ORDER
M. V. R. PRASAD, A.M.
These cross-appeals are directed against the order of the CIT(A), dt. 28th Nov., 1989, for the asst. yr. 1984-85. We may mention that these appeals were decided earlier, but the order of the Tribunal was recalled vide order dt. 9th Jan., 1997, in NUk No. 139/Mum/96. The ground taken by the assessee in its appeal read as under:
” 1. The learned CIT(A) erred in law and on facts in not accepting the assessee’s contention that the amount of Rs. 99,97,462 received by way of fees for supervision of construction and erection in terms of the agreement dt. 15th Feb., 1981 with RCF Ltd. was in the nature of fees for technical services and was not management charges and, hence, was not liable to Indian income-tax under the IT Act, 1961, read with the relevant provisions of the Agreement for the Avoidance of Double Taxation of Income between India and Denmark.
2. Without mejudice to the above ground of appeal, the learned CIT(A) erred in law and on facts in rejecting the appellant’s alternative contention that, in any event, having regard to the nature of services specified in Art. 2. 11 of the said Agreement with RCF Ltd. for which the amount of Rs. 99,97,462 was received by HTAS, the greater part of this amount could be properly regarded only as fee for technical services and not as management charges and, hence, was not liable to tax”.
The giounds taken by the Department in its appeal read as under:
1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in deleting the addition of Rs. 14,24,167 made in respect of service rendered for pre- commissioning and commissioning including test run and guarantee tests.
2. On the facts and in the circumstances of the case and in law the learned CIT(A) erred in deleting the addition of Rs. 5,22,839 made in respect of arranging for practical experience of Indian technicians”.
2. The assessee is a Dinesh company. It entered into certain agreements with various companies for the provision of certain services and has received payment as per the terms of the agreements-The issue raised in these crossappeals relate to the amounts received by the assessee under two separate agreements entered into with Rashtriya Chemicals & Fertilisers Ltd. (“RCF”), a public sector company registered under the Indian Companies Act, 1956. The first agreement is dt. 15th Feb., 1981, and the second is dt. 19th July, 1982. The first relates to the construction and erection of an ammonia plant and the second for the construction and erection of cracking unit. There is a Double Taxation Avoidance Agreement entered into between Denmark and India dt. 16th Sept., 1959. There is also a subsequent agreement dt. 8th March, 1989, between the two countries. For the purposes of these appeals, we are concerned only with the earlier agreement.
3. The AO brought to tax an amount of Rs. 99,97,462 described as payment for supervision of construction and erection under art. 4.06 of the agreement dt. 15th Feb., 1981. He has also brought to tax another amount of Rs. 14,24,167 described as payment for supervision of pre- commissioning and commissioning services in terms of art. 4.07 of the same agreement dt. 15th Feb., 1981. He has also brought to tax another amount of Rs. 5,22,839 described as payment for technical advisory services for technical co-ordination in terms of art. 4.2 ol-lhe second agreement dt. 19th July, 1982. The CIT(A) upheld the addition of the amount of Rs. 99,97,462 but deleted the other two additions, i.e., Rs. 14,24,167 and Rs. 5,22,839. The assessee,, is in appeal against the confirmation of Rs. 99,97, 462 and the Department is in appeal against the deletion of the amounts of Rs. 14,24,167 and Rs. 5,22,839.
4, The AO brought to tax the above-mentioned three amounts on the ground that they were payments for services of the nature of management charges. The CIT(A) held that only the amount of Rs. 99,97,462 was payment for the services of the nature of management charges whereas the other two amounts were only payments for technical services rendered by the foreign company to the Indian concern. In this view of the matter, he upheld one addition and deleted the other two additions. The controversy raised in these appeals is regarding the nature of the services for which payments were received by the foreign company. There is also an issue whether the Departmental Representative can be permitted to argue at this stage that the assessee has no permanent establishment in India.
5. For understanding the nature of the issues raised in these appeals, it is necessary to refer to the terms of the Double Taxation Avoidance Treaty between India and Denmark dt. 16th Sept., 1959. Article III of this Treaty so far as it is relevant for our purpose stood as follows:
“Art. III(l) Subject to the provisions of paragraph (3) below, tax shall not be levied in one of the territories on the industrial or commercial profits of an enterprise of the other territory unless profits are derived in the first-mentioned territory through a permanent establishment of the said enterprise situated in the first-mentioned territory. If profits are so derived, tax may be levied in the first-mentioned territory on the profits attributable to the said permanent establishment.
(2)xxxxx
(3) For the purposes of this Agreement the term “industrial commercial profits” shall not include income in the form of rents, royalties, interest, dividends, management charges, remuneration for labour or personal services or income from the operation of ships or aircraft but shall include rents or royalties in respect of cinematographic films”.
It may be observed that as per the above article of the Treaty, industrial and commercial profits of a foreign enterprise are not taxable in India unless they are derived from a permanent establishment in India. It has also to be noticed that certain items of income like royalties and management charges are excluded from the purview of industrial or commercial profits for the purposes of this agreement. In other words, if certain payments are received by the foreign company for management charges, they become taxable in India even though the foreign enterprise has no permanent establishment in India. If, on the other hand, the payments are received for technical services they are taxable in India only if the foreign enterprise has a permanent establishment in India. This is on the assumption that payments for technical services are an integral part of “industrial or commercial profits” referred to in art. III(1) of the Treaty, as such payments are not specifically excluded from industrial or commercial profits in the said article. It is the contention of the learned counsel for the assessee that technical service charges are an integral part of “industrial or commercial profits” whereas the learned Departmental Representative disputes that assumption. Similarly, it is the contention of the learned counsel for the assessee that the Danish company has no permanent establishment in India whereas the learned Departmental Representative has sought to contend that this assumption is not correct. The position taken by the learned counsel for the assessee in this regard is that this controversy whether the assessee has a permanent establishment in India or not is a closed chapter and cannot be raised before the Tribunal for the first time.
6. Having noticed the scope of the controversy, we may now turn to the terms of the two agreements entered into by the Danish company with the Indian concern. Article 1.01 of this agreement gives scope of the services rendered by the foreign company which is described as consultant. It reads as follows :
1.01 Scope of work.
Consultant shall for the cofisideration provided hereunder, make arrangement for the following services to be performed for the ammonia plant :
(i) Licensing of the process referred in art. 2.01.
(ii) Prepare and supply process design and engineering documentation.
(iii) Prepare and supply detailed engineering documentation.
(iv) Prepare and supply drawing and documentation.
(v) Provide procurement services for equipment.
(vi) Provide services to enable owner for obtaining import licences.
(vii) Provide inspection and expediting services for equipment.
(viii) Prepare or obtain and supply network schedules for all activities including
those of vendors and sub- contractors.
(ix) Provide services for procurement of spares and maintenance tools.
(x) Provide services for procurement of special construction tools.
(xi) Associate owner’s representative to participate during design, engineering
and procurement services.
(xii) Provide services for arranging transportation and shipping of equipment.
(xiii) Provide construction management services.
(xiv) Provide precommissioning services.
(xv) Achieve the guaranteed completion point.
(xvi) Provide commissioning services.
(xvii) Provide post commissioning services after acceptance of ammonia plant.
(xviii) Arrange for practical experience of owner’s personnel in accordance with
art. 2.17.
(xix) Prove performance guarantees.
(xx) Observe safety and security regulations.
(xxi) Comply with statutory laws and regulations.
(xxii) Monitor and report progress.
(xxiii) Furnish technical information and know-how as may be required for the operation of ammonia plant.
(xxiv) Transfer consultant’s ammonia technology to FPDIL.
(xxv) Prove plant availability guarantee at owner’s option”.
Art. 2.01 provides that the consultant has to provide certain non-exclusive, non-transferable rights to the Indian company which is described as the owner and consultant has also to furnish services of engineers, designers, etc., for the performance of work pursuant to the agreement.
Art . 2.02 provides that the consultant should provide the design and engineering for the ammonia plant.
Art. 2.03 provides for drawing and documents to be supplied by the consultant.
Art. 2.04 provides for the services to be rendered by the consultant for the procurement of equipment required for the ammonia plant which also stipulates that the consultant shall secure services of vendors specialised in installation and commissioning of the machinery.
Art. 2.05 provides that the consultant should help in obtaining import licences and other permits by preparing necessary data.
Art. 2.06 relates to network schedule to be prepared by the consultant and this Article reads as follows:
“2.06 Network
Consultant shall make available a master schedule indicating the important milestones of activities relating to work from effective date of agreement to the acceptance of ammonia plant. Consultant shall also prepare a composite network schedule and shall obtain from vendors/sub- contractors the schedule of activities relating to the tasks to be carried out by them. Information from vendor/sub- contractor shall be incorporated in consultant’s bimonthly computer printout indicating the status of vendor/sub- contractor’s activities in relation to consultant’s composite network schedule and if necessary the Master Schedule shall be updated”.
Art. 2. 10 relates to the services to be provided for transporting and shipping of equipment which is bought from the vendors.
Art. 2.11 which relates to payment in question of Rs. 99,97,462 reads as follows:
2. 11 construction management services
Consultant shall provide services for the management of all activities relating to civil works, erection, site fabrication, piping, instrumentation, electrical installation, interpretation of drawings and other miscellaneous construction jobs of ammonia plant leading to the guaranteed completion point. Consultant shall organise these activities in appropriate sequence and proper methods giving due regard to the requirement of safety, quality, sound engineering practice, compliance of relevant codes and regulations and for achievement of guaranteed completion point. The construction management services performed by consultant shall also include the following:
(i) Preparation of the list of qualified contractors for the various construction activities in association with the owner’s representative.
(ii) Preparation of bid documents for tendering in association with owner’s representative.
(iii) Inviting and receiving sealed quotations to be opened in the presence of owner’s representative.
(iv) Bid evaluation in association with owner’s representative including negotiations with prospective contractor where necessary.
(v) Preparation of work order stipulating all terms, conditions quality, time schedule and penalties for award of work by owner.
Articles 2.12 and 2.14 relate to the payment of Rs. 14,24,167 and read as follows ..
‘212. Pre-commissioning semces
Consultant shall render and be responsible for supervision and direction of preCommissioning activities leading to guaranteed completion point of ammonia plant. These activities will include relevant checkings, adjustments, testing, calibration, running in and trial runs of individual equipments and other similar jobs. Owner shall provide experienced/trained and suitable operating and maintenance personnel who will perform their tasks under the supervision and direction of consultant. Consultant shall provide experienced personnel as required for carrying out the supervision of precommissioning activities with owner’s personnel. Consultant on behalf of owner shall arrange for vendor’s specialists where required. Suitable provision for such services should be made by consultant at the time of placing the purchase order”.
“2.14 Commissioning services.
Consultant shall render and be responsible for supervision and direction of commissioning after precommissioning activities are completed giving due regard to safety of equipment according to sound international practices”.
The assessee has also to give a performance guarantee and the relevant art. 2.13 reads as follows:
“2.13 Guaranteed completion point.
Consultant shall be responsible for completing the design, engineering, procurement, inspection and expediting, arranging for transportation of equipment, services for construction supervision and precommissioning for making ammonia plant ready for acceptance of feed stock according to the guaranteed completion point.
Consultant shall guarantee ammonia plant completion point making the first 1350 MTPD ammonia unit ready for accepting feed stock within 37 (thirtyseven) months from the effective date of agreement and the second 1350 MTPD ammonia unit within 41 (forth-one) months from the effective date of agreement”.
The assessee has to assist the owner in co-ordination of various activities and art. 2.24 reads as follows:
“2.24 Co-ordination
Consultant shall assist owner in achieving overall co-ordination of all work connected with the project as described in art. 3.02. Towards this end consultant shall agree for a meeting as soon as practicable after the effective date of agreement with owner, FPDIL and such other parties as are necessary to settle the following:
(i) Review the basic design conditions set forth in final proposal and where appropriate, review possibilities for standardisation.
(ii) Review the overall steam and power network of ammonia & urea plant and off-sites.
(iii) Assess the priorities and key dates required to be included in the consultant’s schedules.
(iv) Make an assessment of all items requiring co-ordination.
(v) Mix up a date and agenda of any subsequent meeting as may be required in association with owner/FPDIL/sub- contractors.
(vi) Discuss with pollution consultant appointed by owner and supply technical information to owner about various pollution emission/discharge points from different sources indicating the quality, quantity of gaseous/liquid emission of pollutants from the ammonia plant. Consultant shall also supply to owner any additional information required on the above matter during the performance of process design and basic engineering stage”.
The payments to the Danish company are governed by art. 4 and the relevant portion reads as follows:
“Consultant shall receive gross lump-sum fees as described in this article for the faithful performance of work detailed in art. 1.01 through 2.26 of this agreement leading to proving the performance guarantees and acceptance of ammonia plaint by owner. The consultant work will be classified as follows for the purpose of payment of fees only.
(i) Licence & know-how
(ii) Basic design and engineering package to be done and delivered in Denmark.
(iii) Procurement services including expediting and inspection.
(iv) Supervision of detailed engineering.
(v) Supervision of erection and construction.
(vi) Supervision of precommissioning & commissioning operations.
(vii) Arranging practical experience to owner’s personnel.
(viii) Optional services”.
7. We are not concerned with the other payments described as fixed fees,
licence and know-how fees, basic engineering and design package, etc. etc. under art.4.01, 4.02, 4.03, 4.04 and 4.06 of the agreement in the present appeal.
Article 4.06 of the agreement which relates to payment of Rs. 99,97,462 reads as follows:
“4.06 Supervision of construction and erection
US $ 5,359,091 (US Dollar five million, three hundred fifty nine thousand ninety one only) being the gross lump sum fees corresponding to 315 man months for supervision of construction including civil works, erection and installation of ammonia plant. The fees are subject to adjustment as provided under art. 4.09 hereof “.
Article 4.07 which relates to payment of Rs. 14,24,167 reads as follows:
“4.07 Precommissioning and commissioning services US $ 681,818 (US Dollars Six hundred eighty one thousand, eight hundred eighteen only) being the gross lump sum fees corresponding to 40 man-months for services of precommissioning and commissioning services including the sustained load test and successful guarantee test of ammonia plant. The fees are subject to adjustment as provided under art. 4,09 hereof”.
8. The first limb of the argument taken by the learned counsel for the assesset,is that the taxability of the amounts in question has to be considered in terms of the Treaty for Avoidance of Double Taxation dt. 16th Sept., 1959 between India and Denmark. In other words, the benefit of the Treaty has to be given wherever applicable and the terms of the Treaty override the terms of the IT Act, 1961. For this proposition, he relied upon the Circular No. 333, dt. 2nd April, 1982, of the CBDT which is at 137 ITR 1 (St.) and reads as follows :
“Circular No. 333, dt. 2nd April, 1982
Subject: Conflict between the pruvisions of the IT Act, 1961 and the provisions of the Double Taxation Avoidance Agreement-Clarihcation.
It has come to the notice of the Board that sometimes effect to the provisions of Double Taxation Avoidance Agreement is not given by the AOs when they find that the provisions of the agreement are not in conformity with the provisions of the IT Act, 1961.
2. The correct legal position is that where a specific provision is made in the double taxation avoidance agreement, that provision will prevail over the general provisions contained in the IT Act, 1961. In fact the Double Taxation Avoidance Agreements which have been entered into by the Central Government under s. 90 of the IT Act, 1961, also provide that the laws in force in either country will continue to govern the assessment and taxation of income in the respective country except where provisions to the contrary have been made in the Agreement.
3. ThLis, where a Double Taxation Avoidance Agreement provides for a particular mode of computation of income, the same should be followed, irrespective of the provisions of the IT Act. Where there is no specific provision in the agreement, it is the basic law, i.e. the IT Act, that will govern the taxation of income.
(Sd.)/
K.R. Gupta
Director, Central Board of Direct Taxes
[F. No. 506142181-FTDI”
In this context, he has also relied upon the decision of the Hon’ble Andhra Pradesh High Court in the case of CTT vs. Visakhapatnam Port 7Tust (1984) 38 CTR (AP) 1 ‘ – (1983) 144 ITR 146 (AP) and also of the Tribunal (Spl. Bench) in the case of Siemens Aktiengesellschaft vs. ITO (1987) 64 CTR (Thb)(Bom) 21 : (1987) 22 ITD 87 (Bom).
9. The next limb of the argument of the learned counsel for the assessee is that technical service charges are part of industrial and commercial profits. For this proposition, he had relied upon the decision reported in (1987) 22 ITD 87 cited supra and also the decision of the Tribunal, Bombay Bench, in the case of G. U. J Jaeger Gmbh vs. ITO (1991) 39 TTJ (Bom) 231 : (1991) 37 TID 64 (Bom) and Atlas Copco A.B. of Sweden vs. Dy. CIT (1995) 53 7TJ (Bom) 93 : (1996) 57 ITD 139 (Bom).
10. The next limb of the argument of the learned counsel for the assessee is that technical service charges being part of industrial and commercial profits are not taxable in India in terms of the aforesaid Treaty because the assessee has no permanent establishment in India.
11. In response to a query from the Bench as to why the assessee cannot be regarded as having had a permanent establishment in India during the relevant period in terms of the definition of permanent establishment in the Treaty, the learned counsel for the assessee replied that firstly, the assessee was only giving consultancy and supervisory services and it did not carry on construction, installation or assembly project which are referred to in the definition of permanent establishment in the Treaty. He pleaded, that supervisory activity is included only in the subsequent Treaty dt. 8th March, 1989. It is also pleaded that at any rate, it was not the contention of either the AO or the CIT(A) that the assessee had a permanent establishment in India and this is evident from the assessment orders passed for the years 1982-83 and 1983-84, copies of which have been furnished before us. It is also pleaded that it would be beyond the jurisdiction of the Tribunal to raise a new controversy and in this context, the learned counsel for the assessee has relied upon the decision of the Hon’ble Calcutta High Court in the case of R.L. Rajghoria vs. CIT (1977) 107 ITR 347 (Cal) and ITO vs. R.L. Rajghoria 1978 CTR (Cal) 123 (1979) 119 ITR 872 (Cal).
12. The next limb of the argument of the learned counsel for the assessee is that the services rendered by the Danish company cannot be regarded as management charges because firstly, the question of management arises only after the plant is set up whereas the agreement between the Danish company and the Indian concern is only about the erection, construction and commissioning of the ammonia plant. The assessee has no place in the affairs of the Indian concern after the plant is commissioned. Secondly, even though the payments under art. 4.06 of the agreement are described in art. 1-01, item (xiii) as construction management services, the assessee was only supervising construction work. It is pleaded that the label given to the ser-ces does not determine the nature of the services. In this context, reliance is placed upon the decision of the apex Court in the case of Continental Constru,-,tion Ltd. vs. CIT 0 992( 101 CTR (SQ) 386 : (1992) 195 TTR 81 (SO. According to the learned counsel for the assessee, the litmus test to decide the nature of the services in question is whether those services can be rendered by a M.B.A. even if from Harvard or only an engineering graduate can render those services. According to him, in the present case, only the latter category could have delivered the goods. It is also pleaded that the definition of management implies the existence of control and the assessee has no control over the affairs of the Indian company or even erection and construction of the ammonia plant. He invited our attention to the definition of manager and managing agent in s. 2(24) and 2(25) of the Indian Companies Act, 1956. Finally, he relied upon the decision of the Tribunal in the case of ITO vs. Rheinbraun Consulting Gn2bH in ITA no. 1145 IBoml l985 for the asst. yr. 1980-81 and Swedish Telecorns International AB vs. Asst-t. CIT in ITA No. 7506IBoml9l for the asst. yr. 1988-89 which lay down that the element of final control is a prerequisite to characterise a management charge. It is also pleaded that the AO had changed his mind for the asst. yr. 1984-86 and has called the payments in question as management charges whereas in the earlier years, he decided them only as technical service charges. It is pleaded that an assessing authorit; or the Tribunal should not come to a conclusion contrary to that arrived at earlier on the same facts. In this context, reliance is placed upon the decision of the Hon’ble Bombay High Court in the case of H.A. Shah & Co. vs. CIT (1956) 30 ITR 61B (Born) and CIT vs. Shree Nirmal Commercial Ltd. (1994) 120 CTR (Bom) (FB)124 : (1995) 213 ITR 361 (Bom) (FB).
13. The learned Departmental Representative pleaded that firstly, it cannot be held that technical service charges are an integral part of industrial or commercial profits mentioned in art. Ill(l) of the Treaty simply because they are not, unlike royalties or management charges under art. 111(3) of the Treaty, excluded from the scope of industrial or commercial profits. He has pleaded that whatever is not specifically excluded cannot be regarded as included in industrial or commercial profits. He has mentioned that certain treaties exclude even capital gains but that does not mean that where capital gains are not so excluded, they form a part of industrial or commercial profits. As an instance of where capital gains are excluded, he invited our attention to art. VII(6) of the Treaty with Belgium which is at page 981 of Kanga & Palkhivala, Seventh Edn. He has also plea ded that art. III of the Treaty with Denmark has to be read in the light of art. XVII which reads as follows:
“Art. XVII(1): The laws in force in either of the territories win continue to govern the assessment and taxation of income in the respective territories except where express provision to the contrary is made in this Agreement”.
As no specific provision is made under the treaty for taxation of technical services, it is pleaded that the provisions of s. 9(l)(vii) of the IT Act, 1961, which is a deeming provision and also gives an extended definition of fees for technical services will come into operation and the payments received by the assessee in question are accordingly taxable in India. He has also invited our attention to Expln. 2 to s. 9(l)(vii) which ropes in consideration received for managerial services has fees for technical services. The contention made out is, whether the payments received by the assessee- company are fees for technical services or fees for managerial services, they are to be regarded as fees for technical services and as they are not part of industrial or commercial profits, they have to be taxed in India irrespective of the fact whether the assessee has a permanent establishment in India or not.
14. The learned Departmental Representative also pleaded that the AO has not given any finding whether the assessee had a permanent establishment in India or not and so, this question can still be agitated at the level of the Tribunal. He has pleaded that a disallowance can be upheld by the Tribunal on a ground different from that given in the order. In this context, he relied upon the decision of the Hon’ble Calcutta High Court in the case of Steel Containers vs. CIT (1978) 112 ITR 995 (Cal). He has also pleaded that the Tribunal can permit new grounds to be raised before it and that it has even the power of enhancement. For this proposition, he has relied upon the decision of the Hon’ble Rajasthan High Court in the case of CIT vs. Pratap Singh & Ors. (1986) 57 CTR (Rai) 291 : (1987) 164 TTR 431 (Raj).
So, it is pleaded that under the definition of permanent establishment given under art. 11(l)(h) of the Treaty the place of work of the assessee i.e-, the ammonia plant erected itself becomes the permanent establishment. He invited our attention to art. II(1)(h) and the relevant portion reads as follows:
“(h) the term “permanent establishment” means a fixed place of business in which the business of the enterprise is wholly or partly carried on:
(aa) the term “fixed place of business” shall include a place of management, a branch, an office, a factory, a workshop, a warehouse and a mine, quarry of other place of extraction of natural resources;
(bb) an enterprise of one of the territories, shall be deemed to have a fixed place of business in the other territory if it carries on in that other territory a construction, installation or assembly project or the like”.
So, it is pleaded that the assessee did have a permanent establishment in India during the relevant period and even if the payments in question are received for technical services and such receipts are part of industrial or commercial profits of the asspssee, they are still taxable in India as the assessee has a permanent establishment in India in terms of the extended definition of this term in the Treaty.
15. The learned Departmental Representative also pleaded that, without prejudice to the above arguments the receipts in question can still be brought to tax in India on the ground that they are of the nature of management charges. He has no quarrel with the proposition of the learned counsel for the assessee that a label does not determine the nature of the receipts. His contention is that the services rendered by the assessee are substantially of the nature of management. It is pleaded that even a technical service can be a management service. In this context, he has stressed that art. 2.11 of the agreement dt. 15th Feb., 1981, between the assessee and the Indian concern itself describes services rendered by the assessee as construction management services. We have already extracted this article hereinabove. It is stressed that under this article, the consultant had to provide services “for the management of all activities relating to civil works, erection etc. etc.”.
16. The learned Departmental Representative also refuted the charge that the AO arbitrarily changed his mind in respect of the nature of the receipts in question in the asst. ~r. 1984-85 whereas in the earlier assessment years, he treated the same as fees for technical services. The learned Departmental Representative supported the stand of the AO on the ground that while framing the earlier assessments, the AO did not analyse all the provisions of the agreement. The agreement is bulky running into a couple of hundreds of pages and it is understandable that the earlier AO missed some relevant provisions. So, he supported the action of the CIT(A) in upholding that the amount of Rs. 99,97,462 is of the nature of management charges.
17. In reply, the learned counsel for the assessee pleaded that fees for technical services are part of business profits. As the assessee is in the business of rendering technical services, the receipts in question will have to be held as part of industrial or commercial profits. He has also pleaded that the Hon’ble Bombay High Court in the case of CTT vs. Cilag Ltd. (1968) 70 ITR 760 (Bom), has held that even royalty is part of business income. Similarly, receipts for supply of know-how on a licence basis are also held to be par-~ of business income by the Bombay High Court in the case of CTT vs. Gflbert & Barker Mfg. Co. 1977 CTR (Bom) 347 : (1977) 111 TTR 529 (Born). It is also pleaded that s. 44D of the IT Act, which is a special provision for computing the income by way of royalty or fees for technical services figures in Chapter IV-D relating to computation of business income and so, even as per the terms of the IT Act, fees for technical services are part of industrial or commercial profits. The learned counsel for the assessee also explained that the treaty gives a wide meaning to business profits and so, even capital gains are occasionally excluded for separate treatment in some treaties. In other words, it cannot be inferred that technical service charges are not part of industrial or commercial profits simply because there is no separate treatment for them. If they are not part of industrial or commercial profits, the learned counsel queried as to why some treaties exclude technical service charges while others do not. At any rate, it is pleaded that this question stands settled by the decision of the Tribunal (Special Bench) and other Benches cited supra.
18. On the question whether the assessee has a permanent establishment, it is pleaded that the decisions cited by the learned Departmental Representative are distinguishable on facts. According to the learned counsel for the assessee, this issue is not before the Tribunal and the Tribunal cannot go into this question. In this context, he invited our attention to the decision of the Hon’ble Bombay High Court in the case of CIT vs. Hazarimal Nagji & Co. (1962) 46 ITR 1168 (Bom), in which it was held that a respondent can support the order of the lower Court on fresh grounds, provided such grounds do not require a further investigation into facts which are not already on record. In other words, it is pleaded that the question whether the assessee has a permanent establishment in India or not requires a further investigation into facts which are not on record and so, this question cannot be agitated at this stage. He has also invited our attention to the decision of the Hon’ble Bombay High Court in the case of Pokhraj Hirachand vs. CIT (1963) 49 1TR 293 (Bom), in which it was held that powers of the Tribunal, though wide, are not absolute and the Tribunal can consider only the subject-matter of appeal. It is stressed that for the asst. yr. 1982-83, the AO did not tax the fees for technical services on the ground that the assessee did not have a permanent establishment. The assessee never had the opportunity of meeting the case that it had a permanent establishment as the history of the case proceeded on the basis that it did not have such permanent establishment. It is also pleaded that the assessment proceeded on the basis that the assessee did not have a permanent establishment as otherwise, the receipts and expenses of the establishment had to be computed which was not done. The learned counsel for the assessee finally urged us to consider what prejudice would be caused to the assessee if such a question is permitted to be raised now as in that case, the assessee would be required to prove the expenditure incurred in 1982 i.e., after 1-1/2 decades. Finally, the learned counsel mentioned that there is difference between administrative management and technical management and what is involved in the present case is only technical management which is only another name for technical services and so, it is pleaded that the receipts in question cannot be brought to tax as management charges.
19. We have considered the rival submissions. Firstly, we find that we cannot quinto the question whether the assessee has a permanent establishment. Assessments for the years 1982-83 and 1983-84 proceeded on the basis that the assessee did not have a permanent establishment-I Order dt. 31st March, 1983 for the asst. yr. 1982-83 reads as follows:
“Shri V.K. Gupta of M/s Vijay Deepak & Co., C.As., attended waiving notice under s. 143(2) of the IT Act and the case was discussed with him. He made his submissions from time to time claiming that fees for technical services received by the assessee company from Rashtriya Chemicals & Fertilisers Ltd. are exempt in view of the Agreement for Avoidance of Double Taxation between the Governments of India and Denmark”.
It may be seen that the fees for technical services were held not to be taxable and it could have been so held only if the AO accepted the contention of the assessee that it did not have a permanent establishment., lil the assessment order dt. 3rd Jan., 1983, for the asst. yr. 1983-84, there is a specific finding that the assessee did not have a permanent establishment in India. Paras (e), (f) and (g) of this order at page 4 read as follows.-
“(e) The assessee company has received a payment of Rs. 47,869.80 as per para 5 of the letter dt. 23rd April, 1981, from National Fertilisers Ltd. to the assessee company for carrying out detailed feasibility study for charging the converter internals and making other modification in the synthesis loop of NFL’s plant at Nangal. Shri Gupta claimed that the services envisaged in articles are of the nature of technical services and since the assessee- company does not have any permanent establishment in India the fees are not liable to tax in India. Shri Gupta’s contention is accepted.
(f) The assessee has received a payment of Rs. 1,40,318.05 from Shriram Fertilisers & Chemicals as per para 2 of the letter dt. 18th July, 1981 for carrying out the study for the capacity of reformer section. No tax has been deducted at source. Shri Gupta’s contention that the services are of the nature of technical services and are, therefore, not liable to tax in India as it has no permanent establishment in India is accepted.
(g) The assessee company has received payment of Rs. 11,376.56 as per the terms of purchase order of Shriram Fertilisers & Chemicals being charges for destructive testing of Reformer Catalyst Tube to determine the residual life of same. Shri Gupta’s contention that the services are of the nature of technical services and are not taxable in India in view of the provisions of art. 111(3) of the DTA agreement since the assessee- company does not maintain any permanent establishment in India is accepted. No taxes have been deducted at source in respect of this payment.”
It may be observed that the AO has Specifically accepted the contention that the assessee did not have a permanent establishment.
Turning to the order for the asst. yr. 1984-85, the AO observed as follows.-
“The contention of the assessee is that the fees for technical services form part of industrial or commercial profits and as to whether these could be taxable would depend upon whether the assessee maintains a permanent establishment in India. In this connection, the assessee has stated that it has not maintained a permanent establishment in India. It refers to the definition as appearing in art. 11(l)(b) wherein “permanent establishment’ is defined as a fixed place of business which in turn -has been defined in art. 11(l)(aa) as representing a place of management, a branch, an office etc, It is contended that since no activities of assessee could be relating to having a permanent establishment in India in terms of such definition, the question of taxing any income by way of fees for technical services cannot arise”.
20. We are constrained to reproduce the above portion of the assessment order to bring out that, implicitly, the AO accepted the contention of the assessee that it did not have a permanent establishment in India. Apparently, there f8 no’ finding on this issue but actually, he deviated from the stand taken earlier that the receipts in question are of the nature of fees for technical services and did not deviate from the position accepted earlier that the assessee did not have a permanent establishment in India. He also accepted the position that in the circumstances, if the receipts in question are of the nature of fees for technical services, they are not taxable because the assessee has no permanent establishment. Accordincgly, he brought the receipts to tax as management charges.
21. The CIT(A) upheld the addition as management charges. He deleted the other two idditions of Rs. 14,24,167 and Rs. 5,22,889 on the ground that they are of the nature of fees for technical services and so, they are not taxable in India.
22. Implicit in these deletions is the acceptance of the position canvassed by the assessee that it did not have a permanent establishment in India. The grounds taken by the Department before’us also do not raise the issue whether the assessee has -any permanent establishment in India. In the circumstances, we agree with the contantion of t1fle learned counsel for the assessee that it would be beyond the jurisdiction of the Tribunal to go into the question whether the assessee has a permanent establishment for determining the taxability of the receipts in question. The cases cited by the learned Departmental Representative in this regard are distinguishable because they do not lay down the proposition that even in a matter accepted by the Revenue authorities the Department can be permitted to agitate the issue before the Tribunal. So, on the basis of the cases cited by the learned counsel for the assessee and mentioned supra, we hold that the question whether the assessee has a permanent establishment cannot be raised before the Ttibunal.
23. We may, however, add that under art. 3.13 of the agreement dt. 15th Feb., 1981, the Indian company had undertaken to provide certain site facilities and office accommodation to the assessee. Whether this amounts to maintenance of a permanent establishment in India is a question, which does not seem to have been considered by the Department. But as already mentioned, this issue is beyond the purview of the jurisdiction of the Tribunal in deciding this appeal.
24. We also hold that fees for technical services are part of industrial or commercial nrofits mentioned in art. HIM of, the Treaty between Denmark and India. This issue stands settled by the decision of the Tribunal (Special Bench) in the case of Siemens Aktiengesellschaft vs. TTO cited supra. The relevant portion of the headnote of this decision reads as follows:
“Therefore, a definition introduced in the Act solely, as an Explanation to s. 9(l) cannot have any impact in interpreting the scope of the terms used in art. III. This being the case, industrial or commercial profits of the assessee in India would not be taxable unless such industrial or commercial profits are of the nature of income which falls under art. 111(3)”.
The above view is supported by the decision of the Tribunal in the case of G.U.J Jaeger GmbH and Atlas Copco AB of Sweden cited supra. This view is also supported by the decision of the Tribunal in the case of Rheinbraun Consulting Gmb.H and Swedish Telecoms international AB cited supra. In the latter case, it is observed as follows:
“It was held by the Tribunal in the case of ITO vs. Rheinhraun Consulting CrmbH (supra) that technical consultancy fee may not be industrial profit, but it was definitely a commercial profit. We find ourselves in respectful agreement with this decision and hold accordingly.
We hold that fees for technical services are included in industrial or commercial profits mentioned in art. III(l) of the Treaty and as such, they are not taxable in India unless they are derived from a permanent establishment maintained by the assessee in India, As we have already held that it is an accepted position of the Department that the assessee did not have a permanent establishment in India and we have negatived the efforts of the learned Departmental Representative to raise this question at this stage apparently taking a clue from certain queries raised by the Bench during the hearing, we have to hold that the receipts in question cannot be taxed in India to the extent they are of the nature of technical service charges.
25. That leaves us the question whether the receipts in question are of the nature of management charges. In the appeal by the assessee, we are concerned with the amount of Rs. 99,97,462. We do not agree with the learned counsel for the assessee that the Department cannot go into the question whether this amount is of the nature of management charges simply because in the earlier years, similar receipts were held to be fees for technical services and were exempted from tax. While there should not be an arbitrary change of opinion by the AO on the same facts, the assessee cannot also be allowed to take advantage of an error committed by an earlier AO or an undue leniency shown by him. In the present case, in the earlier years, the AO did not examine the issue whether the receipts in question are also of the nature of management charges. The present AO has done this and to our mind, he cannot be faulted for that, We have already reproduced the relevant provisions of the agreement between the assessee and the Indian concern. While the services rendered by the assessee are enumerated in art. 1.01 of the agreement and there are 25 different types of services, the fees to be received are enumerated in art. 4 and the fees are to be received only under 8 heads. So, there is no one-to-one co-relation between the types of services and the heads in which the fees are received. During the hearing, the learned counsel for the assessee has, in response to a query from the Bench, expressed his inability to establish an exact correlation between the provision of services and the 8 heads enumerated under art. 4 of the agreement.
26. Now the question is whether the amount of Rs .98,97,462 is received as fees for technical services or as management charges. We do not agree with the learned counsel for the assessee that the amount is exclusively for technical services. We aj e of the view that there is a component of management charges for this amount We do not agree with the argument of the learned counsel for th-P, assessee that there Gdn be no management charges till the plant is set up. Possibly, there is a greater need for management before the plant is set up than after-. We also do not agree that because the ultimate control of the affairs is widh the owner, there can be no management services rendered by the assessee. The ultimate control may lie with the owner and in most caserl it does so lie. That does not mean that the Consultant cannot provide management services for the owner. The definition of manager and management given in the Companies Act in s. 2 are also not, to our min-i. conclusive of the matter.
27. The learned counsel for the assessee has referred to certain definitions of the word “management” in Oxford English Dictionary, but we find that some of the definition, qo not postulate control. For example, even conduct of affairs is given as one of kie meanings of the word “manage” (item 5). We are also of the view that the two decisions relied upon by the learned counsel for the assessee, i.e., the decision in the case of Rheinhraun Consulting GmbH and Swedish Telecoms International AB proceeded on their own facts and are distinguishable. The services rendered by the assessee in the case of Rheinbraun Consulting GmbH are given in para 8 of the order of the Tribunal which reads as follows:
“8. The assessee had to scrutinise advise and assist in preparing project report and tender documents and in the matter of lay-out. The project report, tender documents, etc. had to scrutinise and furnish technical advice thereon. Data drawings pertaining to the mine field are to be examined by the assessee. Provision has been made for giving assistance and technical advise in the matter of many field operations to be conducted at the mining area. The assessee was also to scrutinise and give advise on financial analysis. All the data and other things had to be provided by the NLC to seek the technical advice by the assessee. Clause (4) says that the assessee had to depute personnel to work at Neyveli who are competent for the consultancy work”.
On the above facts, the Tribunal gave its finding as follows:
“15. This is also not a case of management charges. The assessee has no control over the industrial undertaking ofNLC. The assessee was not managing any of the affairs of the NLC in their new set-up of a second lignite mine. They were only to oversee the operations of the NLC and give technical advise and assistance in matters specified in the agreement. The nature of work expected. of the assessee can in no wise be called management work”.
The decision in the case of Swedish Telecoms International AB, cited supra only followed the ratio of the earlier decision of the Tribunal in the case of Rheinbraun Consultancy Grnbh.
28. We find that the services rendered by the assessee go far beyond the services rendered by the assessees in the earlier two cases decided by the Tribunal. Firstly, the assessee has an overall responsibility for the installation and erection of the ammonia plant. It has not only provided licence and technical documents and designs but also provided procurement services and construction management services. Art. 2. 11 of the agreement which we have reproduced hereinabove gives the different types of services rendered by the assessee and under this Article, the assessee is in charge of management of all activities specified therein. It has even given the performance guarantee under art. 2.13. It has given the network schedule under art. 2.06 and under art. 2.23, it is responsible for the work of the sub-contractors who are appointed on its recommendation and under art. 2.24, the assessee has to assist the owner in achieving an overall co-ordination of all work connected with the project. Under this Article, it had to lay down the priorities and key dates required to be included for various activities. It is not necessary to summarise the various provisions of the agreement. A copy of the agreement is at pages 18 to 181 of the assessee’s paper book. On a reading of this agreement, we are of the view that a portion of the services rendered by the assessee can be categorised as management charges. Direction, co-ordination and setting up of priorities are generally considered to be functions of management and on a reading of the agreement, have are left with the impression that the assessee has discharged partly’such functions. So, we are of the view that a portion of the receipt of Rs. 99,97,462 can be considered to be of the nature of management charges. The learned counsel for the assessee pleaded that not more than 5 per cent of the receipts can be held as management charges. We are of the view that this percentage is too small. Considering the multiplicity of non-technical services rendered by the assessee we hold that about 10 per cent of the receipts of Rs. 99,97,462, i.e., roundly Rs. 10,00,000 is of,the nature of management charges. The assessee gets a relief of Rs. 89,97,462. The appeal is partly allowed.
29. In the appeal by the Department, no new arguments have been advanced either by the learned Departmental Representative or by the learned counsel for the assessee, It is accepted position by both sides that this appeal may be decided in the light of the arguments advanced in the context of the appeal by the assessee, discussed hereinabove.
30. We have already reproduced the grounds taken by the Department at the beginning of this order. The CITA() deleted an amount of Rs. 14,24,167 on the ground that this represented fees for technical services. We have already held above in the context of assessees appeal that there is no one-toone correlation between the 25 types of services rendered and the 8 heads under which the fees were received in terms of the agreement dt. 15th Feb., 1981. We have held that 10 per cent of the receipt of Rs. 99,97,462 is of the nature of management charges. We are of the view that even the receipts of Rs. 14,24,167 contain a component of management charges. The functions of directing, setting up of priorities and co-ordinating are discharged even in respect of pre-commissioning and commissioning of the plant. Accordingly, we hodl that 10 per cent of the amount of Rs. 14,24,167 can be regarded as management charges. We hold accordingly. The first ground is allowed to this extent.
31. As regards the second ground, an amount of Rs. 5,22,839 is received by the assessee under the terms of the agreement dt. 19th July, 1982, entered into by it with the same Indian concern i.e., Rashtriya Chemicals and Fertilisers Ltd. for the setting up of an ammonia cracking unit. Art. 2.4 of this agreement reads as follows :
“2.4 HTAS shall provide technical advisory services to owner in India as and when required for the technical co-ordination of the process, and utility units for the project. HTAS shall review and make recommendations to owner on th basic design features and operating manuals for these units in a manner to be agree dupon with owner with the object of ensuring the most efficient technical integration of these units within the project and with the ammonia plant. This shall also include supervision of detailed engineering of ammonia plant. This shall also include supervision of detailed engineering of ammonia synthesis unit. HTAS shall depute subject to the general conditions specified in Appendix VII to this agreement senior engineers to owners offices to provide the aforesaid technical advisory services”.
Art. 4.2 under which te amount in question of Rs. 5,22,839 was received reads as follows :
“4.2 Co-ordination services
For the technical advisory services for technical co-ordiantion as specified in sub-cl. 2.4 of this agreement, owner shall pay to HTAS a gross lumpsum fee of D. Kr. 2,375.000 Danish Kroner two million three hundred and seventy five thousand) for 18 (eighteen) man-months of ex-patriate engineers.
32. We find that this agreement is only a kind of extension for the earlier agreement dt. 15th Feb., 1981. We agree with the CIT(A) that the services rendered in respect of the payment of Rs. 5,22,839 are almost exclusively technical in nature and hold that the CIT(A) was correct in deleting this amount. The ground is rejected. The appeal is partly allowed.
33. In the result, the appeal of the assessee and that of the Revenue are partly allowed.