Syed Shah Mohammed Quadri:— These two applications are filed under section 245Q(1) of the Income-tax Act, 1961 (for short the “Act”). Rotem Company (for short the ‘Rotem’) incorporated and registered in and a tax resident of Korea, is the applicant in AAR/612/2003 and Mitsubishi Corporation (for short the ‘Mitsubishi’) incorporated and registered in and a tax resident of Japan, is the applicant in AAR/613/2003. The Government of the Republic of India and the Government of the Republic of Korea concluded a convention for avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income on 1 August, 1986, which was notified on 26 September, 1986 (hereinafter referred to as ‘Treaty-I’). On 29 December, 1989, the Government of Republic of India and the Government of Japan concluded a convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, which was notified on 1 March, 1990 (hereinafter referred to as ‘Treaty-II’).

2. On May 18, 2001, the applicants and Mitsubishi Electric Corporation, Japan formed a consortium of which Mitsubishi Corporation is the consortium leader. Pursuant to the international tender for the design, manufacture, supply testing and commissioning of passenger rolling stock for Delhi Metro issued by the Delhi Metro Rail Corporation (for short the “DMRC”), in the year 1999, the consortium offered a tender, which was accepted. The consortium and the DMRC entered into a contract in respect of the said work on May 22, 2001 (hereinafter referred to as “Rs. 1). The consideration for the entire work to be carried out by the consortium is a fixed lump sum price of INR 3,110,439,836 and US $ 260,997,269, which is apportioned amongst various cost centers (A to J — See para 12 of Annexure-III of the applications) and further apportioned amongst various milestones (sub-clause 13.3 of General Conditions of Contract). Heading “A” of “instructions to the tenderers” contains instructions for apportionment of fixed lump sum price to cost centers and milestones under each cost center. The members of the consortium are entitled to receive interim payment on achieving one or more of milestones. The applicants say that RS-1 is a composite contract for manufacture, supply and commissioning of high speed trains for Delhi metro which involves all stages from designing to commissioning and that it is not for rendering any services. No license or patent concerning the machinery or copyright of its design is granted to the DMRC. The supply of designs and drawings to the DMRC was merely to ensure that the trains supplied are of the agreed specifications. The applicants further submit that RS1 is for sale and supply and not for rendering services and that no part of the fixed lump sum price under Rs. 1 can be regarded as fee for technical services (FTS) within the meaning of article 13 & 12 of the Treaties — I & II respectively. On these facts the applicants sought advance rulings of the Authority on questions set forth as follows:

In AAR/612/2003

(1) Whether in terms of contract RS1 between DMRC and the Consortium, the lump sum price for the works of design, manufacture, supply, testing and commissioning of passenger rolling stock of the Mass Rapid Transport System included any element of fee for technical services as defined in Article 13 of Double Taxation Avoidance Agreement between India and Korea?

Or as a corollary to the above question, based on the contract ‘RS1’ of composite nature in its totality, whether it would be correct to disintegrate the contract and view and tax each of its components individually?

(2) If the answer to question no. 1 is in affirmative, what proportion of lumpsum price payable by DMRC under contract RS1 can be regarded as fees for technical services (FTS)?

(3) Whether on the facts and in the circumstances of the case, fee for technical services, if any, rise through permanent establishment in India and as such is taxable as business profits under Article 7 read with Article 13(5) of DTAA between India and Korea?

(4) Whether on the facts and in the circumstances of the case, US Dollar portion of lumsum price for inputs to the works supplied from outside India would also be chargeable to tax as business profits under Article 7 of DTAA between India and Korea?

(5) Whether on the facts in the circumstances of the case, the expenditure incurred in India would be allowed deduction against business profits?

In AAR/613/2003

(1) Whether in terms of contract RS1 between DMRC and the Consortium, the lump sum price for the works of design, manufacture, supply, testing and commissioning of passenger rolling stock of the Mass Rapid Transport System included any element of fee for technical services as defined in Article 12 of Double Taxation Avoidance Agreement between India and Japan?

Or as a corollary to the above question, based on the contract ‘RS1’ of composite nature in its totality, whether it would be correct to disintegrate the contract and view and tax each of its components individually?

(2) if the answer to question no. 1 is in affirmative, what proportion of lumpsum price payable by DMRC under contract RS1 can be regarded as fees for technical services (FTS)?

(3) Whether on the facts and in the circumstances of the case, fee for technical services, if any, rise through permanent establishment in India and as such is taxable as business profits under Article 7 read with Article 12(5) of DTAA between India and Japan?

(4) Whether on the facts and in the circumstances of the case, US Dollar portion of lumsum price for inputs to the works supplied from outside India would also be chargeable to tax as business profits under Article 7 of DTAA between India and Japan?

(5) Whether on the facts in the circumstances of the case, the expenditure incurred in India would be allowed deduction against business profits?

It may be stated at the outset that at the time of hearing, question nos. (4) and (5), aforementioned in both the applications, are withdrawn by the applicants.

3. The substance of the comments of the Commissioner is as follows:—

The contract (RS1) is between the consortium and the DMRC and that there is no separate contract between the DMRC and the members of the consortium. The implementation of RS1 is under the control of a unified and dedicated project management team drawn from three member Companies. All payments are received from the DMRC in the bank account of the applicant in AAR/613/2003, which has the authority to act on behalf of the other members. The members then divide the amounts among themselves. It is stated that RS1 is not an ordinary contract for supply of rolling stock as per the specifications of the DMRC. Though the contract is a composite contract under which a fixed lump sum price is payable, the pricing schedule has itself disintegrated the fixed lump sum price into various cost centres which laid down milestone activities for payments. Some of those payments are in respect of technical services including provision of personnel as would be evidenced from the schedule of cost centres. It is also important to point out that the entire payment to the leader of the consortium is on account of its managerial services by way of coordinating the entire programme for execution of the contract. Only 16 trains were manufactured offshore and imported into India and the remaining trains are required to be manufactured with maximum indigenization in India. It is specifically provided in the contract that though the designs/drawings continue to remain the property of the contractor, the DMRC will have unequivocal license to use these designs for manufacturing trains which indicates that royalty for the license is part of the lump sum price. RS1 and related documents make it clear that the contract is essentially for providing technical services as also for supply of trains and these two elements are equally important. The preparation of plans and designs, supervision of maintenance and training are clearly in the nature of the technical services and the payments attributable for that purpose cannot but be fee for technical services. The contract is separable into fee for technical services and the manufacture and supply of trains. It is added, “milestones payments for preparing the various management plans and designs etc. which have been culled out from the Schedule of “cost centres” have been made in respect of technical services including provision of personnel of which the description is given in the following tables:—

COST CENTRE No. A — PRELIMINARY AND GENERAL REQUIREMENT FOR RAIL AND METRO CORRIDOR (P. 203-220 MC/PB)

MILESTONE NUMBER WORK DESCRIPTION US DOLLARS MILESTONE ACTIVITY COLUMN A A1 Project Management Plan 5,284,743 A2 Interface Management Plan and Detailed Interface Documents 3,170,846 A3 Works Programme 3,170,846 A4 Design Submission Programme 3,170,846 A5 Quality Assurance Plan 3,170,846 A6 Safety Assurance Plan and Site Safety Plan 3,170,846 A7 Environmental Plan 3,170,846 A8 Software Quality Assurance Plan 5,284,743 A9 Testing and Commissioning and integrated Testing and Commissioning Plan 5,284,743

B1 Preliminary design submission 6,09,555 B2 Pre-final design submission 6,09,555 B3 Final design submission 6,09,555 B4 Final design document delivery 6,09,555 B5 As built drawings delivery 24,38,221 B6 Mock up at contractor off shore factory 24,87,980 Cost Centre G (P. 217 MC/PB) Milestones for providing training including provision of instructors in India 15,58,410 Milestone J1 (P. 220 MC/PB) Supervision of maintenance 24,54,936 Total 46,25,70,72

It may be noted that in the above table in para 10(sic) the payments in relation to operation and maintenance manuals, integrated testing and commissioning (A9) etc. and payment for mock-up train (B6) have not been included. (emphasis supplied)” RS1 contains a provision for providing of personnel by the contractor to impart training to the personnel of the DMRC as mentioned in cost centre G of the chart. RS1 also provides for supervision and maintenance of the rolling stock and related system for a period of three years by the contractor's personnel; for the purpose of supervision beyond the aforementioned period, the DMRC will have to bear the charges as specified in milestone “J1” which are chargeable as FTS.

4. Mr. Rahul Krishna Mitra, learned counsel appearing for the applicants, filed written submissions before and after the oral hearing. It is submitted that the following salient features of RS1 makes it clear that RS1 is one indivisible and inseparable contract for the manufacture and supply of 60 trains by the applicants to the DMRC. The assignment of figures to cost centres and milestones is merely to facilitate the periodical payments of the contract priced by the DMRC to the contractor and that by itself does not constitute segregation or breaking down of lump sum price of contract into various elements of services/supply. The element of service is merely incidental and inextricably linked to the pre-dominant or underlying activities of manufacture and sale of products, therefore, the price of the contract cannot be segregated between the value of the service and the value of the material for the purpose of arriving at the incidence of income-tax. In the post hearing written submissions, it is stated that clause 1.10 clarifies the factual position that the transfer of drawings/designs was for the limited purpose of use by the DMRC in relation to the works which is defined in clause 1.1.6.11 RS1 does not give any rights to the DMRC or to any other third party for the purpose of manufacture of train sets; designs/drawings are provided to the DMRC for its own use in relation to the works.

5. Mr. S.D Kapila, learned counsel appearing for the Commissioner, argued that after supply of 60 trains designs/drawings etc. were to be used for indigenous trains and relied on pages 28, 77 of Paper Book-II and pages 129 — 133 and 173 of Paper Book — III. He strenuously contended that the apportionment of the fixed lump sum price was provided in RS1 itself; various elements of RS1, having regard to major items of work, were segregated in RS1 itself as would be evident from different cost centres mentioned in it; he referred to definitions of terms, ‘tender’, ‘contract’ and ‘contractor’ in RS1 (PP 128-129 of PB-II) to show that one of the elements of the work is supplying of services as contained in cost centres ‘A’, ‘B’ ‘G’ and ‘J’; various cost centres and milestones specified thereunder would show that RS1 was separable on the basis of the supply of material and providing of services which fell within the meaning of FTS under articles 13/12 of the Treaty-I and Treaty-II respectively.

6. On the above contentions, the germane issues that arise for consideration is whether RS1 - a composite contract - is separable into its elements and whether it contains an element of FTS. These are essentially issues of fact which have to be resolved on a holistic consideration of RS1 along with all other connected documents.

7. It is a common ground that RS1 is a composite contract. Tsshe term ‘Contract’ is defined in clause 1.1.1.3 of the General Conditions of Contract in the following terms:—

General Conditions of Contract

“1. Definitions and interpretation

1.1.1.3 “Contract” means these General Conditions of Contract, Special Conditions of Contract, the Employer's Requirements, the Tender, the Contractor's Proposal, the Schedules, the Letter of Acceptance, the Contract Agreement (if completed) and such further documents as may be expressly incorporated in the Letter of Acceptance or Contract Agreement (if completed)”.

In support of the contention of the applicants that RS1 is one indivisible and inseparable contract for the manufacture and supply of 60 trains, Mr. Mitra has relied on the following factors:—

(1) the consortium of which the applicants are the member, has been awarded RS1 to implement the design, manufacture, supply and commissioning of passengers rolling stock of the Mass Rapid Transport System [Page 20 of the applicants Paper Book (for short “PB-1”)];

(2) the instructions to tenderers forming part of RS-I specifically provide that the contract is a fixed lump sum contract for design, manufacture, supply, testing and commissioning of passenger rolling stock comprising in all 60 metro trains;

(3) there is one fixed lump sum price for RS1, namely, Rs. 3110 million and US $ 261 million; RS1 does not contain any breakup of the aggregate contract price with reference to services;

(4) in order to arrive at milestone payments, the fixed lump sum price had merely been broken down in to cost centres;

(5) the general conditions of the contract forming part of Rs. 1 provide that the ‘defects liability’ period vis-a-vis the contractors would be calculated from the date of taking over of whole of the works and not for any section or part of clause.

8. Factors 1 and 5 may appropriately be dealt with jointly. It will be useful to refer to various clauses of RS1 relied upon by the parties. Clause 1 of RS1, which is the subject matter of the first factor urged by the applicants, reads as follows:

Clause 1

DMRC agrees to hire and the Contractor agrees to be hired to implement the design, manufacture, supply and commissioning of Passenger Rolling Stock of Contract RS1 of the Mass Rapid Transport System — Phase One Project under the terms and conditions specified in this Contract Agreement and the other Contract Documents attached hereto as follows:

X X X X X

We have carefully gone through clause 1 of the contract. It contains neutral facts. It merely states that DMRC has agreed to hire and the contractor has agreed to be hired to implement the design, manufacture, supply and commissioning of Passenger Rolling Stock of the contract - RSI - of the Mass Rapid Transport System under the terms and conditions specified in the contract and the other contract document attached thereto. It also enumerates the documents referred to in RS1 as the contract documents. We have also perused the definition of ‘tender’ and ‘Contractor’. None of these support the contention of inseparability of RS1.

In this connection, it is apposite to refer to the fifth factor, which relates to Clause 12.1 (page 43 of PB-II), General Conditions of Contract dealing with the defects liability period. What is sought to be contended by Mr. Mitra on the basis of the fifth factor, is that for the purpose of ‘defects liability period’ the date of taking over of the whole of the works and not any section or part thereof, is the criteria, therefore the works covered by RS1 are not segregable. The contention though attractive at the first sight, is found to be lacking in substance on examination. The expression “defects liability period”, is defined in Clause 12.1 which reads as under:

Clause 12 (Defects liability)

12.1 “Defects Liability Period” shall mean the defects liability period stated in the Appendix to the Form of Tender, calculated from the date of taking over of the whole of the Works and not for any section or part thereof. Provided that, if any part of the Works or sub-systems of component of that part has been replaced, renewed or repaired, the “Defects Liability Period” in respect of that part or sub-system or components of that part shall start from the date such replacement, renewal or repair has been completed to the satisfaction of the Employer's Representative.

In order that the Construction and/or Manufacture Documents and the Works shall be in the condition required by the Contract (fair wear and tear excepted) at, or as soon as practicable after the expiry of the Contract Period, the Contractor shall:

(a) complete any work which is outstanding on the date stated in a Taking Over Certificate, as soon as practicable after such date; and

(b) execute all such work of amendment, reconstruction and remedying defects or damage, as may be instructed in writing by the Employer or the Employer's Representative during the Contract period..

12.2 All work referred to Sub-Clause 12.1(b) shall be executed by the Contractor at his own cost, if the necessity for such work is due to:

(a) the design of the Works;

(b) Plant, Rolling Stock, Materials or Workmanship not being in accordance with the Contract; or

(c) Failure by the Contractor to comply with any of his other obligations.

If in the opinion of the Employer's Representative, such necessity is due to any other cause, he shall determine an adjustment to the Contract Price, with the approval of the Employer and shall notify the Contractor accordingly. In this event, Sub-Clause 14.3 shall apply to such work”.

Having defined “defects liability period” in Para 12.1, the next para (12.2) goes on to provide that all the works referred to in sub-clause 12.1(b) shall be executed by the contractor at its own cost if the necessity for such work arises due to the design of the work, plant, rolling stock, materials or workmanship not being in accordance with the contract or due to failure of the contractor to comply with any of his other obligations. It also deals with the other connected issues. It is obvious that having regard to the obligations of the contractor, the starting point of the limitation for the defects liability period has to be from the date of taking over of the whole of the works and not any section or part thereof because RS1 postulates taking over of the whole works and not piece meal. Further taking any section or part of works, would lead to a chaotic situation and unending process. As far as we could see these factors are not suggestive of the contract being inseparable into different elements.

Factors 2, 3 and 4 highlighted by Mr. Mitra, can be conveniently considered together. These factors deal with the fixed lump sum price payable to the contractor under RS1. Clause 4 of RS1 (PP 22-23 of PB-1) which incorporates the value of work and completion time reads as under:

“The employer agrees to pay for the total cost of the works and the contractor agrees to accept the sums mentioned below in following currencies to be the total cost of the work carried out by him as part of its obligations, responsibilities and liabilities under and according to the provisions and obligations imposed on him by the contract.

Fixed Lump Sum Price

(i) Rupees three thousand one hundred and ten million, four hundred and thirty-nine thousand, eight hundred and thirty six (Irs. 3,110,439,836); and

(ii) In the foreign currency of United States Dollars two hundred and sixty million, nine hundred and ninety seven thousand, two hundred and sixty nine (US $ 260,997,269)”

The consideration clause recites that the fixed lump sum price comprises of Rs. 3,110,439,836 and US $260,996,269., which is subject to adjustment in accordance with the provisions of General Conditions of Contract. It is also stated that the fixed lump sum price includes all taxes, royalties, duties, fees, cess, Octroi, other levies etc. and any tax to be deducted at source but it does not include the custom duties and excise duties specified in clause (a), (b) & (c) thereof. It is no doubt true that instructions for completing pricing document and instructions to the tenderer (clause 1.1 at page 123 of PB-II) say that the consideration is a fixed lump sum price for design, manufacture, supply, testing and commissioning. Clause 1.1 is in the following terms:

“This contract is a fixed Lump Sum price Contract for Design, Manufacture, Supply, Testing and Commissioning (including integrated Testing and Commissioning) of passenger Rolling Stock comprising 43 No of 25 KV ac trains for Rail Corridor and 17 No. 1500 V Jc trains for Metro Corridor. Out of these 60 trains, 14 Rail Corridor trains and 1 Metro Corridor train shall be completely manufactured offshore. The balance 45 trains will be progressively indigenised with the essential condition that car body shells of at least 18 Rail Corridor trains and 7 Metro Corridor trains shall be manufactured in India with mostly indigenous materials. The price to be quoted shall be inclusive of all taxes, levies, duties and any other charges leviable, including tax deducted at source, except that:

(a) to (c) x x x x x

In the instructions for completing the pricing document, caption “A” deals with ‘apportionment of fixed lump sum price to costs centre and milestone under each cost centre. Para 1.1, referred to above, is under the heading “General Requirements”. Heading ‘B’ deals with “customs clearance”; heading ‘C’ deals with “milestones achievement periods”; heading ‘D’ deals with “milestone payment schedule”; heading ‘F’ deals with “cost centres”; heading “G” & “H” dealing with “Currency” and “Gauge Option” with which we are not concerned here. Paras (2), (3) & (4) of the instruction (Page 124 of PB-II) under Caption ‘A’ of the same document, clearly show that the fixed lump sum price is apportioned to cost centres and milestones under each cost centre. It would be necessary to read these instructions to the tenderers, which are as follows:—

Para — 2

The whole of Works including design is divided into Cost Centres. Each of these Cost Centres represents a major item associated with the Works. Cost Centres are named according to their general scope of Work.

Para — 3

The fixed Lump Sum price for the whole of Works (60 trains) shall be apportioned by the Tenderer among the various Cost Centres. The apportioned amount of each Cost Centre will be further distributed among various Milestones included in that Cost Centre, separately for foreign currency and for the Rupee portion.

Para — 4

The sum of amounts shown against Milestones in a Cost Centre is the Cost Centre Amount that is to be carried forward to the Tender Total. For Cost Centres that involve payment in foreign currency, the division of the respective Cost Centre Amounts between Columns A and B shall be shown in the said Summary.”

Para (2) of the aforementioned instructions, noted under heading ‘A’, recites that the whole work including design is divided into cost centres. Each of these cost centres represents a major item associated with the works. Cost Centres are named according to their general scope of work. Instruction no. (3) thereof enjoins that the fixed lump sum price for the whole of works shall be apportioned by the tenderer among the various cost centres. The apportioned amount of each cost centre will be further distributed among various milestones included in that cost centre giving the foreign currency and the rupee portion separately. Instruction (4) under the heading ‘A’ prescribes the method of carrying forward the sum of amounts against each milestone in a cost centre to the tender total both foreign currency as well as Indian rupee. Under the heading ‘F’, it is provided that cost centres and milestones thereunder are fixed and shall not be changed by the tenderer. It is specified that cost centres represent the major items of the works for which the employer will pay the contractor and the tenderer is instructed to ensure that he has allowed for all costs he requires for the contract to be apportioned among the cost centres. The instructions to the tenderer contain the description of cost centres in the statement which is as under:—

Apportionment of fixed Lump Sum Price among Cost Centres

COST CENTRE Total Apportioned Amounts of Cost Centre Items US Dollars Col A Rupees Amount Col B A. Preliminaries and General Requirements for Rolling Stock for Rail and Metro Corridors 52,843,413 34,088,557 B. Design of Rolling Stock for Rail and Metro rolling 8,707,930 8,114,758 C. Offshore Manufacture, Factory, Testing, Inspection, Marine Insurance and Shipping to port in India and transit Insurance from Port in India to Depot Site of 14 No. 25 KV ac trains for Rail Corridor and one 1500 Vdc for Metro Corridor 46,437,149 151,458,794 D. Indigenous Manufacture, Factory Testing, Inspection and Despatch, transit insurance from factory to Depot of 29 No. 25 KVac trains for Rail Corridor and 16 No. 1500 Vdc trains for Metro Corridor 105,546,593 2,795,448,312 E. Inland Transportation of trains which India including handling charges at port in India, depot or at any other place and all other incidental costs, receipt of cars in depot, formation of trains, satisfactory completion of tests and running of train in the depot 12,121,020 71,017,860 F. Integrated Testing and Commissioning of Trains on the Section and Service trials 19,054,140 G. Training 1,558,410 1,420,358 H. Operation and Maintenance Manuals 1,731,563 I Unit Exchange Spares, consumable spares for a period of three years, special tools, testing and diagnostic equipment 10,538,115 34,569,358 J Supervision of Maintenance 2,454,936 14,321,929 TENDER TOTAL 260,997,269 3,110,439,836

“Cost Centre” is defined (in cl. 1.1.6.2) to mean a group of activities and/or items of work identified as such in the pricing document. And “milestone” defined (in cl. 1.1.3.9) means the completion of a part of the works or the occurrence of an event identified as such in the schedule of milestones.

For each of these cost centres (A to J) particulars of milestone activities have been given in great detail in a separate statement. We shall refer to the relevant milestones in the following discussion.

From a perusal of the statement of cost centres, it is evident that the fixed lump sum price is apportioned among various cost centres (A to J). Each cost centre representing separate major item of work. The terms “Works Programme” and “Works” are defined in the General Conditions of Contract under paras 1.1.1.19 and 1.1.6.11 and the same read as follows:—

Clause 1.1.1.19

“Works Programme” means the programme showing the sequence, method and timing of investigations, design, issue of No Objection Notices, execution, manufacture, delivery to site, erection, installation, testing, commissioning of the Works (including Integrated Testing and Commissioning), indigenisation (where applicable) and related activities in the form and content prescribed by the Employer's Requirements, of any amended or varied version thereof, as submitted by the Contractor and for which the Employer's Representative has issued a Notice of No Objection”.

Clause 1.1.6.11

“Works” means the work, both permanent and temporary, or services to be carried out, designed, manufactured, fabricated, delivered to Site, erected, installed, completed, tested, commissioned, (including Integrated Testing and Commissioning) or supplied in accordance with the Contract and include Plant, Rolling Stock and Materials and their accessories”.

A plain reading of the definition of ‘works’ quoted above, would show that services to be carried out are included within the meaning of that term. Among major items of works (A to J), it is pleaded by the Commissioner, items ‘A’, ‘B’, ‘G’ and ‘J’ involve services to be carried out by the contractor. Even assuming that the cost centres and milestones are prescribed to facilitate periodic payments to the contractor, as contended by Mr. Mitra, is correct, the fact that on functional basis services are allotted separate cost centres as major items of works and divided into milestones and thus there is segregation of services as major items of works which are paid separately under RS1, is not mitigated. We shall advert to this aspect further presently.

9. However, relying upon letter No. DMRC/134/98/XVOO-Payment-582 dated 7 November, 2002 of the DMRC (at page 145-146 of PB-II) it is contended by Mr. Mitra that under RS I no technical services were rendered by the consortium - a fact which is vouched by the DMRC. Mr. Kapila strongly objects to placing reliance on this letter on the ground that it is the handy work of some officers and those who are responsible for the letter are being dealt with administratively by the concerned authorities.

The portion relied upon by the applicants reads as under:—

“It is an accepted fact that industry practice in project procurement is to start fabrication after securing the order. It may be appreciated that Rolling Stock (Trains) are based on standard technologies available with different manufacturer world-wide. These trains draw electric power from overhead electrical equipments (OHE) while running on rail tracks equipped with suitable signaling systems. The work of laying of railing tracks, installation of overhead electric equipment, signaling system and supply of Rolling Stock are executed by different Companies/Contractors. For proper functioning of each sub-system and final system integration, the technical specifications are required to be prepared for individual sub-system and form part of each contract. In the case of RS-1 Contract as well technical specifications including preliminary designs and documents were prepared by General Consultants and formed part of the contract document. To meet the functional requirement prescribed in the detailed technical and engineering documentation provided by DMRC/GC, MRM Consortium prepared the necessary working level drawings and submitted to GC for review and proof checking. The short comings/deficiencies in these working level drawings detected were brought to the notice of MRM and they carried out suitable modification in these working level drawing to ensure that the final train sets manufactured by them are of the desired quality and matching with other sub-systems such as track, OHE & signaling system etc. During proof checking of these working level drawings no technical consultancy or advisory services were rendered by the Rolling Stock Contractor. Neither GC nor DMRC acquired the expertise to manufacture these coaches indigenously as a result of these discussions. The objective of the discussions between GC/DMRC and MRM was to ensure proper interface of trains with other sub-systems and accordingly modify working level drawings where necessary and not to exchange technical expertise or know how or skill between the parties. Thus no technical services have been rendered by the MRM Consortium”.

The above excerpt of the letter indicates that no technical consultancy or advisory services were rendered by the contractor and the DMRC did not acquire the expertise to manufacture these coaches indigenously as a result of these discussions and there has not been exchange of technical expertise or know-how or skill between the parties. Apart from the fact that this letter of the DMRC cannot be taken as having any binding force on the Commissioner in regard to the interpretation of RS1, we are of the view that it is of no consequence because in RS1 - a carefully worded contract - specific services are assigned costs centres for which defined milestones are prescribed for payment and it would, prima facie, be too premature to say within one and a half year of RS1 that no such services are provided. Further having regard to the definition of the expression “fees for technical services” in the treaties I & II, the provision of services of technical or other personnel, would also be within the meaning of FTS and this aspect is not covered by the letter. In as much as article 13(4) and 12(4) of treaties I & II respectively which embody the definition of expression “fees for technical services” (FTS) are substantially the same, we would refer to article 13(4) of Treaty-I which is as under:—

Article 13: Royalties and fees for technical services

1 to 3 x x x x x x

4. The term “fees for technical services” as used in this Article means payments of any kind to any person, other than payments to an employee of the person making the payments and to any individual for independent personal services mentioned in Article 15, in consideration for services of a managerial, technical or consultative nature, including the provision of services of technical or other personnel.

5 to 7 x x x x x

A careful reading of the above definition shows that FTS includes not only the services of managerial, technical or consultative nature but also the provision of services of technical and other personnel. A provision for payment of consideration for services of technical or other personnel nonetheless would, therefore, be within the meaning of the expression “fees for technical services” — FTS.

It is next contended by Mr. Mitra that services are merely incidental to the primary and pre-dominant objective of buying and selling goods and therefore they cannot be treated separately from the primary objective. To support his contention, he relied on two decisions of the Andhra Pradesh High Court and one decision of the Madras High Court.

The decision reported in Commissioner of Income-tax v. Klayman Porcelains Ltd. , was rendered by a Division Bench of the Andhra Pradesh High Court of which one of us (Chairman) was a party. In that case the assessee entered into various agreements with a German company. Under one of the agreements which related to construction/installation of kiln, the taxability of the consideration paid by the Indian company to the German company the non-resident was in question. The Income-tax Officer treated the consideration paid for technical drawings of engineering for the construction of the kiln as royalty within the meaning of Explanation (2) to section 9(1)(vi) of the Income-tax Act. On appeal, the Income-tax Appellate Tribunal held that the payment did not constitute royalty. The case came up before the High Court on reference. It was noted that the Tribunal on construing the relevant portion of the memorandum of agreement recorded the finding that the foreign company undertook to supply, erect and commission a kiln in India. It was held that a close reading of the type of work as well as other items of memorandum of agreement between the parties showed that the consideration was paid for construction/installation of the kiln and the services rendered in India were only that of supervision by an expert deputed by the foreign company and that the payment made to the foreign company was not for imparting any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property falling under clause (ii) of Explanation 2 to section 9(1)(vi) or for imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill within the meaning of clause (iv) of Explanation 2. Consequently, the payments made to the non-resident company did not constitute income by way of royalty within the meaning of section 9(1)(vi) of the Act. It is obvious that this case is not an authority for the proposition whether a composite contract can be segregated into its elements nor can it of any assistance to ascertain whether the contract - RS1 - contains the element of fees for technical services.

In Commissioner of Income-tax v. Sundwiger EMFG and Co., a division bench of the Andhra High Court considered the question whether payments received by a non-resident company from an Indian company, were assessable in India as fees for technical services within the meaning of Explanation 2 of section 9(1)(vii) of Income-tax Act. There the Indian company placed orders with non-resident companies for supply of different types of capital equipment in connection with setting up of special metal and alloy projects. By a separate contract entered into between the parties it was agreed that the non-resident company would send on deputation its employees to India for providing technical services covering supervision of erection, start up, putting into commission etc. The Assessing Officer took the view that the amounts to be remitted by the Indian company to the foreign company for providing such services would amount to fees for technical services and were taxable under section 9(i)(vii) of the Income-tax Act. The Commissioner (Appeals) reversed that order and held that the payments could not be considered as technical fees which was upheld by the Income Tax Appellate Tribunal. On reference to the High Court, it was held that a plain and cumulative reading of the terms and conditions of the contracts between the Indian and the foreign companies showed that the agreements related to one and the same transaction. The services rendered by the experts and the payments made for the services were part and parcel of the sale consideration and could not be severed and treated as business income of the non-resident company for the services rendered by it in erection of the machinery. The supplementary contract was only by way of abundant caution and that the consideration paid by the Indian company under it, was part of the consideration for setting up of the machinery and that it could not be viewed in isolation of the main contract. Therefore, the provision of section 9(1)(vii) of the Income-tax Act could not be applicable and such payments were exempted under Explanation-2 of section 9(1)(vii) of the Act. In that case it was found as a fact that the amount paid for rendering services under the second contract was part and parcel of the sale transaction under the main contract. This case is not of any assistance to the applicants.

In Commissioner of Income-tax v. Neyveli Lignite Corporation Ltd., the assessee was engaged in the mining of lignite. It entered into an agreement with a Hungarian company for acquiring steam generating plants with auxiliaries for more efficient running of its business. The Income-tax officer held that the amounts payable under the contracts for design and engineering were income of the foreign contractor in India and therefore, the assessee was required to deduct the income tax before payment of the amounts to the foreign contractor. The Tribunal held that the amounts could not be regarded as royalty and therefore it would not be income accruing to the foreign contractor in India. On reference, a division bench of the Madras High Court observed that there was no transfer or licence of any patent invention, model or design; the design referred to in the contract was only the design of the equipment required to be manufactured by the foreign supplier to the Indian purchaser; the information concerning the working of the machine was incidental to the supply as the machinery was tailor made for the buyer; therefore, the price paid by the assessee to the foreign contractor was a total contract price which covered all the stages involved in the supply of machinery (from the stage of design to the stage of commissioning) and that the design supply was not to enable the assessee to commence manufacture of the machinery itself with the aid of such design. In that case the Madras High Court considered whether the payments made by the Indian company to the foreign contractor fell within the meaning of royalty. In this case we are not faced with the problem of scope of definition of royalty. Therefore, reliance on this case would be misplaced.

The principle which emerges from the decisions in the aforementioned cases is that in a contract for manufacture, installation, sale or supply of goods the element of services will always be present. Where services are inextricably linked with manufacture, installation, sale or supply, they cannot be evaluated for the purpose of FTS; it is only where services are separable and independent that the FTS will be assessable.

In this context, we cannot but notice the judgement of the Hon'ble Supreme Court of India in Continental Construction Ltd. v. Commissioner of Income-tax. In that case the assessing officer declined to grant deduction under section 80-O of the Income-tax Act on the view that section 80HHB applied to the contracts and as the conditions of the last mentioned provision were not fulfilled, no relief was available to the appellant. The Commissioner (Appeals) confirmed the order of the assessing officer while partly allowing the appeal. On further appeal to the Income Tax Appellate Tribunal it was found that the works contemplated by the contract included design, manufacture, delivery, supply, installation, construction, setting to work, commissioning, site testing, operations and maintenance. Considering the nature of the contract the Tribunal held that it was a contract for commissioning of a turnkey project and that it was not possible to separate one part of the contract from another or to bifurcate a part of consideration for any particular service and therefore, no part of the income could be said to arise as royalty or fee for rendering technical services and it was concluded that income from the execution of the contracts fell under section 80HHB and that the claim of the appellant for deduction under section 80-O could not be considered in spite of the approval granted by the Board. On reference, the High Court, inter alia, opined that the execution of the work by the appellant fell under section 80HHB and not under section 80-O and that it was open to the assessing officer to satisfy himself as to whether the conditions laid down in section 80-O were fulfilled. On appeal to the Hon'ble Supreme Court, it was held that the mere fact that the appellant was carrying on business as engineers and contractors and its receipts flowed in the course of its business as such did not necessarily preclude relief under section 80-O if they could be brought within the categories of receipts mentioned in the section and that the mere fact that the contract did not specifically assign the nomenclature mentioned under section 80-O to the payments made to the appellant could not be conclusive of its claim for exemption. It was, further, held that there was complete identity of the matters governed by section 80HHB and section 80-O and therefore, the appellant would be entitled, in view of section 80HHB(5), only to one and not both the reliefs and that the approval of the Board would not help the appellant to overcome the mandate of section 80HHB(5) and therefore the appellant was entitled to the relief under section 80-O for assessment year earlier to 1983-1984 and the approval granted by the Board under that section was right and proper. Further for the assessment year 1983-1984, the assessee did not qualify for deductions on the terms of that section as contract receipts were fully covered by the provisions of section 80HHB and the deductions under that section would prevail over the relief that might have been otherwise available in view of section 80HHB(5).

It is submitted by Mr. Mitra that the decision of the Hon'ble Supreme Court holding that the apportionment of lump sum price for a composite turnkey construction project so as to assign some amounts as FTS for the purpose of granting tax incentives, has to be restricted to the facts of the case. We are afraid, we cannot accept the contention of the learned counsel. It is true that the subject matter of the contract in the case before the Hon'ble Supreme Court was in the nature of turnkey project and the case on hand relates to sale of chattel but that by itself, in our view, would make no difference.

In so far as Circular No. 681 of CBDT dated 8 November, 1994 is concerned, it was issued with regard to the deductions of tax at source under section 194C of the Act which deals with payments to resident. In the instant case the payment to a non-resident is in issue, which is governed by section 195 of the Act and therefore, the circular will have no application. The distinction made in the circular between the contract for construction of project and sale of chattel has no bearing on the facts of this case.

From the above discussions, it is clear that the claim of the applicants that the contract does not contain any break up of the aggregate contract price with reference to the services is untenable. It follows that RS1 a composite contract - can be segregated into its components.

Whether any element of such contract satisfies the requirement of the definition of FTS has to be determined having regard to the criteria laid down in the definition in article 13(4)/12(4) of Treaties I & II respectively.

We have quoted above article 13(4) of Treaty-I which contains the definition of the expression “fee for technical services” (FTS) and pointed out that it has two limbs, the first limb takes in its fold the services of managerial, technical or consultative nature and the second limb includes the provision of services of technical or other personnel. With reference to the table containing apportionment of the fixed lump sum price among various cost centres and milestones, it is pleaded by the Commissioner that costs centres ‘A’, ‘B’, ‘G’ and ‘J’ involve services to be rendered by the contractor.

In the light of the above discussions, we shall now examine whether in cost centres ‘A’, ‘B’, ‘G’ & ‘J’ the services are inextricably connected with the sale/supply of metro trains or are separate and independent of such sale/supply so as to be within the meaning of FTS under the said treaties. This necessitates an analyse of relevant milestones activities of costs centres ‘A, ‘B’ ‘G’ and ‘J’, keeping in view the scope of works under RS1. Clause 1.1.4 of Chapter I “RS1 Employer's requirements: General specification” which specifies the scope of the works runs thus:

“The Scope of Works under this Contract covers design, manufacture, supply, testing and commissioning of passenger rolling stock, supervision of maintenance and the training of operation and maintenance personnel for Metro and rail Corridors. The Scope also covers supply of spares, special tools, testing and diagnostics equipment, jigs and fixture etc. for maintenance, repair and overhaul of cars. The cars required for the corridors shall be of modern design, lightweight made of stainless steel, with 3 phase AC drive having V.V.V.F control, regenerative braking and suitable for ATP, ATC etc. provided by other designated Contractors. The cars for Metro Corridor and Rail Corridor shall operate on 1500 V d.c over head rigid current collection system and 25 KV ac single phase 50 Hz flexible OHE system respectively. The detailed performance requirements and design criterion of the cars and equipments are covered in Employer's Requirements — Technical Specification’.

The milestones, referred to above, read as under:—

COST CENTRE No. A — PRELIMINARY AND GENERAL REQUIREMENT FOR RAIL AND METRO CORRIDOR

MILESTONE NUMBER WORK DESCRIPTION APPORTIONED AMOUNT US Dollars Col A Rupees Amount Col B MILESTONE ACTIVITY A1 Obtain the “Notice of No Objection” or “Notice of No Objection Subject to “From the Employer's Representative for Project Management Plan 5,284,743 - A2 Obtain the “Notice of No Objection” or “Notice of No Objection Subject to — “from the Employer's Representative for Interface Management Plan and Detailed Interface Documents 3,170,846 - A3 Obtain the “Notice of No Objection” or “Notice of No Objection Subject to — “from the Employer's Representative for Works Programme 3,170,846 - A4 Obtain the “Notice of No Objection” or “Notice of No Objection Subject to — “from the Employer's Representative for Design Submission Programme 3,170,846 - A5 Obtain the “Notice of No Objection” or “Notice of No Objection Subject to — “from the Employer's Representative for Quality Assurance Plan 3,170,846 - A6 Obtain the “Notice of No Objection” or “Notice of No Objection Subject to — “from the Employer's Representative for Safety Assurance Plan and Site Safety Plan 3,170,846 - A7 Obtain the “Notice of No Objection” or “Notice of No Objection Subject to — “from the Employer's Representative for Environmental Plan 3,170,846 - A8 Obtain the “Notice of No Objection” or “Notice of No Objection Subject to — “from the Employer's Representative for Software Quality Assurance Plan 5,284,743 - A9 Obtain the “Notice of No Objection” or “Notice of No Objection Subject to — “from the Employer's Representative for inspection, Testing and Commissioning Plan 5,284,743 - A10 Provide and erect, offices for the Contractor and for the Employer's Representative, including secondary and integrated Testing and Commissioning plan. 17,968,108 17,044,279 A11 Provide transport for the use of the Employer's Representative - 17,044,278 A12 Any other item considered necessary by the contractor to comply with the scope of work. COST CENTRE TOTAL CARRIED TO TENDER TOTAL 52,847,413 34,088,557

COST CENTRE No. B — DESIGN of RAIL AND METRO CORRIDOR ROLLING STOCK

MILESTONE NUMBER WORK DESCRIPTION APPORTIONED AMOUNT US Dollars Col A Rupees Amount Col B MILESTONE ACTIVITY B1 Obtain the “Notice of No Objection” or “Notice of No Objection Subject to — “from the Employer's Representative for Preliminary Design submission 609,555 - B2 Obtain the “Notice of No Objection” or “Notice of No Objection Subject to — “from the Employer's Representative for Pre-Final Design Submission 609,555 - B3 Obtain the “Notice of No Objection” or “Notice of No Objection Subject to — “from the Employer's Representative for Final Design Submission 609,555 - B4 Obtain the “Notice of No Objection” or “Notice of No Objection Subject to — “from the Employer's Representative for Final Design Document Delivery 609,555 - B5 Obtain the “Notice of No Objection” or “Notice of No Objection Subject to — “from the Employer's Representative for “As-Built Drawings” delivery 2,438,221 - B6 Obtain the “Notice of No Objection” or “Notice of No Objection Subject to — “from the Employer's Representative for Mock up at Contractor's Offshore Factory 2,487,980 -

A7 to A12 and B7 and B8 are not relevant for the present discussion.

COST CENTRE No. G — TRAINING

Milestone Number Work Description Apportioned Amount Weeks for completion of milestone from Commencement Date US DOLLARS RUPEES MILESTONE ACTIVITY COLUMN A COLUMN B Obtain the “Notice of No Objection” or “Notice of No Objection Subject to - “from the Employer's Representative for completion of all training including delivery of final training manuals the following for G1 Training of Employer's Driving Instructors and Drivers (4 man months) in operation of Surface/Elevated MRTS Off-shore 155,841 - G2 Training of Employer's Driving Instructors and Drivers (4 man months) in operation of Underground Metro Off-shore 155,841 - G3 Training of Employer's maintenance personnel (40 man months) in Contractor's Works and MRTS off-shore 311,682 - G4 Provision of Contractor's Driving instructors (8 man months) for Training of Employer's operating personnel in India 311,682 710,179 G5 Provision of Contractor's Instructors (8 man months) for Training of Employer's maintenance personnel in India 311,682 710,179 G6 Submission of Training Manuals (Original plus five hard Copies) and in Electronic format. 311,682 - G7 Any other item considered necessary by the Contractor to comply with the Scope of works - - COST CENTRE TOTAL CARRIED TO TENDER TOTAL 1,558,410 1,420,358

COST CENTRE No. J — SUPERVISION of MAINTENANCE

Milestone Number Work Description Apportioned Amount Weeks for completion of milestone from Commencement Date US DOLLARS RUPEES J1* Obtain the “Notice of No Objection” or “Notice of No Objection Subject to - “from the Employer's Representative for completion of the following Supervision of maintenance*. 2,454,936 14,321,929 COST CENTRE TOTAL CARRIED TO TENDER TOTAL 2,454,936 14,321,929

A close reading of the definitions, quoted above, as well as captions of cost centers ‘A’, ‘B’ and milestone activities A1 to A9; B1 to B6 (relied upon by the Commissioner), would show that none of these milestone activities would fit in the meaning of FTS. Cost centre A “Preliminary and General Requirement for Rail and Metro Corridor” and milestone activities A1 to A9 would show that those milestone activities have a direct nexus to implementation of design, manufacture, supply and commissioning of Passenger Rolling Stock of Contract RS1 of the Mass Rapid Transport System. Those activities involve various types of services including coordination and liaison with designated contractors and civil engineer which are necessary for a proper and safe designing and manufacture of metro trains vis-a-vis construction of metro corridor or other related works. They are, therefore, services inextricably linked with the primary object of RS1.

A little explanation would make the point clear. Chapter 2 of ‘RS1 Employer's Requirements: General Specification’ speaks of management plans. Para 2.1.1 of Chapter 2 refers to development and submission of the following plans for Employer's Representative's review:

(i) Project Management Plan - which is referred to in Milestone A1.

(ii) Interface Management Plan - which is referred in Milestone A2.

(iii) Work Plan (Work Programme and Design Submission Programme) - which is referred in Milestone A3 & A4 Safety Assurance Plan - which is referred in Milestone A6

(iv) Quality Assurance Plan - which is referred in Milestone A5 Software Quality Assurance Plan - which is referred in Milestone A8

(v) Environmental Plan - which is referred in Milestone A7

(vi) Inspection, Test and Commissioning Plan - which is referred in Milestone A9

The import of Project Management Plan is contained in para 2.2 of the same chapter. It reads as follows:

2.2 Project Management Plan

2.2.1 The Project Management Plan shall provide a clear over-view of the Contractor's organization, the management system and methods to be used for completion of the works. The organization resources for the design, procurement, manufacture, installation, testing and commissioning and setting to work, shall be clearly defined.

2.2.2 The Tenderer shall submit a Project Management Plan as a part of the Tender, which shall provide the following information:

(i) A diagram showing the organizational structure for the management of the Contract, with locations, names and position titles of staff and their line and staff relationship. The diagram shall include associate organizations and sub-contractors and show clearly the individuals and lines of responsibility linking the various groups. It shall also identify the persons designated as contacts with the Employer's Representative.

(ii) The names, qualifications, positions and current resumes of key executive, supervisory and engineering staff to be employed full time for the works, separately for principals and sub-contractors.

(iii) A narrative describing the sequence, nature and inter-relationship of the main Contract activities including timing for exchange of information.

(iv) Procedure for documentation control.

(v) The Tenderer shall nominate a suitably qualified and experienced English speaking engineer from his staff to be Project Manager. The nominee shall be subject to acceptance of the Employer's Representative, who shall have the right to demand his replacement at any time after the work commences, should the Employer's Representative consider this to be in the best interest of the Project.

(vi) The Tenderer shall also nominate a senior engineer to coordinate activities of the design offices and manufacturing works. The engineer shall be responsible to the Project Manager for all works executed outside India and in India for ensuring that effective coordination is maintained with the various manufacturing units of the Contractor, sub-Contractors and Suppliers and that contract delivery schedules are met.

(vii) The Project Manager shall be continuously on site in New Delhi and devote himself full time to the Project, commencing not later than Thirty (30) calendar days from the date of the Notice to proceed and shall continue up to the end of Defects Liability Period.

2.2.3 The Contractor will submit a Project Management Plan within in 15 days of the date of Notice to Proceed. The Employer's Representative will review the Contractor's Project Management Plan and shall have the right to require the Contractor to make amendments as deemed necessary by the Employer's Representative. The Contractor shall submit a detailed revised plan within 10 days of the review of the Employer's Representative.

From a perusal of cost centre ‘A’ and milestones specified thereunder, a misleading impression is created by milestones A1 and A2 which are in respect of project management plan and interface management plan, respectively, that services of liaison and coordination relate to the project of DMRC, as such they involve FTS. We shall, therefore, deal with milestones A1 and A2 elaborately. A meticulous reading of the above paras makes it clear that the Project Management Plan refers to the contractor's organization, the management system and the methods to be used for completion of the works and not to the project of the DMRC. It requires organization resources for the design, procurement, manufacture, installation, testing and commissioning and setting to work to be clearly defined. The Project Management Plan has to provide the information contained in clauses (i) to (vii) of para 2.2.2 All these information relate to the design, manufacture, installation, testing etc. of the works by the contractor. We have also perused the organizational chart drawn on page 122 of Paper Book-II (filed by the revenue) which relates to the organization of the contractor and not of the DMRC.

In regard to milestone activity A2, para 2.3 of Chapter 2 is material and reads as follows:—

2.3 Interface Management Plan

2.3.1 The Contractor shall interface and liaise with Designated and other Contractors in accordance with the requirements of Chapter 3 of the Employer's Requirement's General Specification.

2.3.2 Within 30 days of notification from the Employer's Representative of the identify of each Designated Contractor, the Contractor shall develop and submit to the Employer's Representative an Interface Management Plan which is mutually acceptable to both the Contractors and the Designated Contractors. The Interface Management Plan shall:

(i) identify the sub-systems as well as the civil works and facilities with interfacing requirements.

(ii) define the authority and responsibility of the Contractor's and Designated Contractors' (and any relevant sub-contractors) staff involved in interface management and development;

(iii) identify the information to be exchanged, precise division of responsibility between the Contractor and Designated Contractors and integrated tests to be performed at each phase of the Contractor's and Designated Contractors' works.

(iv) Address the works programme of the Contract to meet the key dates of each Contractor and highlight any programme risks requiring management's attention.

2.3.3 After the review of Interface Management Plan with no objections by Employer's Representatives, the Contractor shall execute the works in accordance with the Plan.

Clause 2.3.1 requires that the contractor shall interface and liaise with the designated and other contractors in accordance with the requirements of Chapter 3 of the Employer's Requirement's General Specification. Chapter 3 is concerned with ‘Coordination with Designated and Other Contractors’. Clause 3.1.1 in the following terms:—

‘The Contractor is responsible for detailed coordination of his design and manufacturing activities with those of the System-wide Contractors, Civil Contractors, Consultants and other Contractors whether or not specifically mentioned in the contract, who may be working on or adjacent to the site for the purpose of the Project’.

It imposes an obligation on the contractor for detailed coordination of his design and manufacturing activities with those of the system-wide contractors, Civil Contractors, Consultants and other Contractors whether or not specifically mentioned in the contract who may be working on adjacent to the site for the purpose of the project. Indeed it is incomprehensible that RS1 which is for a limited purpose of sale/supply of metro trains, should be dealing with services of extensive project of DMRC. It is worthwhile emphasizing that the services, liaison, coordination of the contractor with designated and other contractors are so inextricably connected with design, manufacturing activities of metro trains that the element of services cannot be separated for purposes of taxation of FTS.

We consider it unnecessary to burden this ruling by a discussion of each of the milestones. Suffice it to mention that we have gone through Chapters 2 and 3 of the “RS1 Employer's Requirements: General Specification” and examined milestone activities of A1 to A9 and we are satisfied that those milestone activities do not involve element of FTS.

Yet another submission of Mr. Kapila needs to be noticed. It was argued that Mitsubishi Corporation — leader of the consortium was not involved in supply of material but was rendering management services as per consortium agreement. Therefore, FTS is attracted. We are unable to accede to this submission. We have perused consortium agreement dated 18 May, 2001. The stipulation in the agreement is vis-a-vis the members of the consortium. Further RS1 is admittedly between the DMRC and the consortium and not members thereof. Under RS1 no management services are required to be rendered by consortium so rendering of management services by Mitsubishi as a leader to the members of consortium is of no consequence for the purpose of FTS.

In so far as cost centre ‘B’ is concerned, it directly deals with design of metro rail and metro Corridor milestone B1 to B5 (B6 is specifically excluded by the Commissioner himself). From a plain reading of milestone activities — B1 to B5 - and contents of chapter 5 (Design Submission Requirement) of “RS1 — Employer's Requirements: General Specification”, it is evident and needs no elaboration to conclude that these milestone activities have direct nexus to the design submission programme for manufacture sale and supply of metro trains. The services postulated by the milestone activities are also inextricably connected with the designing, sale and supply of metro trains and therefore, the payment for these activities do not fall within the meaning of FTS.

Having examined the description and the nature of milestone activities of A1 to A8 and B1 to B5, we are of the considered view that they do not satisfy the requirements of definition of FTS. However, we hasten to add that the same cannot be said about cost centres nos. ‘G’ and ‘J’. Cost Centre ‘G’ and milestones thereunder are concerned with training of Employer's driving instructors and drivers. Cost centre ‘J’ and milestone J1 speak of ‘Supervision of maintenance’. The milestones activities of these cost centres are services which are separate and independent of design, manufacture sale and supply of metro trains. They may be because of but are not intrinsic part of the sale/supply of metro trains. It is worth noticing that the footnote appended to milestone no. J1, specifically mentions, “This excludes Contractor's obligations and responsibilities during the Defects Liability Period”. This brings out the distinction clearly because the nature of the work delineated in 12.1(b), noted above, which the contractor has to execute at his costs, is the work inextricably connected with supply of metro trains, whereas services of cost centre ‘J’ are independent services for which separate payment is made by DMRC.

From the above discussion it follows that the contract — RSI — comprises of element of fee for technical services in cost centres ‘G’ and ‘J’ within the meaning of article 13(4)/12(4) of the Treaty-I and II and it can be separated for purposes of levying income tax.

In regard to question No. 2 which is a consequential question, it will suffice to mention that the proportion of the lump sum price which is noted against each of the above mentioned items (G’ and ‘J’) relating to providing of services could only be regarded as fee for technical services.

In regard to question No. 3; it may be pointed out that in view of para 7 of article 7 of the Treaty when an item of income is dealt with separately in other article of the Treaty, the provision of the other articles shall not be affected by article 7. It is obvious that fee for technical services is specifically dealt with in articles 13/12 of the Treaties, therefore, it gets excluded from the scope of article 7 of the treaties. It would be apt to note that the same view is taken by the Authority in its ruling in Ishikawajima-Harima Heavy Industries Co. Ltd..

While concluding we would note that submissions in regard to transfer of designs etc. to enable the DMRC to manufacture further metro trains or have them manufactured from any third party are not discussed by us as they are in the realm of royalty which is not the subject matter of questions in these applications.

In the light of the above discussion we rule:

In AAR/612/2003 on

Question No. 1, that in terms of contract — Rs. 1 — between DMRC and the consortium, the lump sum price for the works of design, manufacture, supply, testing and commissioning of passenger rolling stock of the Mass Rapid Transport System includes element of fee for technical services as defined in article 13(4) of the Treaty between India and Korea. It follows that it would not be incorrect to disintegrate the contract for purposes of taxation of each of the components.

Question No. 2. The proportion of the lump sum price payable by DMRC under Contract — RS1 — as mentioned against costs centre, ‘G’ and ‘J’ can be regarded as fee for technical services.

Question No. 3: Fee for technical services cannot be taxed as business profit under article 7 in view of the fact that the FTS is specifically dealt with in article 13(4) of the Treaty.

In AAR/613/2003 on

Question No. 1, that in terms of contract — Rs. I — between DMRC and the consortium, the lump sum price for the works of design, manufacture, supply, testing and commissioning of passenger rolling stock of the Mass Rapid Transport System included element of fee for technical services as defined in article 12(4) of the Treaty between India and Japan. It follows that it would not be incorrect to disintegrate the contract for purposes of taxation of each of the component.

Question No. 2. The proportion of the lump sum price payable by DMRC under Contract — RS1 — as mentioned against costs centre, ‘G’ and ‘J’ can be regarded as fee for technical services.

Question No. 3: Fee for technical services cannot be taxed as business profit under article 7 in view of the fact that the FTS is specifically dealt with in article 12(4) of the Treaty.