International Operating Services Limited vs Commissioner of Income Tax

G.C. Bharuka, J.—The Tribunal, pursuant to the present reference made under s. 256(1) of the IT Act, 1961 (in short the ''Act'' only) has

referred the following question of law for seeking our opinion :

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that a sum of Canadian $2,98,623 (Equivalent to

Rupees 22,97,446) was taxable as income under the IT Act, 1961 ?

The assessee is a foreign company incorporated in Canada. It had entered into an agreement dt. 15th April, 1981 with M/s Mysore Paper Mills

Ltd. (in short the ''Paper Mill'' only) for rendering certain services. The said agreement forms part of the statement of case at annexure ''D''. We

will be dealing with the nature of the services which was contemplated to be rendered by the assessee shortly hereinafter.

The paper mill had earlier entered into an agreement dt. 26th May, 1977 with M/s Beloit Welmsley, a United Kingdom company, for supply

and commissioning of ''news-print plant at Bhadravathi. Pursuant to the said agreement, the plant came into existence and started commercial

production. Subsequent thereto the paper mill entered into an agreement in question with the assessee.

The preamble of the agreement reads as under :

And whereas paper mill desires to obtain the services of OPSERV (abbreviated form of the assesses-company as referred in the agreement) in

connection with the operation of their mills located at Bhadravathi.

And whereas paper mill desires to start up their new facilities for production of pulp and of paper and to bring these facilities to their design

capacity.

And whereas paper mill desires to prepare the capabilities of their personnel to maintain the quantity and the quality of production on a continuous

basis.

And whereas paper mill desires to institute a training programme for their personnel so that their capabilities will improve on a continuous basis.

And whereas OESERV is willing to perform for paper mill the technical service hereinafter mentioned in connection with its operations.

Clause (1) of the agreement enumerates the services which were required to be rendered by the assesses-company. It states that the assessee

company will provide to the paper mill the technical and professional and related services necessary to assist the paper mill to achieve its objectives

in production and operation and the services shall include among other things assisting paper mill in attaining the performance offered by the

vendors for the various modules.

On reading of the said agreement the assessing authority as well as the CIT(A) being the first appellate authority as also the Tribunal held the

view that the assessee had rendered only technical services and as such the expenses claimed by it out of the gross receipts as fees do not qualify

for deduction under s. 44D(b) of the Act r/w the Expln. 2 to s. 9(1)(vii) thereof, thus, giving rise to the question referred to above.

From the assessment order placed at annexure ''A'' we find that out of the total fees received by the assessee during the year being a sum of

Canadian $ 3,09,400, it had claimed an expenditure of Canadian $3,06,278 thus offering only Canadian $ 3,122 (Rs. 24,018) for levy of Income

Tax. Whereas if the fees received by the assesses-company, as held by the Income Tax authorities and the Tribunal, are by way of technical

services then it is not entitled to any deduction whatsoever and the gross receipts are liable to be taxed at the flat rate of 40 per cent.

Explanation 2 to s. 9(1)(vii) of the Act reads as under :

Income deemed to accrue or arise in India : (1) The following incomes shall be deemed to accrue or arise in India,

(i) xxx xxx xxx xxx

(vii) income by way of fees for technical services payable by,

(a) xxx xxx xxx xxx

Explanation 1 - xxx xxx xxx

Explanation 2. - For the purposes of this clause, ""fees for technical services"" means any consideration (including any lump sum consideration) for

the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not

include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of

the recipient chargeable under the head ""Salaries"".

It will be also proper here to quote the relevant portion of s. 44D of the Act.

44D. Special provisions for computing income by way of royalties, etc. in the case of foreign companies. - Notwithstanding anything to the

contrary contained in ss. 28 to 44C, in the case of an assessee, being a foreign company,

(a) xxx xxx xxx xxx

(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 Government or an Indian concern in pursuance of an agreement made by the foreign company

with Government or with the Indian concern after the 31st day of March, 1976;

(c)

Explanation. - For the purposes of this section,

(a) ""fees for technical services"" shall have the same meaning as in Expln. 2 to cl. (vii) of sub-s. (1) of s. 9;

From the above provisions it is clear that no deduction can be available under s. 44D in case consideration received pursuant to the agreement

is by way of fees for technical services as defined under Expln. 2 to cl. (vii) of sub-s. (1) of s. 9 of the Act. In the present case, we have already

referred to the relevant contemplations in the agreement entered into by the assessee with the paper mill. On reading whereof it seems quite clear

to us that the assesses-company was not required to put up any construction or assemble any part or plant or machinery or to do anything which

had any bearing on the establishment or construction of the plant. The assessee company was required to render appropriate services to the paper

mill just to assist it in achieving the desired quality and optimum production of the newsprint, for manufacturing of which plant had already been

commissioned and put into production by the U.K. company.

In the said view of the matter, we are of the considered opinion that keeping in view the statutory provisions referred to above the assesses-

company was not entitled to any deduction out of the gross consideration it received under the agreement at Annexure ''D''.

Accordingly, the question posed to us is answered in affirmative and against the assessee but there will be no order as to costs.