TMI Blog2005 (3) TMI 708X X X X Extracts X X X X X X X X Extracts X X X X ..... 0,000 (net of taxes), each calendar quarter year, as fees for technical services and another US $ 12,500, each calendar quarter year, as basic fees for training of Hindalco s (assessee s) personnel at the works of Reynolds and/or its affiliated companies out of India . For training at Hindalco in excess of 120 man days, the training fees was payable @US $ 850 per person per day, while for training at Reynolds subsidiaries outside India, the training fees was payable @ US $ 200 per person per day. While the assessee has fairly conceded taxability of REL, in respect of the component of US $ 50,000 per quarter in respect of fees for included services (or what is popularly known as fees for technical services ), the assessee contends that the fees payable by the assessee, on account of training of its employees at works of REL, is not exigible to tax in India in terms of the provisions of article 12(5)( a ) of the India US DTAA. 3. The assessee s contention is that since article 12(5)( a ) of the India US DTAA specifically excludes, from payment of fees for included services, the payments for "services that are ancillary and subsidiary, as well as inextricably and essentiall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vention applies. It is thus contended that the expression property shall have the same meaning as it has in the context of Indian laws. Reliance is then placed on the definition given in the Law Lexicon which defines property as generic term for all that a person has dominion over . It is indeed most comprehensive of all terms which can be used, inasmuch as it is indicative and descriptive of all terms which can be used, inasmuch as it is indicative and descriptive of every possible interest which the party can have (Stroud). It is more than the mere thing which a person owns. It is elementary that includes the right to acquire, use and dispose of it. Property consists of the free use, enjoyment and disposal of a person s acquisitions without control or diminution by the law of the land. It is contended that Biswas in Encyclopaedic Law Dictionary has defined the term property as including goodwill, trademarks, licence to use a patent, book debts, options to purchase, life policies and other rights under a contract. A reference is made to the Hon ble Supreme Court s judgment in the case of Scientific Engineering House (P.) Ltd. v. CIT [1986] 157 ITR 86 1 in support of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . He however fairly accepted that on identical facts the matter has been restored to the file of the CIT(A) for examining whether the training could be considered to be the service that is ancillary and subsidiary, as well as inextricably and essentially linked to the sale of know-how, but, then, it is also pointed out that there is no finding in the said Tribunal s order to the effect that sale of know-how constitutes sale of property for the purpose of article 12(5)( a ) of the DTAA. It is contended that restoration for the purposes of examining whether or not the training is ancillary and subsidiary, as well as inextricably and essentially linked to the sale of know-how, is meaningless unless there is a categorical finding that the sale of know-how constitutes sale of property. It is thus submitted that even if we accept the proposition canvassed by the assessee for restoration of matter to the file of the CIT(A) for fresh examination on the same lines, such an examination can only be relevant when a specific finding is given on the question of applicability of the exclusionary provisions of article 12(5)( a ). Learned Departmental Representative emphasized the fact that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provision of services of technical or other personnel) if such services : ( a )are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph (3) is received; or ( b )make available technical knowledge, experience, skill, know-how, or processes, or consists of the development and transfer of a technical plan or technical design. Article 12(5) Notwithstanding paragraph (4), "fees for included services" does not include amounts paid : ( a )for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property other than a sale described in paragraph (3)( a );* ( b )for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international traffic; ( c )for teaching in or by educational institutions; ( d )for services for the personal use of the individual or individuals making the payment; or ( e )to an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the this context mean and include sale of a property, which may constitute property in utterly legalistic connotation of that expression, but where the sale consideration itself is taxable in the source country as a revenue item? Are we to do read the words used in a tax treaty in a mechanical manner or we are to give effect to the same in the light of the underlying, but clearly discernible, scheme of tax treaty? These are the key issue which will eventually, in our view, decide the taxability of impugned training fees in the hands of the REL and which, in turn, will decide whether or not the assessee before us should have deducted tax at source from the related foreign remittances. The appellants before us contend that since REL was not exigible to tax in India in respect of the training fees in question, the assessee was not under any obligation to deduct tax at source from the related remittances. In order to properly adjudicate on the controversy arising in this appeal, it is equally important to neatly delineate the scope and limitation of article 12(5)( a ) of the India US tax treaty. 9. Before we address ourselves to the aforesaid questions, it is necessary to bea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsequence (strange though it is) that similar words mean different things in the two sentences." 13. In a later judgment, Harman J. in Union Taxas Petroleum Corporation v. Critchley [1988] STC 69, affirmed the above observations of Goulding J. and added : "I consider that I should bear in mind that this double tax agreement is an agreement. It is not a taxing statute, although it is an agreement about how taxes should be imposed. On that basis, in my judgment, this agreement should be construed as ut res magis valeat quam pereat, as should all agreements. The fact that the parties are high contracting parties , to use an old description, does not change the way in which the Courts should also approach the construction of any agreement." We are in considered agreement with this school of thought which lays down the proposition that, strictly speaking the principles of literal interpretation do not apply to the interpretation of tax treaties. To find the meaning of words employed in the tax treaties, we have to primarily look at the ordinary meanings given to those words in that context and in the light of its objects and purpose. Literal meanings of these terms are n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... instead of precision drafting........ "........ The interpretation of a treaty imported into municipal law by indirect enactment was described by Lord Wilberforce as being unconstrained by technical rules of English law, or by English legal precedent, but conducted on the broad principles of general acceptation . This echoes optimistic dictum of Lord Widgery, C.J. that the words are to be given their general meaning, general to lawyer and laymen alike...... the meaning of diplomat rather than the lawyer ." 16. Hon ble Supreme Court, in the case of K.P. Varghese v. ITO [1981] 131 ITR 597 and even in the context of interpretation of taxing statutes, have held that the task of interpretation is not a mechanical task and, quoted with approval, Justice Hand s observation that "it is one of the surest indexes of a mature and developed jurisprudence not to make a fortress out of the dictionary but to remember that statutes always have some purpose or object to accomplish, whose sympathetic and imaginative discovery is the surest guide to their meaning". Their Lordships observed as follows : ". . . The task of interpretation of a statutory enactment is not a mechanical task. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he object and purpose of the treaty. The context in which the words are used is, therefore, of the paramount importance. General words and phrases, therefore, however wide and comprehensive in their literal sense, must be construed as being limited to the actual objects of the enactment. Therefore, what is really needed in the context of interpretation of treaties is that a holistic view of the matter is taken. This exercise essentially requires that the provisions of the treaty are required to be treated in a harmonious manner. The same principle applies to the interpretation of the taxing statutes as well. It is fundamental principle of interpretation that a statute must be read as a whole, notwithstanding that every section of the statute is a substantive enactment in itself. A co-ordinate bench of this Tribunal, in the case of Ensco Maritime Ltd. v. Dy. CIT [2004] 91 ITD 459 (Delhi), at pages 476-477 and while dealing with the principles of interpretation of treaties, has, inter alia , observed as follows : ". . . it would be necessary to bear in mind that the tax treaties should be interpreted unconstrained by the technical rules of law or precedents on, on the broad pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tage process. Coming to the issue of context of the treaty requiring a different meaning from the meaning under the domestic law , learned authors State that, For this purpose, it is necessary to consider what are the alternative meanings for the term for purposes of treaty and whether one of these meanings is more appropriate in the context of the treaty than the domestic law meanings. Matters that should be considered in this analysis include............ the purpose of the relevant provisions of the treaty (Emphasis supplied by us). The observations which follow, in our considered view, are even more important. The same are reproduced below : "Some international tax scholars argue that in applying Article 3(2), undefined terms should be given, if all possible, a meaning that is independent of domestic law and a domestic law meaning should be used only as a last resort. Other scholars argue that Article 3(2) contain a preference for domestic law meanings because such meanings are only displaced by a treaty meaning if "the context otherwise requires ". The use of word "requires", they argue, places a substantial onus on those seeking to justify a treaty meaning. In our view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urdities and to interpret the treaty ut res magis veleat quam pereat i.e., in such a manner as to make it workable rather than redundant. -A literal or legalistic meaning must be avoided when the basic object of the treaty might be defeated or frustrated when the basic object of the treaty might be defeated or frustrated insofar as particular items under consideration are concerned. Words are to be understood with reference to the subject-matter, i.e., verba accopoenda sunt secundum subjectum materiam. -It is inevitable that interpreter of a tax treaty is likely to be required to cope with disorganised composition instead of precision drafting. Therefore, the words employed in the treaty are to be given a general meaning - general to lawyers and general to layman alike. -When a tax treaty does not define a term employed in it, and the context of the treaty so requires, it can be given a meaning different from domestic law meaning thereof. The meaning of the undefined terms in a tax treaty should be determined by reference to all of the relevant information and all of the relevant context. There cannot, however, be any residual presumption in favour of a domestic law mea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luding gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof. When sale is of a property set out in Article 12(3)( a ), the services which are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of such a property, continue to be regarded as fees for included services exigible to tax in the source country. 23. The easily discernable common thread in all the transactions visualized in Article 12(3)( a ) is that all these transactions are such that when sale takes place by the resident of one Contracting State to the resident of the other Contracting State, consideration of sale is taxable under Article 12 in the source country as well. Article 12(3)( a ) and ( b ) only define as to what constitutes royalties and Article 12(2) provides that royalties and fees for included services arising in a Contracting State and paid to the resident of the other Contracting State may also be taxed in the Contracting State in which they arise, i.e., in the source country, though subject to certain restriction on the rate of tax. It is thus clear that when the principal sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, under article 8 of the Indo US tax treaty, the profits derived from operations of ships and aircraft are only taxable in the country of fiscal domicile, and source rule has no application on such profits. Since main activity itself does not lead to taxability in the source country, but is taxable only in the country of domicile, the same principle also applies on the services subsidiary and integral to the main activity. The principle thus is that the subsidiary and integral transactions have to take colours from the principal transaction itself and are not to be viewed in isolation, so far as taxability in the source country is concerned. 26. There are only two clauses, so far as exclusion of ancillary services from the scope of the fees for included services exigible to tax in the source country, in the treaty. In both these cases, the principle clearly is that when the main transaction is not exigible to tax in the source country, the subsidiary and ancillary transaction is also not exigible to tax in the source country. 27. It is also relevant to note that normally sale of goods does not lead to taxability in the other Contracting State, unless the resident of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndolan s case ( supra ) recognize the fact that one inconvenience is that the interpreter is likely to be required to cope with is disorganised composition instead of precision drafting . 30. Viewed in this perspective, in our considered view, prima facie the context and the setting in which sale of property is used in article 12(5)( a ) requires this expression to have limited meaning in the sense that only sale of such property is covered by this clause which does not lead to taxability of the sale proceeds on source rule basis. Any other view of the matter may perhaps lead to incongruous result that while the principal transaction of sale of the know-how will be taxable in the source country, a subsidiary transaction of imparting the training to use the know-how will not be taxable in the source country on the ground that it is inextricably and essentially linked to the sale of know-how. Accepting and admitting that the two transactions are inextricably linked to each other, different tax treatment may have to be given to these interdependent transactions in the source country. There is no explanation for this incongruity. An interpretation leading to such an incongru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of tax laws envisaged by the treaty, the general rules of interpretation should apply. Therefore, even when connotations of a treaty term are to be adopte as per the domestic law in the country of taxability, it cannot be done so as a thoughtless and mechanical process. Such meaning needs to be ascer- tained in order to ask whether context suggests a differential interpretation and, in the light of the weight given to the alternative interpretation, whether the context requires a different interpretation of the said term. Therefore, it is not merely the task if lifting the meaning of that term as per the domestic law in the country of application and applying the same without having regard to the totality of circumstances and scheme of things in the tax treaty. That would be, in fact, truly a case of making a fortress out of the dictionary - although a legal dictionary in this case. Considering the fact that in K.P. Verghese s case ( supra ). Hon ble Supreme Court deprecated such a practice in the context of interpretation of taxing statutes, it would be futile to even suggest that such an exercise can be permitted in interpretation of tax treaties. Dr. Vogel, in this book, ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scharging the onus to justify the same. It is nobody s case, not even the staunch supporters of the domestic law meaning s supremacy, that the contextual meaning can be ignored altogether in favour of the domestic law meaning. In the case before, we have already set out the reasons as to why, in our considered view, the interpretation of the treaty by adopting the domestic law meaning of the term property will result in an absurdity as to how the same can be avoided by giving the expression property a meaning which the present context, in our considered view, the said expression warrants and justifies. In the context of the interpretation of article 12(5)( a ) of the India US tax treaty, the meaning of the expression sale of property should be confined to only such a sale which does not lead to taxability of sale proceed on source rule basis as in article 12. The arguments of the learned counsel, relying upon the legal connotation of the expression property under the Indian laws, therefore, must fail. This is of course besides the point that even under Indian laws liberal connotations of the expression property are not universal or unqualified, and must depend upon the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of Kesho Ram Co. v. Union of India [1989] 3 SCC 151, it was stated by the Supreme Court thus (page 160): that "The binding effect of a decision of this Court does not depend upon whether a particular argument was considered or not, provided the point with reference to which the argument is advanced subsequently was actually decided in the earlier decision...." In such a situation, we are of the views that the objection raised by the assessee are devoid of any sustainable merits. In any event, having carefully gone through the said order passed by the co-ordinate bench, we are in most respectful agreement with the views so expressed our esteemed colleagues and we endorse and adopt the same. The arguments of the learned counsel on this issue do not meet our approval. 33. A lot of emphasis has been laid by the assessee on the order passed by another co-ordinate bench, in assessee s own case, restoring the matter to the file of the CIT(A) for examining the matter as the fact of training is ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of know-how. It is contended that the Tribunal has implicitly accepted the assessee s conte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unal in assessee s own case being ITA Nos. 5019 and 5020/B/95 dated 18-10-2002. In this case, Tribunal held that training was not only the ancillary and subsidiary services, but was also inextricably and essentially linked to the sale of plant. In such a case, the payment for consideration for the services stand excluded from the definition of fees for technical services as per the Double Taxation Avoidance Agreement for United Kingdom. 9.As per the prescription of section 9(1), income arising directly or indirectly through or from any business connection in India is deemed to accrue or arise in India. The charging section 4 as well as section 5 defining the total income are expressly made subject to the provisions of the Act, which means they are subject to the provisions of section 90. By necessary implication, it is subject to the terms of the Double Taxation Avoidance Agreement, if any, entered into by the Government of India with foreign countries. Even assuming that all the profits of foreign company are to be deemed to accrue or arise in India under section 9 of the Act, the provisions of the articles of the agreement will prevail over section 9. In effect, such profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pleas as may be taken by the assessee during the course of hearing before him. Therefore, having given our findings on what is argued before us and in deference to the decision of the co-ordinate bench, we see no harm in restoring this matter to the file of the CIT(A) for adjudication de novo. While examining the issue de novo , the CIT(A) shall consider whether or not the training is ancillary and subsidiary, as well as inextricably and essentially linked to the sale of know-how. The CIT(A) shall also examine whether or not the sale of know-how constitutes sale of property, in the light of our observations hereinabove and also in the light of the whatever submissions the assessee may wish to make, and deal with the same by way of a speaking order after giving adequate opportunity to the assessee to present its case. 38. In due deference to the order passed by the co-ordinate bench, we restore the matter to the file of the CIT(A) for examination de novo. While doing so, the CIT(A) shall examine ( i ) whether or not the training is ancillary and subsidiary, as well as inextricably and essentially linked to the sale of know-how, and ( ii ) whether or not the sale of know-ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d agreement is entered into. The very purpose of the agreement is thus to make available the "technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design" which is clearly covered by the scope of Article 12(4). It is clearly covered by the definition of the expression fees for technical services . The taxability of amounts of US $ 14,00,000 is thus confirmed and approved. 44. The only other issue that we are left with now is the question of taxability of reimbursement of incidental expenses. Following the view taken by the Hon ble Kerala High Court in the case of Cochin Refineries Ltd. v. CIT [1996] 222 ITR 354 and in assessee s own case, a co-ordinate bench of this Tribunal, to which one of us was a party, has approved the revenue s stand that even reimbursement of incidental expenses is required to be treated as a part of the fees for technical services for the purpose of the India US tax treaty. We see no reasons to take any other view of the matter than the view taken by the co-ordinate bench to which one of us was a party. Accordingly, we reject this contention also. No other argume ..... X X X X Extracts X X X X X X X X Extracts X X X X
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