Indian Kanoon - Search engine for Indian Law

25. Let us first consider whether the consideration paid by the appellant towards "price for basic engineering" in terms of art. 4.1.3 of the collaboration agreement constitutes "Fees for technical services" falling under s. 9(1)(vii)(b) r/w Expln.-2 of the IT Act. The learned counsel for the appellant vehemently contended that the collaboration agreement is a composite one whereunder the foreign company undertook to grant licence for practising licensor's process in the plant, to supply equipment and catalyst for the plant, to deliver the basic engineering and the operating manual for the plant and to depute technical personnel for supervision of the detailed engineering, commissioning, erection and start-up of the plant, that the designs and drawings (documentation) covered by basic engineering were all prepared and sold by the foreign company at Frankfurt, West Germany, outside India, that the technical know-how in the shape of drawings and designs were purchased by the appellant on the basis of outright sale from the foreign company outside India, that what was acquired by the appellant in the shape of drawings and designs outside India was a capital asset and that, therefore, price paid for basic engineering i.e. documentation cannot be treated as "fees for technical services" rendered by the foreign company in India and hence there is no liability on the part of the appellant to deduct any tax on the payment made towards the price for basic engineering. Further, he contended that the Supreme Court in the case of Scientific Engineering House (P) Ltd. vs. CIT (1986) 157 ITR 86 (SC), held that documentation service comprising of drawings, designs, plans, processing data, etc. constitutes 'plant' whereon depreciation also is allowable, that when plant and machinery are sold by a foreign company outside India, that the sale of basic engineering outside India also takes the character of sale of plant and machinery abroad, that if there is any profit element of the said transaction, it can be assessed in the hands of the foreign company as its commercial profit and that the price paid for basic engineering can never be treated as "fees for technical services". He submits that all the transactions took place outside India in respect of the basic engineering which is a capital asset, that the price paid by the appellant to the foreign company can only be treated as a "trading receipt" in the hands of the foreign company and the profit, if any, arising out of it can only be assessed as "commercial profit" in the hands of the foreign company and that it cannot be treated as "fees for technical services." He, further submits that there was no business connection or permanent establishment for the foreign company in India and that even under the provisions of the Double Taxation Avoidance Agreement (DTAA) also the price paid for the basic engineering cannot be treated as "fees for technical services."

27. The foreign company undertook to deliver basic engineering to the appellant outside India as seen from art. 3.2. Art. 2.2 states that the seller will deliver the basic engineering and the operating manual for the plant as per Appendix-I. Seller's scope of engineering services are mentioned in details in Appendix-I of the collaboration agreement. It is mentioned in Appendix-I that the "engineering" comprises of "technical services". Paras 1.1 to 1.9 of Appendix-I describe the details of those technical services under as many as nine heads, which have already been referred to (supra) in para 19 of this order. We find those details (Appendix-I) at pp. 19 to 24 of the paper book No. 1. The technical services constituting "basic engineering" comprised of general documentation, process design, mechanical engineering, piping engineering, instrument engineering, insulation, electrical engineering, structural steel and civil engineering. No doubt, a substantial part of the said technical services are in the shape of designs, drawings, plans, etc. Separate price of DM 16,00,000 was fixed for basic engineering as per art. 4.1.3 of the agreement. Art. 7.1 states that the seller shall assume the following guarantees :

No doubt, it is true, the Supreme Court in the case of Scientific Engineering House (P) Ltd. vs. CIT (1986) 157 ITR 86 (SC) and the Andhra Pradesh High Court in the case of the very same assessee Scientific Engineering House (P) Ltd. vs. CIT (1984) 148 ITR 171 (AP) and the Tribunal Hyderabad Bench 'A' in the case of Klayman Porcelains Ltd. vs. ITO (1985) 21 TTJ (Hyd) 283 : (1984) 8 ITD 265 (Hyd) have held that technical know-how acquired by an assessee is also an asset and falls within the expression 'plant' eligible for depreciation. The Supreme Court held that documentation service comprised of drawings, designs, plans, processed data, etc. in a book form constitutes 'plant' and, therefore, it is eligible for depreciation. There can be no dispute regarding the proposition. A part of basic engineering delivered in the form of designs, drawings, data sheets, plans, etc. may answer the description of a 'plant'. The disbursement in the hands of the Indian company may be capital in nature and the corresponding receipts in the hands of the foreign company may be revenue in nature. It may be a capital disbursement insofar as the purchaser is concerned, but it does not necessarily mean that it would be capital receipt in the hands of the recipient. The foreign company rendered services by preparing the design and basic engineering including documentation and delivered the same to the appellant to enable the latter to erect a plant for the manufacture of maleic anhydride by using the "licensor's process". The said services insofar as the foreign company is concerned are certainly in the nature of "technical services" rendered by it and the receipt of consideration by the foreign company would be chargeable to tax under s. 9(1)(vii) r/w Expln. 2 and art. VIIIA of DTAA. There is no conflict between the DTAA and the IT Act regarding the definition of the expression "fees for technical services".