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Compagnie Francaise D'Etudes Et Vs. Inspecting Assistant - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Delhi
Decided On
Judge
Reported in(1984)8ITD215(Delhi)
AppellantCompagnie Francaise D'Etudes Et
RespondentInspecting Assistant
Excerpt:
.....of february 1976 whereby each of the later foreign concerns had agreed to with the aforesaid indian company for making available by the former to the latter the services of specialists who were to be paid in accordance with the terms and conditions of the aforesaid agreements and which amounts were paid by the assessee-non-resident pursuant to the obligation undertaken by it in the aforesaid agreement dated 30-11-1972 were of no consequence.15. these arguments are controverted by the representative for the assessee, mr. puri, who has urged that the assessee-non-resident company being not a party to the aforesaid agreements of february 1976 between the aforesaid indian company, viz., indian petrochemicals corporation limited and ccm sulzer/nordon & co./jeumont-schneider was not.....
Judgment:
1. I.T. Appeal No. 1584 (Delhi) of 1981 by the assessee-non-resident foreign company, Compagnie Francaise D'Etudes Et De Construction, TECHNIP, incorporated in France and I.T. Appeal No. 1722 (Delhi) of 1981 by the revenue arising out of the order of the Commissioner (Appeals), dated 7-2-1981, have been consolidated, heard together and are being disposed of by a common order for the sake of convenience.

The year of assessment involved is 1977-78, for which the previous year ended 31-12-1976.

2. Admittedly, as in the past in the year under consideration, the assessee-non-resident company was engaged in supplying technical know-how to (i) Haldia Project of the Refinery Division of the Indian Oil Corporation, and (ii) to Low Density Polyethylene Project (LDPP) for the Indian Petro-chemical Corporation Ltd. 3. The IAC in the assessment of the assessee has, by relying on Section 44D(a) of the Income-tax Act, 1961 ('the Act'), restricted the expenses claimed to 20 per cent on the quantum of fee earned for services rendered in India by the assessee. While so holding, the IAC rejected the stand taken by the assessee based on Articles XVI and XIX of the Avoidance of Double Taxation Agreement between the Government of the French Republic and the Indian Government which, according to the assessee, entitled it to the deduction of the entire expenses incurred by the assessee-non-resident company in India in connection with the activities performed in India in the shape of providing technical know-how to the above Indian companies. The IAC further held that the amount received by the assessee-non-resident company from each of the aforesaid Indian companies by way of reimbursement of the payments made on behalf of each of those companies, in all Rs. 30,98,000, was to be treated as part of the total income of the assessee-non-resident company. There was, however, no discussion in the assessment order regarding the set off of the brought forward losses and unabsorbed depreciation in the assessment order by the IAC.4. Aggrieved by the aforesaid assessment, the assessee-non-resident company brought the matter by way of appeal before the Commissioner (Appeals). The contention of the assessee that there being conflict between Section 44D and Articles XVI and XIX of the Avoidance of Double Taxation Agreement between the Governments of India and French Republic, the latter has to prevail. The Commissioner (Appeals) went into the language of Article XVI and rejected the aforesaid stand of the assessee by observing as under: Admittedly, the appellant is an enterprise of France being paid amounts by the two Indian enterprises attributable to activities actually performed in India and in computation of its total income is entitled to deduction of expenses incurred in India in connection with the above activities. It is patent that the deduction for expenses is to be worked out in accordance with the scheme of the Income-tax Act. Ordinarily, the deductions are as provided in Sections 30 to 44C of the Income-tax Act. However, Section 44D inserted by the Finance Act, 1976, stipulates, inter alia, that notwithstanding anything to the contrary contained in Sections 28 to 44C, in the case of an assessee, being a foreign company, the deductions admissible under the said sections, in computing the income by way of royalty or fees for technical services in pursuance of an agreement made by the foreign company with the Indian concern before the 1st day of April, 1976, shall not exceed in the aggregate twenty per cent of the gross amount of such royalty or fees, as reduced by so much of the gross amount of such 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, etc., etc. The effect of this special provision is that in the case of a foreign company, the quantum of deductions admissible under Sections 28 to 44C is subject to the ceiling of 20 per cent of the gross amount of the fees received for technical services. And, if in computation of the assessee's total income, the above special provision, which is equally applicable to all foreign companies, is applied, it cannot be contended that it is not being allowed a deduction of expenses incurred as envisaged under Article XVI of the Agreement with France. It is to be pointed out that Article XIX of that Agreement provides, inter alia, that laws in force in either of the Contracting States will continue to govern taxation of income in the respective Contracting States except where express provision to the contrary is made in the Agreement. By restricting the permissible expenses within the ceiling laid down by Section 44D, the IAC is only giving effect to the provisions of the Tax Laws in force in this country and there is no provision either in the Agreement or in the contracts coming in her way.

5. Coming to the contention that in applying 20 per cent expense-ceiling, the amounts received in reimbursement of the expenses incurred for and on behalf of the Indian concerns, on which the assessee-non-resident company had not derived any profit or loss, should be deleted from the gross receipt/receipts is concerned, the Commissioner (Appeals) agreed with the assessee by observing as under: The IAC will, accordingly, work out the assessee's own business receipts by way of technical fees after excluding the same, after due scrutiny. In this connection, the appellant has filed copy of a letter dated 9-5-1980 addressed by the Indian Oil Corporation Ltd. to the appellant, wherein, with reference to the appellant's letter dated 24-4-1980, it has been stated, inter alia, that the expenses of the nature indicated, which were incurred by Technipindep in their New Delhi Office, had not been reimbursed by the Indian Oil Corporation, since the contract did not provide for this. This letter was obtained by the appellant after the assessment had been made and was, thus, not available to the IAC at the time of making the assessment. It will be appropriate for the same as read with the letter dated 24-4-1980 to which it was a reply, to be taken into account in determining the final picture of the appellant's affairs.

6. Thereafter, the Commissioner (Appeals) has further observed as under: After arriving at the total income by following the directions given in para 4 above, the IAC will allow set off of the brought forward losses and unabsorbed depreciation as may be permissible under the law.

The assessee is aggrieved against the order of the Commissioner (Appeals) holding that Section 44D was attracted in the present case and the expenses incurred by the assessee in providing technical know-how to the aforesaid two Indian companies should be restricted to 20 per cent and that it should not be allowed the entire expenses claimed. The revenue is aggrieved against the order of the Commissioner (Appeals) holding that in applying 20 per cent expenses-ceiling, the amounts received by way of reimbursement of the expenses incurred for and on behalf of the aforesaid Indian concerns should be deleted from the gross receipts as also the direction of the Commissioner (Appeals) to the IAC to allow set off of the brought forward losses and unabsorbed depreciation.

7. Taking the appeal of the assessee first, the representative for the assessee, Mr. S.P. Puri, took us through the Avoidance of Double Taxation Agreement between the Government of India and the Government of the French Republic dated 26-3-1969, more particularly Articles XVI and XIX thereof as also the provisions of Section 90 of the Act giving statutory recognition to the said Agreement. Since the said Agreement, according to the representative for the assessee, was an agreement between the two Governments, the provisions contained therein will prevail over the provisions, if any, to the contrary in the Act, more particularly Section 44D being a general provision. This position, according to the representative for the assessee, is recognized by the CBDT in their Circular No. 333 [F. No. 506/42/81-FTD], dated 2-4-1982 - see [1982] 137 ITR (St.) 1.

8. The representative for the assessee next on the strength of Article XVI of the aforesaid Agreement urged that the assessee was entitled to the entire and not 20 per cent of the expenditure incurred by the assessee-non-resident in India in connection with the activities performed relating to the technical know-how being provided by it to the aforesaid two Indian companies. The said circular, according to the representative for the assessee, in view of the ratio of the decision of the Supreme Court in the case of Ellerman Lines Ltd. v. CIT [1971] 82 ITR 913 was binding on the ITO. In reply, these arguments are controverted by the departmental representative, who basing himself on Section 44D(a) urged that the said provision was attracted in the present case and the orders of the tax authorities limiting the expenses to be allowed to the assessee at 20 per cent of the gross amount received from the aforesaid two Indian companies was correct.

The departmental representative further urged that Article XVI of the Agreement between the Governments of India and the French Republic did not in any way militate against the meaning to be given to the provisions of Section 44D(a). The departmental representative further basing himself on the ratio of the decision of the Madras High Court in A.L.A. Firm v. CIT [1976] 102 ITR 622 urged that the aforesaid circular of the Board cannot in any way control the judicial powers of the tax authorities including the ITO.9. We have given consideration to the above arguments. Section 90 empowers the Central Government to enter into an agreement with any other Government outside India for the grant of relief in respect of income on which have been paid both income-tax under this Act and the income tax 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 the recovery of income-tax under the Act. It is pursuant to this provision in the Act that the aforesaid Avoidance of Double Taxation Agreement, 1969, was entered into between the Government of India and the Government of the French Republic. Article XIX of the said Agreement lays down that the laws in force in either of the Contracting States shall continue to govern the taxation of income in the respective Contracting States except where express provisions to the contrary is made in the present agreement. The rest of the said article is not relevant for the purpose of our discussion and so is not being reproduced.

10. This takes us to Article XVI of the said Agreement which lays down the manner in which the income by way of fees for technical services furnished by an enterprise of one country to the other shall be computed: Amounts paid by an enterprise of one of the Contracting States for technical services furnished by an enterprise of the other Contracting State shall not be subjected to tax in the first-mentioned Contracting State except insofar as such amounts are attributable to activities actually performed in the first-mentioned Contracting State. In computing the income so subjected to tax, there shall be allowed as deductions the expenses incurred in the first-mentioned Contracting State in connection with the activities performed in that Contracting State.

In accordance with Article XIX read with Article XVI, the amounts paid by the aforesaid two Indian companies of this country for technical services furnished by the assessee-non-resident company of the French Republic cannot be subjected to tax in India except insofar as such amounts are attributable to the activities actually performed in India.

At the hearing it was an admitted position that the amounts paid by way of technical fees by the aforesaid Indian companies to the assessee-non-resident company are attributable to the activities actually performed by the assessee-non-resident company in India. As such, the said amounts are subjected to tax in the hands of the assessee-non-resident in India.

11. Once we come to the conclusion stated towards the end of the preceding paragraph, the question which next crops up is as to how the income of the assessee-non-resident to be subjected to tax under the Act is to be computed. The answer to this question is provided by the second limb of Article XVI between the Government of India and the Government of the French Republic. According to that, the income in respect of the amount received by the assessee-non-resident company from the aforesaid two Indian companies by way of technical fees is to be computed for being subjected to tax by deducting from the gross amount so received 'the expenses incurred' in India 'in connection with the activities performed' in India. Forgetting for the present time the effect of Section 44D(a) in the present case, there can be no dispute that the total income of the assessee-non-resident company for being taxed in India in accordance with article XVI would have been computed by deducting from the gross receipt of the assessee-non-resident company received from the aforesaid two Indian companies, the entire expenditure incurred in India in connection with the activities performed in India by the assessee-non-resident company.

12. We next address ourselves to the effect, if any, of Section 44D(a) on the conclusion stated by us towards the end of the preceding paragraph. Section 44D(a) lays down that-- 44D. Notwithstanding anything to the contrary contained in Sections 28 to 44C, in the case of an assessee, being a foreign company,-- (a) the deductions admissible under the said sections in computing the income by way of royalty or fees for technical services received from an Indian concern in pursuance of an agreement made by the foreign company with the Indian concern before the 1st day of April, 1976, shall not exceed in the aggregate twenty per cent of the gross amount of such royalty or fees as reduced by so much of the gross amount of such 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; Can the provisions of Section 44D(a) supersede the provision, if any, to the contrary in the Avoidance of Double Taxation Agreement between the two Governments, which is nothing but the result of an Act of State? The answer as rightly observed by the CBDT in the aforesaid Circular No. 333 [F. No. 506/42/81-FTD], dated 2-4-1981, is that where a specific provision is made in the Avoidance of Double Taxation Agreement between the Government of India and the Government of the French Republic, that provision will prevail over the general provision contained in the Act. The Avoidance of Double Taxation Agreement, like the one in the present case, having been entered into by the Central Government in exercise of the powers under Section 90 also provides that the laws in force in either country will continue to govern the taxation of income in the respective Contracting States except where express provisions to the contrary is made in the said agreement. This is otherwise also quite apparent. We say so because the opening words of Section 44D supersede a provision, if any, to the contrary contained in Sections 28 to 44C of the Act to those contained in Section 44D. The said clause in Section 44D does not have within its sweep the provisions to the contrary contained in Avoidance of Double Taxation Agreement between the Government of India and the Government of the French Republic which has the force of law in view of Section 90.

Furthermore, the said circular in view of the ratio of the decision of the Supreme Court in the case of Ellerman Lines (P.) Ltd. (supra), is binding on the IAC. We, therefore, hold that a specific provision to the contrary in article XVI, as held by us being a provision to the contrary, will prevail over the provisions of Section 44D(a). To say in other words, the provisions of Section 44D(a), in view of our findings given above, have to be ignored and the assessee-non-resident company is entitled to the deduction of all the expenses incurred in India in connection with the activities by way of technical services performed in India towards the aforesaid two Indian companies. Since the question of the extent of the expenses so incurred has not been gone into either by the IAC or the Commissioner (Appeals), we set aside the orders of the Commissioner (Appeals) and the IAC on the point at issue and restore the same to the file of the IAC for determining the expenses incurred by the assessee-non-resident company in India in connection with the technical services furnished by the assessee-non-resident company to the aforesaid two Indian companies in India. The amount of the expenses so incurred will have to be deducted from the gross receipt of technical fees for the technical services performed in India towards the aforesaid two Indian companies by the assessee-non-resident company in computing the taxable income of the latter for the year under consideration. The IAC before so determining the expenditure to be allowed will permit the assessee to lead evidence, if any, in this behalf.

13. In the result, the appeal by the assessee bearing I.T. Appeal No.1584 (Delhi) of 1981 is allowed for statistical purposes.

14, We now come to the appeal filed by the revenue. According to the departmental representative, the Commissioner (Appeals) has erred in deleting the sum of Rs. 30,93,000, rightly assessed by the IAC as the income of the assessee-non-resident company and in directing the IAC to allow set off of the unabsorbed depreciation of the earlier years, which is deemed to be current year's depreciation by virtue of Section 32 as Section 44D does not permit such an allowance. In this connection, the departmental representative took us through the agreement dated 6-8-1969 between the assessee-non-resident company and the Indian Oil Corporation, more particularly articles 3.1 and 3.2 and articles 5(1) and 5(2) of the Addendum No. 2 to the said agreement, as also the agreement dated 30-11-1972 between the assessee-non-resident company and Indian Petrochemicals Corporation Limited, more particularly articles 2(e), (f), (g), 6.3, 7.1, 7.1.4 and 7.1.5.

The departmental representative further, in view of the aforesaid articles in the aforesaid agreement dated 30-11-1972, urged that the diverse provisions in the subsequent agreements between Indian Petrochemicals Corporation Limited and CCM Sulzer/Nordon & Co./Jeumont-Schneider of February 1976 whereby each of the later foreign concerns had agreed to with the aforesaid Indian company for making available by the former to the latter the services of specialists who were to be paid in accordance with the terms and conditions of the aforesaid agreements and which amounts were paid by the assessee-non-resident pursuant to the obligation undertaken by it in the aforesaid agreement dated 30-11-1972 were of no consequence.

15. These arguments are controverted by the representative for the assessee, Mr. Puri, who has urged that the assessee-non-resident company being not a party to the aforesaid agreements of February 1976 between the aforesaid Indian company, viz., Indian Petrochemicals Corporation Limited and CCM Sulzer/Nordon & Co./Jeumont-Schneider was not bound by those agreements. The liability under this agreement to pay for the specialists made available to the Indian Petrochemicals Corporation Limited by each of those foreign companies, namely, CCM Sulzer/Nordon & Co./Jeumont-Schneider in the manner agreed upon was of the said Indian company. As desired by the said Indian company, the assessee-non-resident company made the payments to those foreign companies due to them from the aforesaid Indian companies under the aforesaid agreements of February 1976. The assessee-non-resident company was later on reimbursed all these payments by the Indian Petrochemicals Corporation Limited. That being the position, the Commissioner (Appeals) was justified in holding that since the amounts received by the assessee-non-resident company from the aforesaid Indian Company, namely, Indian Petrochemicals Corporation Limited was by way of reimbursement in the manner indicated hereinbefore, the same could not be termed as the revenue receipt of the assessee-non-resident company.

16. We have given consideration to the above arguments. Taking first the agreement of technical assistance between the assessee-non-resident company and Indian Oil Corporation Limited, we find that Addendum No. 2 to the said agreement lays down that whereas under article 3.3 a provision for the deputation of the assessee-non-resident company's start-up specialists to the extent of 15,00,000 French Francs had been made, yet at the same time it was not clear as to the definite area and the period of work during which these specialists would be required.

The said addendum then goes on to record the following agreement between the parties in this behalf: 3.1 The French Francs compensation in respect of various vendors' and process licensor's specialists shall be payable at the rates specified in Appendices 2 to 11 to this Addendum.

3.2 The contractor shall initially make the payment of the agreed amounts after due verification and certification by the buyer to the respective vendors and process licensors and claim reimbursement on the basis of actual payments made without including any element towards their cost, expenses or profit. The claim for reimbursement shall be supported by the original invoices received from the respective vendors and process licensors.

The rate of living allowance payable by the buyer to the contractor's start-up specialists shall be the same as the rates paid for construction's specialist as per technical assistance contract and its addenda and amendments.

The rate of living allowance payable by the buyer to the vendor's and process licensor's specialists shall be Rs. 115 (one hundred fifteen) per day per specialist. In addition, they would be provided free of cost by the buyer to these specialists living furnished accommodation with air condition, electricity, gas and water supply and transportation from their place of stay to site and back.

A perusal of these provisions in the said addendum makes it abundantly clear that the payment to the assessee-non-resident company by the Indian Oil Corporation Limited for making available the specialist of the type mentioned hereinbefore was nothing but a payment by way of reimbursement inasmuch as the assessee-non-resident company had paid those specialists for and on behalf of the Indian Oil Corporation. That being the position, the Commissioner (App6als) on the facts and in the circumstances of the case rightly held that the amount so reimbursed to the assessee-non-resident company by the Indian Oil Corporation Ltd. was not revenue receipt taxable in its hands for the year under consideration. We entirely agree with the reasoning given by the Commissioner (Appeals) in this behalf. We uphold his order on this point.

17. Coming to the agreement between the assessee-non-resident company and Indian Petrochemicals Corporation Limited, it is correct that the scope of the said agreement covered the rendering of technical services detailed below for the realisation of the plant: Article 2(e) The technical assistance services during detailed engineering to be performed in India in accordance with Annexure IX of this Agreement.

(f) The advisory services during the construction and erection of the plant in accordance with Annexure IX of this agreement.

(g) The European vendor's specialist services during plant precommissioning and start-up, in accordance with Annexure IX to this agreement.

Further, in article 6.3 it was laid down that the aforesaid company was to pay or shall provide for payment to the assessee-non-resident company a provisional sum of French Francs 1,27,66,000 composed as per article 7 below. Articles 7.1.4 and 7.1.5 read as under: 7.1.4 Estimated costs of the Technical Assistance services regarding engineering to be performed in India by I.E.C., of the advisory services during the construction and erection of the PLANT and of the European Vendor's specialists services as well as TECHNIP specialists during PLANT pre-commissioning.

- modification in design requested or approved by IPCL necessitating additional services and/or equipments to be imported.

- additional import of equipment and/or materials which prove impossible to be fabricated/procured in India and which are now not included in TECHNIP scope of work including the relevant procurement services.

18. In spite of the aforesaid agreement between the assessee-non-resident company and the aforesaid Indian company, the latter entered into three separate and distinct agreements with CCM Sulzer/Nordon & Co./ Jeumont-Schneider. The non-resident company was not a party thereto. Under those agreements, the said non-resident companies were to make available the services of specialists who are to be paid in the manner agreed to by the parties in the manner stated therein. We will give here by way of sample, the relevant provisions in this behalf between the aforesaid Indian company, Indian Petrochemicals Corporation Limited and CCM Sulzer, reading as under: IPCL will provide living allowance to the expatriates at Rs. 150 per day.

6. The expatriate coming to India will be considered as assigned to IPCL for the purpose of income-tax.

7. 'Indian' income-tax will be paid by IPCL on income earned or deemed to be earned for performing the service for which he is assigned.

In addition to the facilities described in item No. 3 of this agreement and provided directly by IPCL, TECHNIP will pay to the company JEUMONT-SCHNEIDER an absence fee of 800FF per calendar day of absence from home office of the expatriate subject to the condition that travel time between Europe and India and return will not exceed 24 hours each.

The payment of the absence fees will be made by TECHNIP after receipt of: 1. --Monthly attendance sheets duly signed by IPCL's representative and the expatriate himself.- IPCL 2 cc- TECHNIP FRANCE 4 cc- TECHNIP construction superintendent in BARODA 1 cc 2. --Monthly invoice on the basis of these attendance sheets to be addressed by JEUMONT-SCHNEIDER to TECHNIP RUELL with same despatching as for the attendance sheets.

Since the assessee-non-resident company was not a party to these agreements between the aforesaid Indian company and the aforesaid foreign companies, it was under no obligation to pay any amount to these foreign companies for the services of the specialists made available by them to the aforesaid non-resident company. As has been rightly stated by the Commissioner (Appeals), the assessee-non-resident company at the instance of the aforesaid Indian company paid for and on behalf of the said Indian company diverse amounts to the said three non-resident companies in accordance with the aforesaid agreements. For the payments so made by the assessee-non-resident company, the aforesaid Indian company has made the payments to the former by way of reimbursement as has been correctly found out by the Commissioner (Appeals). As such, the question of the amount so reimbursed being treated as the revenue income of the assessee-non-resident company does not arise. We fully agree with the Commissioner (Appeals) in this behalf.

19. In the result, the appeal by the revenue fails and is hereby dismissed.


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