ORDER
Smt. Diva Singh, J.M.:
This is an appeal filed by the assessed against the order of Commissioner (Appeals)-XVII, New Delhi, dated 24-9-1996.
2. The grounds raised by the assessed in this appeal read as under :
“1. That, on the law, facts and in the circumstances of the case, the learned Commissioner (Appeals) has erred in holding that the appellant- company was liable to deduct tax @ 20 per cent on amounts paid to M/s John Brown E&C, USA, in terms of agreement executed by the company with M/s John Brown on the alleged ground that the same was not paid for the purposes of making or earning any income from any source outside India as specified in section 9(l)(vii)(b) of the Income Tax Act, 1961, read with the relevant provisions of Double Taxation Treaty with USA which is highly erroneous and bad in law.
2. That, on the law, facts and in the circumstances of the case, the learned Commissioner (Appeals) has erred in holding that the amounts paid to M/s. John Brown E&C, USA, for supply of plant, design, layout facilities, equipment selection, etc. etc. was not for construction, assembly or like project which is excluded from the definition “fee for technical services” as specified in Expln. 2 to section 9(l)(vii) of the Income Tax Act, 1961 and hence the same. was chargeable to tax in India.”
3. The relevant facts of the case are that the assessed, vide its letter dated 5-2-1993, in reference to the technical collaboration agreement between the assessed and M/s. John Brown E&C, USA, for supply of consultancy and other services, filed for obtaining “No objection certificate” for opening a letter ofcredit for US $ 1,50,000 in favor of M/s. John Brown E&C, USA, the Dy. CIT (Spl. Ranga-2), New Delhi, vide its order dated 8-2-1993, intimated as under :
“As per art. 12 of the Agreement for Avoidance of Double Taxation between the USA and India, you are required to deduct tax @ 20 per cent of the amount of technical know-how fee payable to foreign collaborators. Certificate regarding no objection for remittance through letter of credit to the foreign collaborators shall be issued on production of proof regarding deduction and payment of tax in Government account. Exchange rates on the date on which the tax has been deducted/paid in Government account may also be furnished.
4. Aggrieved by this, the assessed came in appeal before the first appellate authority before whom, it was contended that the assessed is engaged in the business of manufacturing and marketing of bulk drugs, formulations, diagnostics and animal health care products. It was also contended that it has been selling its products in India and exporting them to various countries like China, Hong Kong, Russia, Thailand, Malaysia, Nigeria, etc. It was further contended that in order to boost its earnings from outside India, particularly from USA and UK and other developed markets, where the margins on sale of formulations are comparatively high, the appellant was desirous of getting its products registered with their Local Food Drug Authority. But, before this could be achieved, the product manufacturing facilities in India needed to be upgraded to a position where it would be possible to meet the stringent requirements prescribed under the respective laws of those countries, It was also stated that the assessed- company already had an industrial license from the Government of India for setting up a plant to manufacture formulations based on all types of “Cephalosporins” at Dewas (MP). It is also contended that in order to expand its export activities to USA, UK and other countries, the appellant engaged M/s John Brown of USA for providing consultancy services in the areas of plant design, layout utilities, equipment selection, development of valuation protocols, training of personnel, good manufacturing practices and in the preparation of documents that may be required for obtaining approval of the plant at Dewas which would conform to the standards of USA and UK so that the appellant would be in a position to export formulation to those countries. It was further clarified that necessary approvals from the RBI were also obtained for the agreement, in pursuance to which, the assessed- company agreed that it would pay a sum of US $ 1,50,000 to M/s John Brown towards consultancy fees through a letter of credit opened in favor of the USA party through the Hongkong & Shanghai Banking Corporation Ltd. New Delhi, and payable at USA. It was further emphasised by the authorised representative of the assessed that payment was made outside India. In this background, it was contended that the assessed-company approached the assessing officer under section 195 for issuance of NOC for opening a letter of credit in favor of the USA party. It was contended by the assessed before the first appellate authority that no tax was deductible at source in accordance with section 9(l)(vii) of the Income Tax Act, 1961. But the assessing officer required the assessed to deduct tax at 20 per cent before he issued NOC in the said circumstances, the assessed deposited tax of Rs. 9,86,700 on 8-2-1993, under protest.
5. After addressing the background, the learned authorised representative, before the Commissioner (Appeals), relied upon the provisions of section 9(1)(vii)(b) on the basis of which it was contended that fees was paid to M/s. John Brown in respect of professional, engineering and validation services so that the oral dosage and sterile dosage facility of the appellant at Dewas conformed to the standard norms set by the respective Drug Administration of USA and UK to facilitate the ompany to register itself in USA and UK to generate income by way of sales to countries outside India. Accordingly, it was contended that it could not be said that the fees paid could be deemed to have accrued or arisen in India. As such, it could not be subjected to tax at source.
6. Alternative argument of the assessed before the first appellate authority was that in the definition of the clause “Fees for technical services” given in Expln. 2 of section 9(l)(vii), such fees did 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” on the basis of these arguments. Accordingly, it was contended that the order under appeal be quashed and the assessing officer be directed to refund the TDS amounting to Rs. 9,86,700.
7. Considering the submissions of the assessed, the Commissioner (Appeals) came to the -following conclusion :
“I have considered the arguments placed before me carefully and also gone through a copy of the agreement entered into between the appellant and M/s. John Brown. In terms of section 9(l)(vii) income by way of fees for technical services payable by a resident would be deemed to accrue or arise in India except where the payment is relatable to a business or profession carried on by such person outside India or any other source of income outside India. In the case under appeal, the appellant who is the person making the payment by way of fees for technical services is a resident and these fees have not been paid in relation to any business carried on by it outside India or is not even relatable to any other source of income outside India. The fees for services rendered by M/s. John Brown have been agreed to be paid in order to set up the infrastructure necessary to start the manufacture of drug formulations which would be in accordance with norms and standards of countries like USA and UK. Therefore, I hold that the case of appellant is not covered by the exception contained in section 9(l)(vii)(b). Coming to the alternative argument to the effect that the fees for technical services do not include the consideration for any construction, assembly, mining or like project undertaken by the receipient, even this exception does not help the appellant because M/s. John Brown have not constructed or assembled the factory project at Dewas. They have rendered consultancy services only. For this proposition, I draw support from para 16.3 of the Board’s Circular No. 202 dated 5-6-1976. Therefore, even the alternate plea raised by the appellant is not acceptable. In view of the reasons given above, the action of the assessing officer is hereby upheld.”
8. Still aggrieved by this, the assessed is in appeal before us.
9. The learned authorised representative Shri Vinod Chandiok, argued at length. His submissions made before the Commissioner (Appeals) were reiterated and the entire background of the case was also addressed. Our specific attention was invited to a copy of the contract between the assessed and M/s John Brown, a division of Trafalgar House Inc. for professional, engineering and validation services for the oral dosage and sterile dosage facility. Arguments were addressed at length on various aspects of this agreement and it was canvassed by the learned authorised representative that the Commissioner (Appeals) had not appreciated this agreement in the correct perspective.
10. Arguments at length were also made addressing section 9(l)(vii) of the Income Tax Act, on the basis of which it was contended that the payment made to M/s John Brown has specifically been made in order to earn income outside India, as such it was argued, the said payment does not invite any tax. Various pages of the said agreement were adverted to, to show the nature of services rendered by M/s John Brown.
11. It was further contended that the manufacturing process was entirely with the assessed and keeping in view the fact that it is not possible to market any drug in US or UK unless it has been approved by the regulatory authority of that country. Keeping the practicality in mind that the process for securing the necessary approval is very stringent in those countries, the said expenditure was incurred by the assessed in order to get that authoritative approval. It was further contended by the learned authorised representative that for this purpose, the assessed submitted its plant design, etc. at Dewas situated in MP and M/s John Brown were required to give their advise thereon and suggest necessary changes keeping in mind the stringent sterility requirements and other such necessary requirements relating to equipment selection, development of validating protocols, plant design, goods manufacturing practices, etc.
12. It was also contended that the assessed has got the approval from the concerned countries on the basis of which substantial exports have been made to the said countries. It was vehemently contended that the expenditure is directly related to the receipt of income from outside India. Thus, since the very object for incurring the said expenditure is for earning income, the assessed was not liable to deduct the tax at source there from.
13. Apart from that, the learned authorised representative made submissions at length presenting his alternative argument relying on the Expln. 2 to section 9(1)(vii) and contended that it is not the case where the said expenditure is also covered. Arguments were addressed on the Circular No. 202, reported in (1976) 105 ITR (St) 17 at p. 27. Our specific attention was invited to para 16.3 of the same which has been considered by the Commissioner (Appeals) on the basis of which it was contended that even considering the case of the assessed from this angle, the fees for technical services is directly linked to the income and here it is not disputed that the payment is made in US. It was vehemently contended that only $ 10,000 has been paid on account of services rendered in India which payment again is for obtaining the necessary approval. It was contended that this expenditure pertained to the visit of 3 people from M/s John Brown for inspection of plant at the site, i.e., to Dewas, Madhya Pradesh, to see that the requirements as advised have been implemented. Accordingly, it was contended that even for this amount, in order to make the said income exigible to tax under DTAA it is necessary to have a permanent establishment in India by virtue of which the personnel should have been in India for about 90 days, whereas in the present facts of the case, there is no dispute that only 3 people have been in India for a period of 3 days.
14. Our attention was invited to the memorandum of understanding, concerning fees for included services. In art. 12 of US-India Tax Treaty certain examples have been given. Special emphasis was laid down on example 7 there under, which reads as under :
“A US manufacturer operates a wall board fabrication plant outside India. An Indian builder hires the US company to produce wallboard at that plant for a fee. The Indian company provides the raw materials, and the US manufacturer fabricates the wallboard in its plant, using advanced technology. Are the fees in this example payments for included services ?
Analysis : The fees would not be for included services. Although the US company is clearly performing a technical service, nor technical knowledge, skill, etc. are made available to the Indian company, nor is there any development and transfer of a technical plant or design. The US company is merely performing a contract manufacturing service.”
15. On the basis of the above, it was contended that the only difference is that therein manufacturing services were availed and herein the protocol validation services have been obtained. As there were stringent requirements to be met in the USA for meeting the requirements before a drug is allowed to be marketed there. Thus, drawing strength from the said example, it was also contended that this is not a case where the assessed was required to deduct tax at source. It was vehemently contended that it is not in dispute that M/s John Brown did not have a permanent establishment in India and its personnel did not stay for more than three days. Thus, by virtue of this fact, it was submitted the requirements of art. 5, sub-art. 2, clause (k) or (i) are not met.
16. The learned Departmental Representative, on the other hand, placed heavy reliance on the impugned order. It was equally vehemently contended by him that the arguments adverted to at length by the learned authorised representative have already been looked into by the Commissioner (Appeals), who after duly considering them, has decided the issue against the assessed. Accordingly, it was contended that the impugned order deserves to be upheld. It was further contended that it is not the case of the assessed that it is only marketing the drugs in USA or UK only because the assessed is also marketing these products for domestic sale very much in India. Accordingly, the necessity for incurring the expenditure was in question.
17. Our attention was invited to p. 2 para 1. 1 of this agreement on the basis of which it was contended that while laying down the scope of work and procedures it is eminently borne out that M/s John Brown were to provide services in the areas of plant design, layout utilities, equipment selection, development of validation protocols, training of owner’s personnel for international regulatory procedures, etc. Thus, it was contended that the Commissioner (Appeals) was justified in concluding that these fees have not been paid in relation to any business carried on by the assessed outside India or is not even relatable to any other source of income outside India.
18. The learned Departmental Representative further questioned the claim of the assessed and contended that its claim was untenable in view of the specific and undisputed fact that how can M/s John Brown sitting in USA without visiting India apart from the 3 days, as has been contended by the assessed, be expected to undertake and perform any services for which the said payment is being made.
19. It was again reiterated that the fact cannot be lost sight of that the assessed is marketing the drug in the domestic market also and M/s. John Brown as per the agreement on record was to supply the plant design. As such, heavy reliance was placed by him on the impugned order.
20. Having heard the rival submissions and perused the material placed on our files, we are of the opinion that right at the outset, it would be pertinent to bring out the exact provision of the Act on which the arguments have been addressed at length by the learned Departmental Representative and authorised representative and which has been the basis on which the impugned order has also proceeded. The relevant portion of section 9 of the Income Tax Act reads as under
“9Income deemed to accrued or arise in India
(1). The following incomes shall be deemed to accrue or arise in India
(i) to (vi) …………..
(vii) income by way of fees for technical services payable by
(a) the Government; or
(b) a person who is a resident except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India, or
(c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India
Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1-4-1976, and approved by the Central Government.
Explanation 1 : For the purposes of the foregoing proviso, an agreement made on or after the 1-4-1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date.
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 provisions of services of technical or other personal) 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’.”
21. Before addressing the specific requirements of the provision, we are of the opinion that it would be pertinent to state right at the outset that there is no dispute over the issue that the assessed was required to seek approvals for marketing specific pharmeceutical drug from the regulatory authorities of USA and UK. There is also no dispute over the issue that the services of M/s. John Brown had been obtained by the assessed for this specific purpose. We have also taken into consideration the fact that the necessary approval has been granted to the assessed as a result of which, substantial exports have been made by the assessed. We have also considered at length the agreement entered into by the assessed with M/s. John Brown and examined the nature of services which were to be rendered by John Brown in order to secure the necessary approvals from the regulatory authority of USA and UK.
22. Coming to the specific provision of the Act which has been invoked by the tax authorities, it is pertinent to note that it is a deeming provision. It is seen that first and foremost requirement of section 9(1)(vii)(b) is that income by way of fees for technical services is payable by a person who is a resident. In the present facts of the case, this condition is fully applicable. One of the exceptions envisaged by the legislature is that where the fees are payable for the services of business or profession carried on by a person outside India. In the present facts of the case, there is no dispute that the fees are payable in respect of services which are utilised in the business or profession of an assessed which is carried out in India. There is no evidence, basis or argument in the facts of the case that even for a moment, it can be considered that the business is carried out outside India. Thus, the pre-condition employed by the legislature in order to bring this payment in the exception clause is conspicuous by its absence. As undisputably the business is carried out in the facts of the case in India.
23. Thus, it is seen that the exception carved out by the legislature does not encompass the payment made for the fees for technical services as in the present facts of the case, there is no dispute that the business or profession which is carried on by the assessed is based in India and not outside India. The next exception which has been envisaged by the legislature is that the fees for technical services payable by the residents of India is not to be treated as deemed income if the same is payable for the purposes of making or earning any income from any source outside India. In the present facts of the case, it is seen that there is no dispute over this issue also. Here, the income which is earned by the assessed is definitely from a source in India and merely because an assessed is exporting some goods which are made/manufactured in India, it cannot be said that the income is earned from a source outside India as the source definitely remains within the territorial jurisdiction of India.
24. The next issue to be examined is Expln. 2 which has been inserted to the said section. The Explanation defining “fees for technical services” specifically states that it means any consideration for the rendering of any managerial, technical or consultancy services and the only exception carved out herein is that it does not include consideration for any construction, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head ‘salaries’.
25. In the present facts of the case, it is seen after fully examining the nature of services rendered by M/s. John Brown that it is a technical or consultancy service and is most definitely not a consideration which has been paid for eithet construction or assembly or mining or any other like project and there is also no debate that it is not in the nature of income which is chargeable under the head ‘salaries’. Accordingly, it is seen that the exceptions carved out by the legislature in Expln. 2 also do not render any help to the assessed.
26. It is pertinent to note that the relevant criteria for determining the present issue is that in the case where the assessed is a resident of India who is not engaged in the type of activity excluded in Expln. 2 is making a payment for using the technical/consultancy services for business or profession carried on outside India or for the purposes of making or earning any income from any source outside India.
27. After fully examining the issue in the facts of the case, we are of the opinion that the requirements of the provision to hold that the income does not deem to accrue or arise in India are not fulfillled and the tax authorities in the facts and circumstances of the case have correctly held it to be a case where the payment is made for services which are utilised in a business in India and, as such, are deemed to accrue or arise in India. It may be that some of the services in such a case are rendered abroad by the personnel employed or deputed by M/s. John Brown but the fees paid are for the services utilised by the assessed which has been carried out in India. Therefore, irrespective of the place where the services are rendered, the amounts should be deemed to accrue or arise in India. Thus, after examining the nature of the services rendered by M/s. John Brown, places where services have been utilised and the provisions of the Act as well as the exclusionary provisions, we are of the opinion that the payment in the facts and circumstances of the case would not come within the exclusionary provisions.
28. Before parting, we would like to reiterate that the genuineness of the expenditure is not the deciding criteria or the issue to be determined in the present appeal. The issue on the present appeal to be decided is whether payment made to the concerned party, i.e., M/s. John Brown can be said to be deemed income under section 9(1)(vii)(b) of the Act and after fully examining the requirements of the Act along with the Explanation attached to it and the terms and agreements of the nature of services to be rendered by M/s John Brown, we have no hesitation in saying that section 9(l)(vii)(b) is attracted. Accordingly, the tax authorities were fully justified on the facts and circumstances of the case to apply the provisions of the said section. Accordingly, the grounds raised by the assessed are rejected.
29. In the result, the appeal filed by the assessed is dismissed.