1. ' G. C. BHARUKA, J.---The Tribunal, pursuant to the present reference made under section 256(1) of the Income Tax Act, 1961 (in short the "Act" only), has referred the following question of law for seeking our opinion: "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that a sum of Canadian $ 2,98,623 (equivalent to Rs,22,97,446) was taxable as income under the Income Tax Act, 1961?"
2. ' The assessee is a foreign company incorporated in Canada. It has entered into an agreement, dated April 15, 1981, with Mysore Paper Mills Limited (in short the "paper mill" only) for rendering certain services. The said agreement forms part of the statement of case of Annexure "D". We will be dealing with the nature of the services which was contemplated to be rendered by the assessee shortly hereinafter.
3. ' The paper mill had earlier entered into an agreement, dated May 26, 1977, with Beloit Welmsley, a United Kingdom company, for supply and commissioning of a newsprint plant at Bhadravathi.
4. Pursuant to the said agreement, the plant came into existence and started commercial production. Subsequent thereto, the paper mill entered into an agreement in question with the assessee.
5. ' The preamble of the agreement reads as under: ' And whereas the paper mill desires to obtain the services of opsery (abbreviated form of the assessee-company as referred to in the agreement) in connection with the operation of their mills located at Bhadravathi.
6. ' And whereas the paper mill desires to start up their new facilities for production of pulp and of paper and to bring these facilities to their design capacity.
7. ' And whereas the paper mill desires to prepare the capabilities of their personnel to maintain the quantity and the quality of production on a continuous basis.
8. ' And whereas the paper mill desires to institute a training programme for their personnel so that their capabilities will improve on a continuous basis.
9. ' And whereas Opsery is willing to perform for the paper mill the technical service hereinafter mentioned in connection with its operations."
10. ' Clause (1) of the agreement enumerates the services which were required to be rendered by the assessee-company. It states that the assessee company will provide to the paper mill the technical and professional and related services necessary to assist the paper mill to achieve its objectives in production and operation and the services shall include among other things assisting the paper mill in attaining the performance offered by the vendors for the various modules.
11. ' On a reading of the said agreement, the assessing authority as well as the Commissioner (Appeals) being the First Appellate Authority as also the Tribunal held the view that the assessee had rendered only technical services and saw such the expenses claimed by it out of the gross receipts as fees do not qualify for deduction under section 44D(b) of the Act read with Explanation 2 of section 9(1)(vii) thereof thus giving rise to the question referred to above.
12. ' From the assessm ent order placed at Annexure "A", we find that out of the total fees received by the assessee during the year being a sum of Canadian $ 3,09,400 it had claimed an expenditure of Canaddian $ 3,06,278, thus offering only Canadian $ 3,122 (Rs,24,018) for levy of income-tax.
13. Whereas if the fees received by the assessee-company, as held by the income-tax authorities and the Tribunal, are by way of technical services, then it is not entitled to any deduction whatsoever and the gross receipts are liable to be taxed at the flat rate of 40 per cent.
14. ' Explanation 2 to section 9(1)(vii) of the Act reads as under: "9. Income deemed to accrue or arise in India.---(1) The following incomes shall be deemed to accrue or arise in India. . . .
(vii) income by way of fees for technical services payable by. . . .
15. ' Explanation 2.---For the purposes of this clause, 'fees for technical services' means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other pergonnel) 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'."
16. ' It will be also proper here to quote the relevant portion of section 44D of the Act.
17. "44D. Special provisions for computing income by way of royalties, etc., in the case of foreign companies.---Notwithstanding anything to the contrary contained in sections 28 to 44C, in the case of an assessee, being a foreign company,---....
(b) no deduction in respect of any expenditure or allowance shall be allowed under any of the said sections in computing the income by way of royalty or fees for technical services received from Government or an Indian concern in pursuance of an agreement made by the foreign company with Government or with the Indian concern after the 31st day of March, 1976. . . .
18. ' Explanation.---For the purposes of this section,---
(a) 'fees for technical services' shall have the same meaning as in Explanation 2 to clause (vii) of subsection (1) of section 9;"
19. ' From the above provisions it is clear that no deduction can be available under section 44D in case the consideration received pursuant to the agreement is by way of fees for technical services as defined under Explanation 2 to clause (vii) of subsection (1) of section 9 of the Act. In the present case, we have already referred to the relevant contemplations in the agreement entered into by the assessee with the paper mill, on reading whereof, it seems quite clear to us that the assessee- company was not required to put up any construction or assemble any part of plant or machinery or to do anything which had any bearing on the establishment or construction of the plant. The assessee-company was required to render appropriate services to the paper mill just to assist it in achieving the desired quality and optimum production of the newsprint, for manufacturing of which, plant had already been commissioned and put into production by the U.K. Company.
20. ' In the said view of the matter, we are of the considered opinion that keeping in view the statutory provisions referred to above, the assessee company was not entitled to any deduction out of the gross consideration it received under the agreement at Annexure "D".
21. ' Accordingly, the question posed to us is answered in the affirmative and against the assessee but there will be no order as to costs.
22. ' Let a copy of this judgment be sent to the Registrar of the Tribunal.