1. These appeals are in respect of the assessment years 1979-80 and 1980-81. The issue involved is the same in both the years. The assessee is a Canadian non-resident company. It was retained by Kudremukh Iron Ore Co. Ltd. (KIOCL) to provide field supervision services for the erection and commissioning of ball mills and autogenous mills.
Travelling expenses and allowances on daily basis were made by KIOCL in respect of the services rendered by the supervisors provided by the assessee-company. The payments to be made were tax-free and KIOCL was to bear the taxes on these amounts. Accordingly, for purposes of assessments, the payments had to be grossed up. There is no dispute with regard to the principle of grossing up. The disputes before the IAC, however, centred round two points, viz., the rate of grossing up and the applicability of provisions under Section 44D of Income-tax Act, 1961 ('the Act'). The contention of the assessee before the IAC was that the income was not for technical services but for construction and assembly of the plant or a like project, thus, taking the income out of the purview of Explanation 2 to Section 9 of the Act and Section 44D. According to the assessee, Section 44D which imposed a ceiling on the expenditure deductible from technical fees, applied only to technical fees assessable as income deemed to accrue or arise in India and even there Explanation 2 carved out an exception in the case of construction and assembling charges. Once the payment is towards charges for construction and assembly of plant, the assessee would be entitled to deduct the entire expenditure incurred in that connection ignoring the limit prescribed under Section 44D. According to the IAC, however, the receipt by the assessee-company was towards technical services and Section 44D was applicable. The project having been approved by the Government of India subsequent to 1-4-1976, no deduction was permissible from the receipts towards technical fees. The concessional rate of 40 per cent would apply in terms of Section 115A of the Act. The assessee's stand was that the entire expenditure incurred by it in earning the income was deductible as the receipts did not partake of the character of technical fees. The rate of tax applicable would be 73.5 per cent. The principle of grossing up was, however, admitted. The IAC relied on the following facts for coming to the conclusion that Section 44D applied : (i) Every invoice raised by Aerofall Mills Ltd. on KIOCL bore the inscription that the charges were for field supervision charges for erection and commissioning of ball mills, etc.
(iii) Labour and materials for the assembly and erection were supplied by KIOCL, and (iv) Separate contract had been entered into with Aerofall Mills Ltd. for supply of machinery and it was not obligatory on the part of KIOCL to employ the assessee-company for the assembly and erection of equipments supplied by them.
He rejected the contention that making available the services of supervisors for assembly and erection of the plant was an integral part of the contract for purchase of materials from the assessee-company and it was incumbent on KIOCL to make use of the services of the assessee-company in erecting the plant. He referred to various letters written by the assessee-company and KIOCL and came to the conclusion that field supervision was a separate contract entered into between the two companies concerned and further, as the payments made by the client-company are based on daily rates of 350 dollars per person for 10 hours for six days in a week along with 6,000 dollars towards travelling expenses, which did not include any other expenses for payment of erection and assembling of the equipment which were taken care of by the client-company itself, the payment received by the assessee was purely for technical services rendered and not for construction and assemblage of plant.
2. In appeal, the Commissioner (Appeals) referred to letter dated 12-7-1977 addressed to KIOCL by the assessee. In that letter it was stated that the cost of field supervision was completely under the control of the owner as it related directly to the construction schedule which in turn was controlled hundred per cent by the owner and the supplier had no control over the priorities during the construction with the result that it was not possible to predict the exact number of [days for which the field supervisors would be required at the site. He agreed with the reasonings of the IAC and dismissed the appeals.
3. Before us Shri K,P. Kumar, the learned counsel for the assessee, reiterated the arguments advanced before the authorities below. In particular, he submitted that this is a case where there is no dispute about the place of accrual of income. The income accrued in India. It was, therefore, unnecessary to resort to Section 9 as observed by the learned authors, Kanga and Palkhiwala's in Law and Practice on Income-tax, Vol. 1, 16th edition, p. 198 of their commentary. This was based on the decisions of the Supreme Court in CIT v. R.D. Aggarwal & Co.  56 ITR 20 and CIT v. Little's Oriental Balm & Pharmaceuticals Ltd.  18 ITR 849 (Mad.). He then referred to Section 44D and submitted that as fees for technical services shall have the same meaning as in Explanation 2 to Clause (vii) of Sub-section (1) of Section 9, Section 44D could be invoiced only when Section 9 was applied. Section 9 cannot be applied in the case of a direct accrual of arisal of income in India, that section being restricted to income not accruing or arising in India, but deemed to be so. In effect, he submitted that the entire expenditure incurred in connection with the earning of the fees should have been deducted.
The learned departmental representative referred to an order of this Tribunal in Appeal No. 332 (Bang.) of 1982 dated 25-11-1983, where under similar circumstances, it was held that payments received by an assessee did not amount to charges for construction or assembling of plants but technical services. He then submitted that Explanation to Section 44D holding that fees for technical services shall have the same meaning as in Explanation 2 to Section 9 did not mean that Section 44D applied only in cases where Section 9 was invoked. It merely clarified the meaning of technical services and once payment was received for such technical services, Section 44D applied. He submitted that the appeals of the assessee should be dismissed.
4. We have heard the rival submissions. It is not necessary for us to refer in detail to the entire contract between the assessee-company and K10CL regarding purchase of materials. The confirmatory order dated 22-3-1978 issued by KIOCL states as follows : 18. Erection & Supervision : A separate contract shall be concluded as mutually agreed.
It is, therefore, obvious that the contract did not envisage a turnkey project. There is a contract for supply of materials and another contract for supervision of erection of the plant. Aerofall Mills Ltd.'s letter dated 12-7-1977 to KIOCL clarifies the position.
Paragraph C of that letter is reproduced below : The cost of field supervision is completely under the control of the owner as it is directly related to the construction schedule which in turn is 100 per cent controlled by the owner. The supplier has no control over the priorities during the construction. It is, therefore, impossible for us to predict the exact number of days our field supervision will be required at the site. Further, we wish to point out that you have excepted our offer for field supervision in the autogenous mill contract. We will not require any additional field supervision for the ball mills. Therefore, if Aerofall/ UBE supply both the autogenous mills and ball mills, only one field supervision is required for both types of mills. In this case then, Kudremukh saves the cost of one field supervision. This represents a substantial saving to Kudremukh of at least $ 1,00,000. Our offer is one field supervision for both autogenous mills and ball mills at a rate of $ 350 per day. We will guarantee travelling expenses will not exceed $ 6,000. Taxes, etc., are extra.
It is, therefore, obvious that the contract was not one for construction and assembling of the plant. There was one contract for supply of materials. KIOCL was to incur all the expenses in connection with the erection of the plant. The assessee was to provide technical men to supervise the erection work being done by KIOCL. Therefore, the assessee itself had no contract for erecting and assembling the plant.
It, however, provided technical services. Therefore, our decision in IT Appeal No. 332 (Bang.) of 1982 dated 25-11-1983 applies to the instant case also. Hence, the exception provided in Explanation 2 to Section 9 cannot be extended to the assessee's case.
4.1 We may now examine the assessee's contention that income cannot be deemed to accrue or arise in India by Section 9. This argument has relevance only regarding the application of Section 44D, which will be examined in the succeeding paragraph. However, we wish to state that if the submission of the assessee that Section 9 does not apply is to be accepted, it also means that the exception carved out in Explanation 2 to Section 9 with regard to fees for construction or assembling of plants will also not apply.
5. Having come to the above conclusion, it remains for us to see whether Section 44D applies only to cases where Section 9 is invoked.
We are reproducing Section 44 D along with its Explanation below : 44D. Special provisions for computing income by way of royalties, etc., in the case of foreign companies.--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 ; (b) no deduction in respect of any expenditure or allowance shall be allowed under any of 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 after the 31st day of March, 1976.
(a) 'fees for technical services' shall have the same meaning as in Explanation 2 to Clause (vii) of Sub-section (1) of Section 9 ; (b) 'foreign company' shall have the same meaning as in Section 80B ; (c) 'royalty' shall have the same meaning as in Explanation 2 to Clause (vi) of Sub-section (1) of Section 9 ; (d) royalty received from an Indian concern in pursuance of an agreement made by a foreign company with the Indian concern after the 31st day of March, 1976, shall be deemed to have been received in pursuance of an agreement made before the 1st day of April, 1976, if such agreement is deemed, for the purposes of the proviso to Clause (vi) of Sub-section (1) of Section 9, to have been made before the Is day of April, 1976.
The wordings in the Explanation 'fees for technical services shall have the same meaning as in Explanation 2 to Clause (vii) of Sub-section (1) of Section 9' do not ipso facto mean that fees for technical services referred to in Section 44D are those fees considered as fees for technical services by invoking Section 9. The section does not contain any such restriction. It merely states that the deduction admissible under technical services is subject to the restrictions imposed by that section. The words are 'fees for technical services shall have the same meaning as in Explanation 2 to Clause (vii) of Sub-section (1) of Section 9'. The section does not say that the restrictions would apply only to such technical services deemed to accrue or arise under Section 9. It is to be held that all incomes by way of technical fees received by a foreign company, whether they accrue or arise directly in India or deemed to accrue or arise in India by virtue of Section 9, are to be computed under Section 44D. But what is technical service is defined in Section 9. The definition of technical services provided under Section 9 will apply in both cases and, consequently, the restrictions under Section 44D. We, accordingly, reject the contentions of the learned counsel for the assessee in this behalf.
6. The learned counsel for the assessee submitted that the interpretation that we are placing on Section 44D would result in a lot of hardship particularly in cases of foreign banks having branches in India and carrying on consultancy business. The possible repercussions in other cases cannot be a ground for interpreting Section 44D contrary to the plain meaning of the wordings employed in that section. We, accordingly, reject the arguments advanced by the learned counsel for the assessee.