Judgment:
ORDER
M. A. BAKSHI, J. M. :
These cross appeals, one by the assessed and one by the Revenue for asst. yr. 1986-87 directed against order dt. 4th Aug., 1989, of the CIT(A) XVI, New Delhi, are disposed of by this consolidated order.
2. First, we take up the appeal of the assessed. assessed-company is a non-resident Japanese concern. It had entered into an agreement with M/s. Maruti Udyog Ltd. (MUL) on 28th June, 1985, for the supply of the machinery and for fabricating the paint line. As per the agreement, it received a sum of Rs. 7,85,998 as supervision fee during the previous year relevant to asst. yr. 1986-87. The Assessing Officer treated this amount as fee for technical services as in earlier years. assesseds claim that supervision fee constituted the business income of the assessed and not fee for the technical services within the meaning of S. 9(i)(vii) of the Act was rejected. CIT(A) also followed his earlier order in rejecting the claim of the assessed. Shri Sharma, the learned counsel for the assessed placed copy of the order of the Tribunal in ITA No. 7078/Del/88 in assesseds own case for asst. yr. 1984-85, order dt. 7th Dec., 1992, before us in support of the claim that the issue is covered in favor of the assessed by the said decision of the Tribunal. We have gone through the decision of the Tribunal. The Hon'ble Accountant Member and Hon'ble Judicial Member have given separate reasons for arriving at the same conclusion that the supervision charges are not assessable as fee for technical services and the same are to be assessed as commercial profits. We, respectfully following the aforementioned decision of the Tribunal, hold so. The alternative claim made by the assessed that the amount received be treated as reimbursement of expenses has not been pressed before us.
3. The second ground of appeal is that the income may be computed on completed contract basis. The assessed had completed the execution of the contract in 15 months, i.e., from 22nd Jan., 1985 to 21st April, 1986. Replying on the Delhi High Court decision in Tirath Ram Ahuja (P) Ltd. vs . CIT : [1976]103ITR15(Delhi) , the Assessing Officer held that the income has to be computed on year to year basis. He took into account the receipts and allowed deduction on account of payments. In this process he assessed a sum of Rs. 21,59,902. Before the CIT(A), assessed had pleaded that he had no quarrel with the principle that income should be computed on year to year basis but their grievance was about the mode of computation. It was pointed out that income from this contract had been determined by the Assessing Officer in the subsequent assessment year at Rs. 14,33,667. After allowing deduction of Rs. 21,59,902 being the profit assessed for the year under appeal, the Assessing Officer assessed the loss at Rs. 7,26,235. The CIT(A) has accepted the contention of the assessed and directed to assess the profit of Rs. 13,23,385 in the year under appeal and substitute the loss with the income of Rs. 1,10,282 for the subsequent year.
4. Since assesseds claim has been accepted by the 1st appellate authority in toto, we do not find any merit in this ground of appeal of the assessed.
5. The only other issue raised before us is relating to disallowance of expenses to the extent of 50%. assessed has claimed deduction on account of expenses of Rs. 94,444. The Assessing Officer disallowed 50% of the expenses by holding that the details in respect of these expenses were not furnished. The CIT(A) also refused to interfere on the ground that the details of such expenses had not been filed. Learned counsel for the invited our attention to the details relating to these expenses placed at pages 61 and 62 and pleaded that the disallowance should be deleted. The learned Departmental Representative Mrs. S. Sinha confirmed that the details regarding these expenses were available in assessment record.
6. Since the very foundation for the disallowance is non-furnishing of details which is contrary to the facts on record, the disallowance, in our view, is unwarranted. The addition of Rs. 47,222 is accordingly deleted. The business income of the assessed for asst. yrs. 1986-87 and 1987-88 shall be modified accordingly. Appeal of the assessed is partly allowed.
7. We now take up the appeal of the Revenue. Two grounds of appeal have been taken. For the sake of convenience, we take up the second ground of appeal first which is against the direction of the CIT(A) that the income of the contract be taken at Rs. 13,23,385 instead of Rs. 21,59,902.
8. We have decided this issue in the appeal of the assessed vide para 3 of this order. We do not find any infirmity in the directions of the CIT(A) as the income from the contract concluded in the subsequent assessment year was none and the same could be assessed on year to year basis by apportionment on pro rata basis. This ground of appeal is accordingly dismissed.
8. The first ground of appeal is relating to the directions of the first appellate authority to exclude the profit on the sale of machinery out of the assessable profit of the assessed. As pointed out earlier, assessed had entered into an agreement with Maruti Udyog Ltd. on 28th of June, 1985, for setting up paint line and allied equipment at their factory located at Palam, Gurgaon Road, Gurgaon. By virtue of this agreement, assessed supplied machinery to MUL in Japan on FOB basis. 100% payment towards the cost of the machinery was paid in Japan in foreign currency. Apart from supply of machinery, the assessed-company undertook the design, engineering, supply, installation commissioning and trial run of the paint line equipment in India. The income derived in India in connection with the execution of the contract for which the permanent establishment was set up in India has been held to be assessable as business income of the assessed in India by the Tribunal in assesseds own case for asst. yr. 1984-85. The issue that has arisen in this year is as to whether the profits attributable to the supply of machinery by the foreign company in Japan is assessable in India under S. 9 r/w Double Taxation Agreement between India and Japan. The Assessing Officer assessed the profits attributable to the supply of machinery also to tax. The CIT(A) has held that the permanent establishment of the assessed in India did not contribute anything to the placement of the order, manufacture or delivery of the machinery. All the activities relating to the manufacture, delivery and payment having taken place outside India, the CIT(A) held that the profits relating to such transaction could not be attributed to the permanent establishment of the assessed in India. The addition of Rs. 3,96,863 was accordingly deleted.
9. Revenue is aggrieved. Mrs. Sinha, learned Departmental Representative, contended that supply of the machinery and other activities carried on by the assessed-company were by virtue of a single contract executed by the assessed-company with MUL. The contract was a composite contract and could not be segregated for the purpose of supply of machinery and other activities. The profits relating to other activities and the profits arising out of the supply of machinery, according to the learned Departmental Representative, flow from the same contract and accordingly the entire profits were assessable as business profits of the assessed-company. Mrs. Sinha invited our attention to provisions of S. 2(3), S. 4(1), S. 19(1), S. 20, S. 21, S. 22, S. 41(1), S. 41(2) and S. 42 of the Sale of Goods Act, 1930, in support of the contention that the sale of the machinery was not complete in Japan. According to Mrs. Sinha, the sale of the machinery would be complete only on the satisfactory functioning of the machinery in India after the completion of the project. Mrs. Sinha also relied on the following case law :
1. Clay vs. Yate (1856) 25 LJ Ex. 237;
2. State of Rajasthan vs . Man Industrial Corpn. : [1969]3SCR505 ;
3. Sentinal Rolling Shutters vs . CST : [1979]1SCR644 ;
4. State of Gujarat vs . Variety Body Builders : AIR1976SC2108 ;
5. State of Rajasthan vs. Nenu Ram (1970) 26 STC 268; and
6. Vanguard Rolling Shutters vs . CST : [1977]3SCR165 .
in support of the contention that setting up of the paint line was the works contract and could not be considered as a sale of goods. As such, the profit on the sale of machinery could not be segregated. Mrs. Sinha also relied upon the decision in the case of Sacks vs. Tilley (1915) 32 TLR 148. In support of the contention that mere supply of the property and payment was not sufficient for the sale of the machinery, the acceptance by the assessed was necessary which could be done only after successful installation. Our attention was also invited to the decision in the case of Philips Head & Sons Ltd. vs. Shawfronts Ltd. (1971) L Rep 140. In support of the contention that installation of the machinery being one of the important parts of the contract, the property could not pass till it had been installed.
10. It was further contented that the contract was to be read as a whole and when that is done, it would be clear accordingly to her that supply of the machinery was part and parcel of the contract for erection of the paint line plant. The profits attributable to the supply of the machinery could not, thus, be excluded from the taxable income of the assessed, contended the learned Departmental Representative.
11. Learned counsel for the assessed on the other hand contended that he has no quarrel with the contention raised on behalf of the Revenue that the agreement executed by the assessed with MUL was to be read as a whole. According to Shri Sharma, when the agreement is read in totality it is abundantly clear that assessed had entered into an agreement for the supply of the machinery as one part of the contract for which separate payment had been agreed to be made in Japan. Referring to the provisions of the agreement, Shri Sharma pointed out that the assessed was to receive 100% payment in respect of the supply of machinery on FOB basis. The supply of machinery was not dependent on any condition except the supply and payment thereof. The permanent establishment of the assessed in India had no role to play in the supply of the machinery by the assessed in Japan. assessed was the manufacturer of the machinery and had agreed to sell the same to the assessed on the terms and condition of the agreement executed on 28th June, 1985. Shri Sharma contended that the sale of machinery on FOB basis was outside India for which payment was also made out of India. The decisions and the provisions of Sale of Goods Act cited by the learned Departmental Representative, according to Shri Sharma, are of no assistance as the same are inapplicable to the facts and circumstances of the case. It was accordingly pleaded that the appeal of the Revenue may be dismissed.
12. We have given our careful consideration to the rival contentions. assessed is a non-resident company having its registered office in Tokyo in Japan. assessed had agreed with M/s. MUL for the setting up of paint line and allied equipment at the factory of MUL at Gurgaon (Haryana). The agreement executed on 28th June, 1985, provided for the contract to be executed in two phases, both of which included a Japanese content which provided for manufacture and supply of hardware (FOB Kobe Port) and erection and supervision thereof. It is not disputed on behalf of the assessed that it had a permanent establishment in India for the purposes of erection of the paint line plant and other supervision activities in India. The income derived from the activities carried on in India has been disclosed as income from business. The Tribunal for asst. yr. 1984-85 while dealing with a similar contract executed on 5th March, 1983, held the income attributable to the activities in India was assessable as income from business. The dispute for this year is relating to the profits attributable to the supply of the machinery FOB (Japan). We are not in doubt that assessed had agreed to execute the complete project of setting up of the paint line and allied equipment plant of MUL in India. It is also not in dispute that the supply of machinery, its erection, installation and supervision was agreed upon by the assessed and MUL. The dispute between the assessed and the Revenue is as to whether the profits on account of supply of machinery in Japan could be attributed to the permanent establishment of a non-resident company in India. A perusal of the agreement between the assessed and the MUL clearly establishes the fact that supply of machinery had been agreed by the assessed-company at Japan FOB for which 100% payment was to be made by MUL in foreign currency before its shipment. We would like to refer the relevant clauses of the agreement which clearly establish that the supply of machinery by the assessed-company in Japan was to be segregated for the purposes of ascertaining the business profit of the assessed-company from its activities in India. Art. 1 of the agreement provides that MUL awards the contract for the various works, scope of which is described in Art. 3. Art. 3.1 covers design, engineering, supply, installation, commissioning and trial run of the paint line equipment for phase II. Art. 5 of the contract provides that shipment will be made by the assessed through Shipping Corporation of India for which advance information would be given to MUL. Art. 6 provides that MUL at their own cost shall arrange to take comprehensive insurance of import of goods. Arts. 8 and 9 are crucial for determination the issue before us, which we reproduce below :
'Art. 8. O Inspection certificate :
8.1 All material before shipment will be inspected by MUL official. M/s. Taikisha Ltd., Japan will be responsible to give an advance intimation to MUL for detailed check before shipment so that MUL official will be available for inspection.
8.2 M/s. Taikisha shall make available at their cost two copies in English of all test certificate(s) and inspection report(s) relating to equipment supplied that they have been tested in accordance with their own inspection and quality control procedure.
8.3 MUL has got the right to reject any material or part thereof if found sub-standard or not meeting the specification.
Art. 9. O Consideration :
9.1 MUL agrees to pay a sum of 805,031,750 (Japanese yen eight hundred five million, thirty one thousand and seven hundred fifty only) and Rs. 1,67,09,244 (One crore sixty seven lacs nine thousand two hundred forty four only) payable to Taikisha as the price for the entire scope of work covered under phase II of the project as outlined in Art. 2. O. The above price has already taken into consideration the necessary adjustments consequent upon the agreements reached, agreed amendments and all conditions of this agreement. The title to the equipment shall pass to MUL with negotiation of shipping documents through Taikis has bankers in Japan.
9.2 The break up of the above contract price is as furnished below :
A. P. O. No. MUL/PE/PN/52/2044, dt. 22nd Jan., 1985
Japanese content :
Yen
(a) Manufacture & supply of equipment (FOB Japan)
510,795.500
(b) Design & Engg. in Japan
128,900.000
Total (FOB Japan)
639,695.500
Indian content :
Rs.
(a) Manufacture & supply
49,47,066.00
(b) Erection and commissioning of Indian content
88,24,667.00
13,771,733
(c) Supervision charges for Japanese supervisor towards boarding, loading, transport, telex, telephone, etc., to be paid by MUL on actuals except packet allowance which will be given on lump sum basis in advance
11,00,000,00
Total
148,71,733.00
B. Letter of Intent No. MUL/PE/52/2044, dt. 22nd Jan., 1985
Japanese content :
Equipment
Yen
Manufacture & supply of equipment (FOB Japan)
165,336,250
Indian content :
Rs.
(a) Manufacture & supply of equipment
8,75,511.00
(b) Erection & commissioning of India content
9,62,000.00
Total
18,37,511.00
13. Art. 11 provides for the terms of payment in respect of design and engineering, 30% payments is provided to be made within four weeks of the signing of the contract. 65% to be paid after submission of all designs and engineering documents. 5% is withheld till expiry of two months after commissioning of the paint line. Art. 11(ii) provides for 100% payment on pro rata basis in accordance with supply of equipment on FOB basis. This clause is also vital which we reproduce hereunder :
'(ii) Equipment
(a) 100% payment Yen 510,795,500 shall be made on pro rata basis in accordance with supply of equipment on FOB basis.'
14. Art. 12 provides for performance guarantee and acceptance test which is reproduce hereunder :
Art. 12. O Performance guarantee and acceptance test
12.1 Performance and guarantee test for each of the equipment erected shall be carried out by Taikisha in presence of MUL personnel. During such tests Taikisha shall successfully demonstrate the equipment performance parameters guaranteed by them. Such tests will be conducted as specified in the specified schedule attached at Annexure II and as per procedures to be issued by MUL and to the satisfaction of MUL. However, any loss or damage to the equipment or any other machine in the factory or to the building shall be sole responsibility of the Taikisha.'
15. The above clause does not support the contention of the Revenue that the sale of equipment was not complete till performance and guarantee test was complete as is clear from the various other clauses of the agreement that the sale of equipment by the assessed-company was complete in Japan against 100% payment after inspection by MUL officials in Japan. Art. 12 of the agreement gives a guarantee to MUL for the effective performance of the machinery. Such guarantees are normal features in the sale of costly equipments. The sale of the machinery was complete in Japan notwithstanding the guarantee for its performance. In our view, the above article does not advance the case of the Revenue that the sale of the machinery was not complete in Japan.
16. The aid of various sections of Sale of Goods Act, 1930 taken by the learned Departmental Representative is of no consequence as none of those sections are the applicable to the facts and circumstances of this case. The decisions relied upon by the learned Departmental Representative are also inapplicable. In this case, assessed is the manufacturer of the equipment in Japan. The sale of the machinery was not in any way dependent upon the permanent establishment of the non-resident company in India. Since the agreement itself makes it abundantly clear that the supply of equipment on FOB was complete in Japan and was not in any way dependent upon permanent establishment of the foreign company in India, no part of profit from such activity was assessable in India. The decision of the CIT(A) in directing to exclude the profits attributable to the supply of machinery from assessable income is, thus, justified. The appeal of the Revenue is without merit. The same is accordingly dismissed.