the correct figure is 25 lakhs Yen. Both the learned Members have basically differed on as to whether this Indian Rupee equivalent of Japanese Yen of 25 lakhs was to be treated as the income of the assessee or not. The inclusion of income will not be legally tenable unless it is legally permissible within the four corners of the Income-tax Act and until then no amount could be included in the income of the assessee. Therefore whether it was said that the inclusion of Japanese Yen was legally tenable or not or whether the Japanese Yen was required to be income liable to tax in India is in my opinion one and the same. I therefore proceed on the basis that except for the difference in the language, there was no basic difference of opinion in the structure and the question is whether Indian Rupee equivalent to Japanese Yen of 25 lacs could be included in the income of the assessee or not is the basic point of difference of opinion and I will address myself to it in the following paragraphs.
3. The assessee M/s D.C.M. Limited is having a number of units engaged in the manufacture of several items, one of which is Shriram Fertilisers and Chemicals Factory at Kota engaged in the manufacture of Synthesis Gas Compressor and CO2 Gas Compressors. It was discovered by the Engineers working in this factory at Kota that the foundations of this factory were sinking. If allowed without repairs in due time by strengthening it there would be certain risk of the entire factory collapsing. It was therefore an emergency requiring the foundations to be strengthened within the least possible time. The appellant company approached M/s Kobe Steel Ltd., Tokyo, Japan for the repair of the foundations of Synthesis Gas Compressors and CO2 Gas Compressors. It entered into an agreement dated 7th July, 1984 with M/s Kobe Steel Ltd., Tokyo, Japan, which received the approval of the Government of India in the Ministry of Chemicals and Fertilisers vide letter dated 23rd July, 1984. In connection with the above repair work some preparations had to be done, like designing, calculations, etc., by the foreign party in Japan, for which it was agreed to pay 25 lakhs Yen describing it as "Engineering and management fees". In addition to the above for the actual carrying out of the above repair work at factory site at Kota, the foreign company M/s Kobe Steel Ltd., Tokyo arranged to send two engineers from another company called M/s Alpha Kogyo, Japan. For these services a sum of Japanese Yen 35,94,267 was agreed to be paid. Thus a total sum of Japanese Yen 60,94,267 net of Indian taxes was agreed to be paid in respect of which the tax component was to be borne by the assessee company. For the purpose of remittance to the foreign party, a no objection certificate was required by the Reserve Bank of India from the Income-tax Officer having jurisdiction over the assessee company. The concerned Income-tax Officer was requested by the assessee company to issue a no objecton certificate for the remittance of Japanese Yen of 60,94,267 to the foreign party. In making the request the assessee company pointed out to the Income-tax Officer that since engineering and management fees of Japanese Yen of 25 lakhs was payable to the foreign party for the services rendered in Japan was not taxable in India under the provisions of Clause (k) of Article X of the agreement entered into between the Governments of India and Japan for Avoidance of Double Taxation of income and that therefore no tax was deductible from this fees of 25 lakhs Yen and a specific request was made to the Income-tax Officer to give a certificate only in respect of the balance of 35,94,267 Yen for services rendered by the engineers of the foreign party in India as per the provisions of Section 115A of the Income-tax Act, 1961.
4. The Income-tax Officer rejected this claim by his letter dated 13th February, 1985 mentioning that the payment of 25 lakhs Yen though for engineering and management fees related to the services rendered by the technicians in India with the aim of undertaking the repair work at Kota in India and the entire amount of 60,94,267 Yen was taxable in India under Article X(k) of the agreement for Avoidance of Double Taxation and required the assessee to pay tax at 40% on the entire amount. The letter of the Income-tax Officer dated 13th February, 1985 is in the following terms :-
Please refer to your letter dated 12-10-1984 and 14-12-1984 on the above subject.
Your claim is that Yen 25,00,000 is not taxable in India as this represents fee for the services rendered by the foreign party in Japan. I have examined the point and I hold that payment of Yen 25,00,000 representing Engineering Management Fee is closely related with the services rendered by the technician in India. The design calculation, etc., were done only with a view to undertake the repair work at Kota (India). The entire amount of Yen of 6,094,267 is, therefore, taxable in India in terms of Article 10(1) of the Double Taxation Avoidance Agreement between India and Japan. You are, therefore, required to pay tax @ 40% of the entire amount equivalent to 6,094,267 Yen at the time of Remittance to the above party.
5. Thereafter the assessee company filed an appeal against this order to the Commissioner (A). The Commissioner (A) confirmed the view of the Income-tax Officer by holding that the claim of the assessee company that Engineering and Management Fees were paid in respect of the work done outside India was factually and legally untenable. The main ground that prevailed with the Commissioner (A) was that since two technicians were deputed to manage the work in India and as there was no provision for payment of overtime charges and as there was no evidence to show that as per the agreement any part of the work was to be done in Japan, it could not be held that the work in respect of Engineering and Management was done only outside India. A certificate obtained from the foreign company dated 27-9-1984 was produced to show that design and calculations for foundation repairs were all carried out in Japan. The Commissioner (A) did not attach much significance to this certificate as proving the assessee's case on the view that this work could be carried out only after inspection of the site in India and in any case the work in that connection constituted an insignificant part of the total work.
6. Against this order, an appeal was filed before the Tribunal. The learned Accountant Member after going through the agreement, the certificate and other evidence came to the conclusion that the work in respect of Engineering and Management was done only outside India, i.e., in Japan and therefore the fees referable to that part of the contract was not liable to tax in terms of the language used in Clause (k) of Article X of the agreement for Avoidance of Double Taxation. In particular the learned Accountant Member laid emphasis on the fact that the work in respect of engineering, designs and as to the methods of carrying out the work was done not by M/s Kobe Steel Ltd., Tokyo, with which the assessee company entered into the agreement but by M/s Alpha Kogyo, Japan with which the said M/s Kobe Steel Ltd. entered into a collaboration agreement. He pointed out that the proposal elaborately referred to consultations, negotiations and finalisation of the plan in respect of the repair work to be carried out along with the preparation of requisite designs. He held that the work in regard to this aspect of the contract was done only in Japan and it was only on the basis of the plan and designs prepared in Japan that the work was done in India under their supervision. He referred to another fact, namely, that on 5th June, 1984 the assessee company had to write a letter to the Ministry of Chemicals and Fertilisers informing about the use of indigeous materials like Araldite, etc., which could be used only after they were tested in Japan and approved by the company for use in India, which according to the learned Accountant Member established that the services were rendered outside India. But the learned Judicial Member came to a different conclusion without disputing the facts found by the learned Accountant Member. In other words while there was an agreement on the facts, the Members have differed only in the interpretation thereof and the inferences to be drawn therefrom. The inference of the learned Judicial Member was that since the agreement provided that the payment of 25 lakhs Yen was to be made against an invoice and work completion statement within 30 days of the completion of the work, it was clear that the payment was vitally connected with the completion of work in India and in the absence of any specific mention about any work being done in Japan, it could not be concluded that the work in respect of this contract was done outside India. The payment according to him provided a vital link between the work done and the payment. This link having been established through the invoices, Clause (k) of Article X of the agreement of Avoidance of Double Taxation became operative and as such the fees payable in India will have to be taxed in India. That was how the learned Judicial Member concluded against the assessee's contention and disagreed with the view expressed by the learned Accountant Member.
7. I have heard the learned counsel for the assessee Shri O.P. Vaish and also the learned Departmental Representative Shri Rajiv Bakshi and perused the relevant documents and agreements. I came to the conclusion that having regard to the nature of the work and the sequence of events, the work relating to the engineering and management could not have been done in India although execution of the work had to be done only in India. In my view the confusion arose because the repair work has to be done in India. What was perhaps missed was that the engineering aspect and the designing had to be meticulously undertaken before the repair work is executed and this part of the work was all done in Japan by M/s Alpha Kogyo, Japan, with whom M/s Kobe Steel Ltd., Japan entered into an agreement. While the assessee company entered into agreement with M/s Kobe Steel Ltd., for carrying out the repair work, M/s Kobe Steel Ltd., in its turn entered into a further agreement with M/s Alpha Kogyo for carrying out the work. It was M/s Alpha Kogyo that actually designed the work and prepared the plans, relevant documents, instructions and directions and even got the indigenously available raw material for testing for purposes of user as to their strength, durability and reliability in Japan with the express permission of the Government of India, Ministry of Chemicals and Fertilisers and only then they were allowed to be used in the execution of the work. This testing work also took place in Japan by M/s Alpha Kogyo. On 22-2-1984 M/s Alpha Kogyo sent their estimate of the expenditure to M/s Kobe Steel Ltd. providing very clearly therein that delivery time would be within 30 days of your order, not later than 30 November, 1984 meaning thereby that M/s Alpha Kogyo would deliver the required material and the plans to M/s Kobe Steel Ltd. in Japan. This to my mind, is an important aspect of the whole agreement. Copy of the estimate given by M/s Alpha Kogyo to M/s Kobe Steel Ltd. is to be found on page 6 of the paper book. This very estimate also provided the terms of payment. It said :-
Payment should be made for Items (1), (2) and (3) within 30 days of their delivery to a designated Forwarder's Warehouse. Payment for Items (4) and (5) should be made against an Invoice and signed work Completion Statement within 30 days of completion of the work described in the proposal.
Rs.
1. Materials 13,898,000
2. Equipment Lease 1,677,070
3. Consumables 1,253,700
4. Supervision 3,024,000
5. Engineering and Management fee 2,500,000 This also shows that the materials, equipments and consumables were to be delivered to the designated forwarder's warehouse which is in Japan. Then it stipulated that the payment for items (4) and (5), namely, supervision and engineering and management was to be made against invoice on furnishing of completion statement within 30 days of the completion of the work. Thus, this document furnished by M/s Alpha Kogyo to M/s Kobe Steel Ltd., is in my view an ample proof to show that all the work that was necessary to execute the work in India, namely, designing, planning instructions and materials to be used, etc., were all prepared in Japan and not in India at all. If any payment was reserved for doing this part of the work under the agreement, then the payment must necessarily be for the work done outside India and not within India. Linking the payment with the submission of the invoice to afford as proof of the situs of the performance of work is in this context not proper, for, the terms of agreement between M/s Alpha Kogyo and M/s Kobe Steel Ltd. provided that the payment of fees for engineering and management shall have to be paid only after the furnishing of completion statement against invoice, which means that the execution of the work was done in India, over which there was no dispute and that is not to be related to the work that was necessary, namely, planning, etc., to execute the work in India. The learned Judicial Member laid emphasis on this fact of furnishing of invoices and payment to arrive at his conclusion that the work in respect of engineering and management was also done in India. Since this document does not prove that aspect at all, except the mode and time of payment, the mode and time of payment agreed upon between the parties, should not have been inferred as proof of the situs of performance of services in respect of engineering not decisive. The assessee claimed that engineering and management work was done in Japan and only in respect of that it claimed exemption from tax by including all the other items of work as having been performed in India, which includes supervision. Even for supervision the payment was to be made against invoice after furnishing of completion certificate. But that service was shown as having been rendered in India in respect of which tax was paid. The supervision work and the engineering work, which are different, one from the other, should not have been grouped together as one and the same, to say that the work for engineering was also done in India. The further details enclosed to the estimate, which are to be found on page 8 of the paper book show that for engineering and management fees of 25 lakhs Yen, a flat fee was charged to cover design of the repairs and its management. Even the department is unable to adduce any proof to show that the designing part of the repair work was done at all in India and it was the designing of the repair work that was most important in this transaction of repair. If the execution of the work of repairs is of a great importance, designing the work for carrying out the repairs is of greater importance. While it cannot be denied that the Engineers of M/s Alpha Kogyo did visit India before the repair work was undertaken to find out the nature of the repairs, what exactly was to be done was to restore the foundations to their original position. The planning that needed to be done to execute the repair work was not done in India nor shown to have been in India, except by remote inference and it was done only in Japan, whereafter the instructions were sent. It was for this planning that fees of 25 lakhs Yen was settled.
8. There was an argument addressed by the learned Departmental Representative that this splitting up of fees was deliberate and was undertaken with a view to gain exemption by bringing that fee within terms of Clause (k) of Article X of the agreement of Avoidance of Double Taxation on the ground that the approval given by the Government of India was for the full amount. I am unable to subscribe to this view because firstly for lack of evidence and secondly it appeared natural that when the contract was split up into several parts, like, engineering, materials, consumables, supervision and management, it could not be said that the management was specially conceived of to take it out of the clutches of taxation in India. On page 25 of the paper book, there is a letter dated 22-9-1984 written by M/s Alpha Kogyo to the General Manager of the assessee company stating that :
For repair of Compressor Foundation, the Engineering & Management fee being charged is towards the design calculations, etc., done at our office in Japan prior to undertake the repair work at your site. These design calculations included calculation of foundation load for designing the HASP (Sole Pads) and other strength calculations for the Epoxy resin used indigenously. Keeping the different specifications of Indian material to be used in view, different recipe was prepared and repair procedure altered accordingly.
This clearly clinches the issue as to where the work in relation to engineering and management was done. This clearly shows that the work was done only in Japan. Therefore the argument that the fee was deliberately split up with a view to gain an advantage from taxation in India does not appear logical and sound.
Further the approval given by the Government of India is for the fees payable separately for engineering and supervision. The relevant portion of the Government's approval is reproduced below :
(1) A lump sum payment not exceeding 5,524,000 Yen (Yen five million & five hundred twenty four thousand) only made up of the following will be made to M/s Kobe Steel Limited :-
(i) Supervision fee for 42 mandays
at the rate of Yen 72,000 Yen 3,024,000
(ii) Engineering and Management Fee Yen 2,500,000
---------------
Total Yen 5,524,000
--------------
This shows that even when the proposal went to the Government for approval, it went by separating the fee for engineering and management separately and distinctly. This therefore disproves the argument that this fee was deliberately split up. This letter further states that keeping the different specifications of Indian material to be used in view, different recipe was prepared and repair procedure altered accordingly This letter was always on the record of the Department, the contents of which not having been disproved, except on suspicion disbelieved, must be taken to correctly depict the situation, which is also in accord of the general run of the things of carrying out repairs of such a magnitude. When you contact a foreign company for advice to undertake repair work, which is not possible in our country, it cannot be expected that everything connected with the repair would be carried out in India. Some part of the work relating to the repair should be expected to have been done outside India, i.e., at the place where the repairer is located. Another piece of evidence that establishes this point is the letter dated 7-7-1984 written by the assessee to M/s Kobe Steel Limited accepting the offer of repair conveyed to the assessee by them by their letter dated 24-2-1984. After detailing the scope of the work, the method of payment, it was particularly pointed out in paragraph 8, where a guarantee was asked to be given by M/s Kobe Steel Limited for the repair work done, it was mentioned that :-
The repair of the compressor foundation using ceilcote 648-I grout and spoxy adhesive for completing filling up the cold joints, voids, cracks, etc., in the concrete, using the procedure given by you vide your repair procedure No. 737 dated 22-2-1984, should restore the cracked foundation of the CO2 Gas & Syn. Gas Compressors to the full strength and usefulness.
This show very clearly that the procedure for carrying out the repair work was prepared not in India but in Japan by M/s Kobe Steel Limited and was conveyed to the assessee by their letter dated 22-2-1984, which the assessee company had accepted.
9. It is an undisputed fact that but for the application of Clause (k) of Article X of the agreement of Avoidance of Double Taxation, the said sumin question would be taxable in India under Section 9(1)(vii) Explanation 2 read with Section 115A of the Income-tax Act, 1961. Clause (k) of Article X provides :-
Fees for technical services payable to an enterprise shall be treated as income from sources within the Contracting State in which are rendered the services for which such fees are paid.
It is to locate the Contracting State in which the technical services are rendered that the entire exercise has been undertaken because the fee for technical services payable to such an enterprise will be treated as income from sources within that Contracting State. Thus if fee is payable for services rendered in Japan, that portion of the fee for technical services could not be treated as income from sources within India under this agreement. The evidence brought on record, the sequence of events and other relevant material do lead one to the conclusion that other than the planning for the work, namely, engineering, etc., the other work was only done in India and the engineering part of it and management was done in Japan by M/s Alpha Kogyo, which in turn was conveyed to M/s Kobo Steel Limited directly and not to M/s Alpha Kogyo. Merely because the invoice was prepared after the completion of the job, as I have endeavoured to point out, was not at all the conclusive proof to show that the work in respect of engineering was done in India. Even though there was no mention about any worksaid to have been completed or undertaken in Japan in the agreements, from the events that took place, it has to be inferred where that work could have taken place. In my view this part of the work could have been taken only in Japan and not in India and in any case there was no evidence to show that that part of the work was also done in India and as I have endeavoured, the correspondence do show that that part of the work was done only in Japan if the work of planning was done in India, there would have been payments to technicians. I therefore agree with the view expressed by the learned Accountant Member and hold that the amount of Indian Rupees equivalent to Japaness Yen 25,00,000 was not to be treated as income liable to tax in India.
10. The matter will now go back before the regular Bench for decision according to majority view.