TMI Blog2002 (4) TMI 891X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. The issue price of each GDR was US $ 15.92. Each GDR represented 2 shares of the company of the face value of Rs. 10 per share. Approximately US $ 58 million were expected to be collected by the issue of the GDRs. 2. On 9-11-1994, certain documentation took place in connection with the issue of GDRs. Firstly, an agreement styled "subscription agreement" was entered into between the assessee-company on the one hand and (1) Merrill Lynch International Limited (2) Goldman Sachs (Asia) Limited and (3) DSP Financial Consultants Limited, on the other. Copies of this agreement are placed at pages 107 to 149 of the paper-book filed by the assessee. This agreement provided in detail for the rights and duties of the concerned partners vis-a-vis the GDR issue, warranties, approvals to be obtained, delivery of GDRs, payment, opinions to be obtained, commission payable to the managers of the issue and so on and so forth. 3. Secondly, an agreement styled "managers' agreement" was entered into on 9-11-1994 between Merrill Lynch International Limited on the one hand and (1) Goldman Sachs (Asia) Limited (2) DSP Financial Consultants Limited (3) Banque Paribas (4) Barclays de Zoete Wedd Limit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the depositary who subsequently issues the GDRs. The physical possession, of the shares is entrusted to a custodian, who, in the present case, is the ICICl. The custodian is the agent of the depositary. Thus a GDR represents the issuing of a company's shares, but it has a distinct entity and does not figure in the books of the company separately. According to the compendium referred to above, the main advantage of a GDR to the issuer company is that the company is not exposed to any exchange risk, although it is able to mobilise, foreign exchange by way of issue proceeds. The dividend outflow is in rupee terms, but the depositary converts this into US dollars and pays them to the ultimate investors. The GDRs are issued in foreign currency, they do not carry any voting right, there is no exchange risk for the issuer as it is issued in US dollars, they are listed at the Luxembourg Stock Exchange and are traded in two other places (e.g.OTC market in London and on the private placement market in USA), and do not have a lock-in period. 8. Normally, Indian companies issuing GDRs are forced to depend on the services of underwriters and international merchant bankers of repute for mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tails relating thereto in the order passed by the Assessing Officer. The CIT(A) also dealt with various other issues that arose in connection with the appeals and these will be noticed at the appropriate juncture. The assessee has filed two appeals, one challenging the decision of the CIT(A) with regard to the assessee's liability to deduct tax under section 195(1) and the other challenging his decision regarding the liability to pay interest under section 201(1) / (1A). This is how two appeals are before us. Issues 11. The various issues that arise in the appeals are as under:- (a) Is the selling commission, underwriting commission and management commission paid by the assessee to Merrill Lynch "fees for technical services" are chargeable as income in India with reference to the provisions of section 9(1)(vii) of the Income-tax Act and the provisions of the double tax agreement with UK ? In this connection, is the assessee correct in contending that there was first a sale of the GDRs to Merrill Lynch who in turn sold them to the investors? Again, is the assessee correct in contending that the arrangement under the documentation is one under which the assessee obtained a fini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns, the facts of the case and the orders of the income-tax authorities, we proceed to give our findings on the various issues arising in these appeals in the succeeding paragraphs. The "Resale or Subscription" theory 15. Put in its simplest form, the argument was that the assessee-company just sold the GDRs to the managers or that the agreement was that they should subscribe for the them and therefore there is no question of they rendering any kind of services to the assessee-company. They in turn sold the GDRs to the investors. Consequently, the assessee was under no liability to deduct tax. 16. The CIT(A) has adverted to this point in paragraph 18.4 of his order. The argument before him was that the assessee had no inter face with the investors in the GDRs except for the road shows, that the amount retained by the managers represented the discount and the balance remitted by them represented the sale price of the GDRs and thus nothing is taxable in their hands and consequently the assessee was not responsible for deducting any tax under section 195(1) as there is no income element. 17. This argument has been met by the CIT(A) by saying that though there is a "sprinkling o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anagers/underwriters who in turn sell them to the actual investors. 19. Another facet of the argument of Mr. Dastur was that this is not a case of a subscription "simpliciter" where the buyer retains the shares. It was pointed out that the managers are interested in disgorging the shares and they are merely being compensated by the assessee-company for the costs incurred. The "selling concession" given to them as per the agreement is only a discount from the sale price. The underwriting commission is paid for guaranteeing that the entire issue of GDRs will be subscribed. As held by the Supreme Court in the case of CITv. V.P. State Industrial Development Corpn. [1997] 225 ITR 703, the underwriting commission will only go to reduce the cost of the shares in the hands of the managers. 20. Relying on clauses 7(g) and (i) ("conditions precedent") of the "subscription agreement" it was further contended that the liability of the managers was to remit the "net subscription monies" which meant that the GDRs were sold to them and that the assessee-company would look to the managers for the sale proceeds. If was said that if the assessee were to file a suit in case an investor fails to p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pointed out that the sub-clause did not provide for any penalty or damages for defaulting managers which would be meaningless if the GDRs are considered sold by the assessee-company. It was further pointed out that by 9-11-1994, the date of the agreement, firm commitments from investors already existed and therefore the question of any sale of the GDRs to the managers could not possibly have been in contemplation. The presence of DSP Financial Consultants, an Indian company, it was finally argued, "exploded" the "purchase and resale" theory. DSP was registered as a merchant banker of category-l under Regulation 3(2)(a)(1) of Chapter-II of the SEBI Rules, 1992 (Securities and Exchange Board of India), which made it an Indian Merchant Banker who cannot buy or sell GDRs. Our attention was drawn in particular to regulations 13,20,22 and 26, read with Schedule-III of the Rules. The contention was that since an Indian Merchant Banker, who is prohibited from buying and selling GDRs, is party to the subscription agreement, it could not have been intended by the parties thereto that there would be a sale of the GDRs first to the lead manager and other managers and thereafter by them to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the assessee-company who is described as the "issuer". It was thus contended that even Rule 144A sales (to QIBs) are only resales. Mr, Dastur also pointed out that Rule 144A made a distinction between an "issuer" and "seller" and treated the sales under the Rule, of securities, as "resales", The assessee was the "issuer" and the managers (Merrill Lynch etc.) were the "sellers", which supported the "resale" theory. 24. Our attention was also drawn in the reply by Mr. Dastur to the reference to the lead managers and other managers agreeing "jointly and severally, with the Company, subject to the satisfaction of certain conditions, to subscribe for GDRs at the initial offering price...." appearing in the offering circular under the heading "Subscription and Sale" and it was contended that this also supported the sale or subscription theory. It was further pointed out that rule 144A allows it and therefore the resale theory is not a mere facade to cover up the real position in law. It was said that even the "managers' agreement", to which the assessee-company was not party, provided that the managers inter se agreed that they will purchase the GDRs though so far as the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... concluded alone should be looked into. But we are not sure whether the principle laid down in the above authority can be extended to commercial arrangements of the type with which we are concerned in this case. That was a case of a government grant and it was held that what mattered ultimately were the terms of the grant itself and not the "antecedent communings". But herein we are concerned with a commercial or financial transaction where an Indian company desires to mop up the savings of people outside India by issue of financial instruments that have gained currency in recent times. To such a situation we do not feel inclined to apply the Privy Council ruling and make the flow of events water-tight and isolated from each other. We would prefer to look at the events on a broader canvass and so viewed we find it difficult to hold that though there were firm commitments prior to 9-11-1994 for purchase of the GDRs from qualified institutional buyers still it must be held, on the strength of certain documentation between the parties where the words "resale" (with its grammatical variations) or "reoffer" are coined that there is a sale first to the managers and then by them to the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , that there is a purchase of or subscription to the GDRs by the lead managers (Merrill Lynch) but we would prefer to be guided by the substance of the matter rather than the form in which it is put through. As rightly pointed out on behalf of the Revenue, if it was a case of a simple sale of the GDRs to Merrill Lynch and thereafter a sale by them to the investing public, there is no need for such meticulous documentation defining the rights and duties of the concerned parties with regard to the services to be rendered by each of them in connection with the GDRs. There was also no need for the assessee to participate in the road shows. There was perhaps not even the need to issue an offering circular, which is in the nature of a prospectus giving complete details about the assessee company. There was no question of the assessee paying 3% or 4% of the sale proceeds as selling commission and reimbursing certain expenses to the lead managers. For all these reasons, we are unable to hold that the effect of the documentation is that there is a sale of the GDRs to Merrill Lynch first and thereafter a resale by the latter to the investing public. For the same reasons, the argument that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was interested only in ensuring the success of the issue and so long as the managers were able to inform the assessee that the issue has been successfully put through, the assessee company was not interested in the type of technical services which the managers might have rendered. In other words, it was said that the assessee company and the managers have in substance agreed that the latter would ensure that the GDR issue was successfully marketed. In this view of the matter, it cannot be said that there was a rendering of any managerial, technical or consultancy services within the meaning of Explanation (2) to section9(1)(vii) of the Income-tax Act. It is also added that even assuming that the entire GDR issue was under-written by the managers, under-writing was only a financial activity or service. The assessee was really not interested in knowing under what category the type of services rendered by the Managers would fall so long as the GDR was successfully put through. Thus, the deal between the assessee company and the managers was that the assessee would look upon the managers to ensure that the GDR issue was successfully marketed without bothering about what type of servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and on the basis of their reputation. The reputation arises because of the type and nature of the services undertaken to be rendered by them. Thus, it is not possible to accept the "finished package" theory. In our considered opinion, the payment has been made to the managers only for services rendered by them in connection with the GDR issue. Applicability of section 9(1)(vii) 34. We may recall that the first two limbs of the arguments of Mr. Dastur, the learned counsel for the assessee were based on the "resale" theory and the "finished package" theory. The attempt was to show that if either of the two theories is accepted, then it would mean that what was paid to the managers would not partake the character of income in their hands. In the case of the resale theory, there would have been no question of the assessee paying any income to the managers as the income would have been made or generated by the managers themselves by buying the GDRs from the assessee and selling them in Europe and USA for a profit. In the case of the "finished package" theory, the assessee would be paying for something which it has acquired or bought as a package and whatever has been paid cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries".' 36. The contention of Mr. Dastur was that since all under-writing activities took place outside India, the aforesaid statutory provision is not attracted. This was controverted by Mr. Kapila on behalf of the department, by contending that the services were rendered in India, because the primary activity in connection with the issue of GDRs was the issue of shares which was in India and all other activities, though rendered abroad, were merely supplementaries. It was thus contended by him that the provisions are attracted. 37. We have to notice, at this juncture, a point made by the CIT (Appeals) in paragraph 18.2 of his order. In this paragraph, he has referred to the argument of the assessee that since most of the services were rendered outside India, the remuneration paid for them is not taxable in India. He has held that the argument "does not have any legal support and the provisions of Explanation (2) to section 9(1)(vii)". He has further held that "the stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India". According to the section, all income by way of fees for technical services payable by a person who is resident in India is deemed to accrue or arise in India. The only exception is where such fees are payable "in respect of services utilised in a business or profession carried on by such person outside India". It is not necessary for the purpose of attracting the section that the services should be utilised "in India". There is a distinction between services utilised "in India" and services utilized "in a business carried on in India". No doubt, the services of the managers of the GDR issue have been rendered outside India, but they have been utilised for the purpose of the assessee's business, which is carried on in India. Since the assessee has no business outside India, it follows that the services were utilised only for the purpose of business carried on in India, thus attracting the statutory provision. 40. The argument on behalf of the department that the services were rendered only in India because the primary activity is of issue of shares, is too broad to be accepted. The services were actually rendered abroad and not in India. However, the argument need not be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erson having a specialised knowledge and experience in accountancy was contended to be irrelevant for the purpose of ascertaining whether the services by the managers in the present case amounted to managerial, technical or consultancy services. According to Mr. Dastur, giving or grant of a loan does not involve the idea of any services being rendered by the lender which are in the nature of managerial, technical or consultancy services and therefore any advice given in connection with the procurement of a loan cannot also be a managerial, technical or consultancy service. By issuing GDRs the assessee was actually mobilising resources for the purpose of its business in India and any advice given by the managers as to how to go about the GDR issue, cannot be equated to the rendering of managerial, technical or consultancy services. 44. Coming to the specifics, Mr. Dastur on behalf of the assessee pointed out that clause (4) of the subscription agreement dated 9-11-1994 provided for the payment of (i) management commission, (ii) under-writing commission and (iii) selling concession. His contention was that items (ii) and (iii) i.e., under-writing commission and selling concession c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t or machinery so fabricated, is acquired or purchased by the assessee. 45. As regards the judgment of the Supreme Court in the case of Oberoi Hotels India (P.) Ltd. relied upon by the CIT(A), the argument of Mr. Dastur was that it is distinguishable on facts in the sense that the assessee in that case was rendering all types of services and was thus virtually managing the whole show which is not the case here. It was said that the decision must be "read in the context". Our attention was drawn to the observations of the court in pages 171 to 173 of the report (231 ITR) to the effect that the term "technical services" appearing in section 80-0 of the Act included "professional services", a controversy which, according to Mr. Dastur, does not arise in the case before us. 46. The judgment of the Supreme Court in the case of GVK Industries Ltd. relied on by the department was also sought to be distinguished on facts. It was claimed that in that case advice was given as to how a loan could be obtained and it was held that such advice amounted to rendering of "technical services". In the present case, it was said, the assessee did not utilise any advice given by the non-resident com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the managers before 9-11-1994 would establish the fact that none of the agreements entered into on 9-11-1994 would have been executed but for those services. All technical services, according to him, were rendered by the managers six months prior to 9-11-1994. It all started with the Board meeting on 22-2-1994 where the proposal to issue GDRs was discussed. He pointed out that even according to the assessee payments were made for certain advisory work, planning, arranging of offering, road shows and fees for legal counsel etc. prior to 9-11-1994. In fact the road shows started on 17-10-1994 as stated by the Assessing Officer in para 5 of the aforesaid order. He also drew our attention to the board resolution passed on 29-9-1994 which adverted to what he described as certain "very important inputs given by Merrill Lynch" such as suggestions and advice regarding the size of the issue, mode of raising funds and the premium to be charged in consultation with it (Merrill Lynch) etc. 49. Mr. Kapila further submitted that "this contract (the one dated 23-10-1994) is between the assessee and Merrill Lynch Asia Pacific and not Merrill Lynch International which stepped in only later". Acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad shows". The letter also provides for joint determination of the timing of the issue. It was for the company to obtain all prior approvals as per Indian legal requirements. As for such approvals to be obtained outside India, the company will abide by the advice and assistance of Merrill Lynch. A "gross underwriting spread" of 396 of the aggregate subscription price of the GDRs and expenses to be reimbursed was agreed upon. It was also agreed that when formal contracts are entered into they will supersede the terms of the letter and by such formal contracts the terms of the letter may be modified or amended. It is only in accordance with the terms of this letter that subsequent contracts were entered into on 9-11-1994. Elaborate and meticulous documentation was prepared which is only to be expected considering the importance of the arrangement and the parties involved. No doubt certain terms were modified as for example the fees payable which was a consolidated 396 plus expenses as per the letter but was specified clearly under three different heads in the "subscription agreement". But from this it does not follow, with respect to Mr. Kapila's argument, that we have to view the en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e RBI about the appointment of DSP Financial Consultants Limited as "co-lead manager" along with Merrill Lynch. 55. The first of these charges was countered by Mr. Dastur for the assessee by saying that the preliminary offering letter was part of the final offering circular dated 9-11-1994 which was unquestionably before the income-tax authorities. In our opinion, this controversy is needless to be decided in this case. Firstly, the assessee-company had undertaken to file the preliminary offering memorandum with SEBI, the concerned stock exchange and the Registrar of Companies - see assessee's letter dated 15-9-1994 to the RBI at page 77 of the paperbook filed by the Department. There is nothing to show that this undertaking was not complied with. Having filed it with some wings of the Government of India, the assessee could have had no motive to withhold the same from the income-tax authorities. Secondly, even if it is assumed that it was not filed with the income-tax authorities, that does not appear to us to be quite an intentional omission with any oblique motive, considering that all the other documentation has been filed with them, both relating to events prior to 9-11- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the Offering; (b) The prospectus is to be prepared by the lead managers together with the assessee-company to international investor standards and with due diligence; (c) Merrill Lynch will make marketing efforts including "road shows" in which the assessee-company will participate - such presentations will be in cities in the USA, Europe, Japan, Singapore and Hongkong; (d) The lead manager will advice and assist the company in obtaining approvals and permissions as are required to be obtained outside India. The resolution of the Board of Directors of the assessee-company passed on 29-9-1994, a copy of which is at page 81 of the Department's paperbook No. 1, acknowledges the following services rendered by Merrill Lynch: (a) Advice/suggestion regarding the size of the issue; (b) Mode of raising the funds and (c) The premium to be charged - the final decision of course to rest with the company. 58. The whole exercise had started, as pointed out by Mr. Kapila, much earlier than 9-11-1994 and services had also been rendered by the lead managers in connection therewith. As already noted, the arrangement which had been in existence prior to the said date in an informal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm could reduce the cost of the shares by the amount of the underwriting commission. We are unable to understand the judgment as laying down as a general proposition of law that underwriting commission is not income in all cases. The principle laid down by the judgment, in our humble understanding, is confined to cases where the underwriter is called upon to acquire the shares which he had underwritten and also receives commission in respect of that part which is subscribed by the investors. We are afraid that if it is meant to be contended, relying on this decision, that underwriting commission can under no circumstances be considered as income, the proposition is put rather too broadly for acceptance. We need not however, consider this decision in further detail because we have taken the view that underwriting commission, insofar as it relates to the issue of GDRs outside USA, cannot be considered as managerial, technical or consultancy service, within the meaning of section 9(1)(vii) r.w. Explanation (2). 61. That takes us to a consideration of the question as to whether the other services rendered by the managers both before and after 9-11-1994 can be considered as "manageria ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "running" of the business is, with respect, not borne out by the language of the sub-clause. We also understand the argument as impliedly making a distinction between services utilised in the capital field and those utilised in the day-to-day running of the business, a distinction that is again, in our view, not borne out by the language used in the sub-clause.The only condition required by the sub-clause is that the services should have been utilised in a business carried on in India, whether in the capital field or in the day-to-day running of the business. 63. The other argument placed by Mr. Dastur, viz., that the services rendered by the managers are part of a larger underwriting activity and are only incidental thereto and hence the fees paid for the same must be considered as having been paid only for the underwriting activity might have merited acceptance had it not been for clause (4) of the subscription agreement which itself makes a distinction between management commission and underwriting commission. This indicates that the parties themselves did not view the services as part of the predominant activity of underwriting. With respect, therefore, the argument cannot b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... econd alternative argument of Mr. Dastur, learned counsel for the assessee is perhaps the most important "argument advanced by him ... since acceptance thereof the entire gamut of the other arguments already -adverted to by us wholly academic. 67. Mr. Dastur's argument based on the double-tax avoidance agreement (DTA, for short) with UK runs like this. According to Article 13.4(c) of the DTA which came into effect from 26-10-1993, "fees for technical services" has been defined to mean "payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including the provision of services of technical or other personnel) which make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design". Under the definition, firstly, managerial services have been excluded. This is a conscious departure from the definition in the earlier DTA where Article 13.4 used language that was similar to section 9(1)(vii) and included "managerial" services also in its ambit. Secondly, under the definition in the present DTA, fees paid for a mere rendering of technic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed "included services" (i.e. as technical services) only to the extent that they make available technical knowledge, experience etc. It further says that consultancy services which are not of a technical nature cannot be considered as included services (i.e. technical services). 69. Mr. Dastur further drew our attention to the following observations in the MoU:- "Generally speaking, technology will be considered "made available" when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skills etc. are made available to the person purchasing the service, within the meaning of paragraph 4(b). Similarly the use of a product which embodies technology shall not per se be considered to make the technology available." 70 The MoU gives certain examples of technology being made available. These are as under:- 1. Biotechnical services 2. Food processing 3. Environmental and ecological services 4. Communication through satellite or otherwise 5. Energy conservation 6. Exploration or exploitation of minera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Circular No. 333 issued by the CBDT on 2-4-1982 confirming this position. 75. Mr. Dastur also pointed out that "professional services" were separately dealt with in Article 15 of the DTA with UK and contrasted the same with section 80-O of the Income-tax Act where managerial services are defined to include professional services. In Article 15.3 of the DTA with UK, professional services are defined to include independent activities of physicians, surgeons, lawyers, accountants, engineers, architects etc. as well as independent scientific, literary, artistic, educational or teaching activities. In this connection, he referred to para 18.5 at page 24 of the order of the CIT(A), where the latter has relied on section 80RRA of the Income-tax Act which defines "technician" to include a person having specialised knowledge and experience in accountancy and submitted that the special definition is only for the purposes of that particular section since normally an accountant is never considered to be a technician. At any rate, submitted Mr. Dastur, the CIT(A) was off the mark in equating the profession of accountancy with under-writing activity, both of which are quite different from eac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t they were binding only on the parties thereto. The letters of understanding under one treaty cannot therefore be applied to the interpretation of another treaty with another country. The MoU under the US treaty (DTA) on which reliance was placed by Mr. Dastur for the assessee, according to Mr. Kapila, cannot therefore be looked into for understanding the provisions of the DTA with UK. He pointed out that the words "which enables the person acquiring the services to apply the technology contained therein" appearing in Article 12.4(b) of the DTA with Singapore entered into on 8-8-1994 are missing in the concerned article in the DTA with UK Only if such words are present in the concerned article of the DTA with UK can it be successfully contended, says Mr. Kapila for the Department, that the payer of the fees must be in a position to apply the technology in future for its own use and so long as words to that effect are not present in the concerned article it is sufficient if the payer of the fees has enjoyed or utilised the services of the non-resident. 80. Mr. Kapila's further contention was with regard to the meaning of the words "make available". According to him, these words ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fundamental analysis of the underlying. The results lead to investment strategies such as index arbitrage or program trading, which is a form of applied technical analysis aimed at exploiting the observed short-run price differences between markets. A person who makes predictions based on the techniques is known as a technical analyst (cf. quant)" 84. In his reply to the above arguments, Mr. Dastur, learned counsel for the assessee, relying on paragraphs 28 to 38 of the order under section 195, submitted that the Assessing Officer himself had applied the provisions of the DTA with UK and therefore it is no longer open to the Department to raise the point that the said DTA was not applicable. The Assessing Officer has even adopted, it was pointed out, the rate of tax of 15% as per Article 13 of the DTA. Mr. Dastur also took this opportunity to point out that the charge of the Department before us that the assessee-company did not point out the UK moorings of Merrill Lynch (vis-a-vis the fact that the agreement dated 23-10-1994 was in the letterhead of Merrill Lynch Asia Pacific Region, Hongkong) was baseless, as unless the assessee had informed the fact that Merrill Lynch was bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... value which the assessee can make use of is necessary" and in this case whatever was made available to the assessee-company worked itself out the moment the GDRs were issued. Something must remain available to the assessee over and above the benefit derived from rendering the services which is covered by the first part of Article 13.4 and the assessee must be in a position to apply the benefit of those services in future. He relied on the definition of the words "make available" given in Oxford Dictionary to mean that something should be within one's reach so that one can use it. 86. As regards the principles to be applied to the interpretation of double tax avoidance agreements, Mr. Dastur submitted that the Singapore and US agreements can certainty be looked into as "aids to construction" and cannot be ignored. He submitted that the MoU explained the treaty with USA which was entered into in 1990, whereas in the 1994 treaty with Singapore it was made part of the relevant article itself which showed that it was a process of evolution enriched by experience. Therefore, it was contended, one can certainly look into the Singapore and US treaties in order to understand the scope and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 26-9-1994 which on 23-10-1994 became a contract between the assessee and Merrill Lynch has no doubt been written by the Asia Pacific Regional office of Merrill Lynch but that, it is reasonable to assume, is only because it was the regional office of Merrill Lynch of UK. As it turned out later, the subscription agreement was entered into with Merrill Lynch of UK. We have already seen that there can be no watertight compartmentalisation between what happened before and after 9-11-1994. Nothing has been brought on record to show that Merrill Lynch UK has disowned the contract of appointment or the terms and conditions thereof embodied in the letter dated 26-9-1994 which was signed by the assessee-company on 23-10-1994. This letter refers to "Merrill Lynch International Limited" which is situated in UK. The appointment as lead manager is of Merrill Lynch International Limited as is clear from this letter itself. Further, the subscription agreement is, inter alia, with Merrill Lynch International Limited and not with Merrill Lynch, Asia Pacific Region, Hongkong. The managers' agreement dated 9-11-1994 also refers to Merrill Lynch International Limited and the complete London address ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this article; (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 private 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 partnership for professional services as defined in article 15 (Independent personal services) of this Convention." The definition of "technical services" in Article 13.4 of the earlier DTA agreement with UK which was superseded by the 1993 agreement, was similar to the language employed in section 9(1)(vii) of the Income- tax Act, 1961 and included "managerial" services. But in the subsequent agreement in 1993, the Article 13.4(c) used different language as may be seen. It dropped the "managerial" services. There are also significant additions. It is however common ground that Article 13.5 does not apply. We should also keep in view the gentle but firm reminder of Mr. Dastur that in the meantime (1990) India had entered into a DTA with USA an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsequent to the "making use of" stage. The qualifying word is "which" - the use of this relative pronoun as a conjunction is to denote some additional function the "rendering of services" must fulfil. And that is that it should also "make available" technical knowledge, experience, skill etc. In grammar, the word "which" is called a relative pronoun "because it refers or relates (i.e. carries us back) to some noun going before, which is called its Antecedent". The noun going before the relative pronoun "which" in the article is "services". At pages 46 47 of the same book by Wren Martin, it is stated as under: "Note - The relative pronouns "who" and "which" can be used - (i) To restrict, limit, or define more clearly the antecedent;......... (ii) To give some additional information about the antecedent; ........." (italicised ours). 92. We hold that the word "which" occurring in the article after the word "services" and before the words "make available" not only describes or defines more clearly the antecedent noun ("services") but also gives additional information about the same in the sense that it requires that the services should result in making available to the use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt. No technical knowledge, experience, skills, plan or design is held to have been made available in such a case. However, in contrast, example (5) is of a US company rendering certain services in connection with modifying the software used by the Indian company to suit a particular purpose. A modified computer software programme is supplied by the US company to the Indian company. It is therefore held that there is a transfer of a technical plan (i.e., computer software) which the US company has developed and made available to the Indian company. The fees are chargeable. These examples affirm the position taken by the assessee-company before us as to the interpretation of the words "make available". 95. Article 12.4(b) of the DTA with Singapore was relied on by both sides - by Mr. Dastur to show that the words used therein, viz. "if such services. make available technical knowledge, experience, skill, know-how or processes, which enables the person acquiring the services to apply the technology contained therein..." merely make it explicit what is meant by "make available" while Mr. Kapila contended that these words being absent in the DTA with UK, it indicates that the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reasons, we are of the considered opinion that (1) the DTA with UK applies to the present case and (2) no technical knowledge, experience, skills, know-how or process etc. was "made available" to the assessee-company by the non-resident managers to the GDR issue (Merrill Lynch and others) within the meaning of article 13.4(c) of the DTA. What happens if the DTA with UK is applicable? 98. We now proceed to consider the consequence of our conclusion that the DTA with UK is applicable to the present case. 99. It was very fairly stated by Mr. Kapila, learned representative for the Revenue, that if the DTA is held applicable, then no part of the fees for "managerial services" can be considered as fees for technical services, since the word "managerial" does not find a place in the article concerned. There can be no two opinions about his view. We therefore hold that the "management commission" of US$ .0938 per GDR cannot be charged to tax in the hands of Merrill Lynch to whom the same is paid. The assessee-company consequently was under no obligation to deduct tax under section 195. We hold accordingly. 100. As regards the "underwriting commission", in view of the foregoing d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning of the DTA with UK and consequently there is no obligation on the part of the assessee-company to deduct tax under section 195. No payment, no credit - is section 195 applicable? 104. One of the arguments of Mr. Dastur was that since the amount payable to Merrill Lynch was not actually paid but was allowed to be deducted out of the sale proceeds of the GDR issue there was neither a payment to Merrill Lynch nor a credit in its favour and therefore section 195 is not attracted. At our instance, he explained the accounting entries made in this behalf by the assessee-company. According to him, section 195(1) has to be complied with only when there is a "payment in fact" and not a payment by a deeming or a fiction. Reliance was also placed by him on the judgment of the Hon'ble Bombay High Court in Hyundai Heavy Engg. Industries Co. Ltd. v. D.C. Pant [1993] 204 ITR 113. The contention of Mr. Kapila on the other hand, relying on the judgment of the Supreme Court in J.B. Boda Co. (P.) Ltd. v. CBDT [1997] 223 ITR 271, was that the present case is one of actual payment as much as it was an actual receipt in the cited case and there was no need for a "two-way traffic" receipt of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee-company under the relevant agreements. The question is whether this can amount to "payment". Mr. Kapila's reliance in this behalf on J. B. Boda Co. (P.) Ltd. appears to us to be well placed. Just as the assessee in that case was held to have "paid" the commission to a person outside India by merely deducting the same from the amounts payable to the non-resident and remitting only the balance, the assessee-company before us must be considered to have "paid" the amounts payable to Merrill Lynch under the subscription agreement by permitting the latter to deduct the amounts payable to it and remit only the balance. The sub-section mentions different modes of payment - cash, cheque, draft "or any other mode". In our view, an adjustment of the amount payable to the non-resident or deduction thereof by the non-resident from the amounts due to the resident-payer (of the income) would fall to be considered under "any other mode". Such adjustment or deduction also is equivalent to actual payment. The principle laid down in J. B. Boda Co. (P.) Ltd.'s case would squarely apply. Commercial transactions very often take place in the aforesaid manner and the provisions of section 195 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... both the orders were dealt with by the CIT(Appeals) as one and the same, as was clear from para 18.1 of his order in the appeal against the order under section 195(1). He agreed that there existed no provision for passing an order under section 195(1), but submitted that the substance of the matter has to be looked at and not the form in which it has been presented or dealt with. 113. On a consideration of the matter, we are of the view that section 195(1) merely declares the liability to deduct tax under certain circumstances and does not contemplate the passing of any order, which position has not been contested by Mr. Kapila on behalf of the Revenue. The reference to section 248 by the Assessing Officer does not appear to be apposite because that section provides for a right of appeal to a person who denies his liability to make the deduction of tax, even though he has deducted and paid the tax. In other words, it would appear to be a condition for filing an appeal under section 248 that the person should have deducted and paid the tax. Only in such a case, a right of appeal is granted, where he could deny his liability to make the deduction. In the present case, the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unable to give effect to the same. 115. Mr. Dastur then criticised as "untenable" the view taken by the CIT(A) in paragraph 18.7 of his order passed in the appeal against the order under section 195. The view taken by the CIT(A) is that a valid order can be passed under section 195 for the assessee's failure to deduct tax under section 195(1) and also for his failure to file an application under section 195(2) or section 195(3). According to him, these sub-sections impose statutory obligations on the assessee and if there is a failure to comply with the same, an order can be passed under section 195. Mr. Dastur points out that the obligation to deduct tax is on the sum chargeable to tax under the Income-tax Act and sub-section (2) of section 195 comes into play only if the assessee himself considers that a part of the sum is so chargeable. He refers to the judgment of the Hon'ble Bombay High Court in the case of CIT v. Cooper Engg. Ltd. [1968] 68 ITR 457. As regards the reliance placed by the CIT(A) on the judgment of the Supreme Court in the case of Transmission Corporation of A.P. Ltd. v. CIT [1999] 239 ITR 587, Mr. Dastur submits that the CIT(A) has (1) taken the observatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (pure income) undoubtedly the tax has to be charged at the appropriate rates on the whole of such sum and deducted and paid. If the sum is only partly chargeable (embedded or hidden income), the assessee has to apply under section 195(2) to the Assessing Officer for determination of the appropriate fraction of the income hidden or embedded therein. The Assessing Officer in that case will have to pass an order on the assessee's application determining the appropriate portion. The assessee has a right of appeal against such order under section 248 but that right of appeal can be exercised only if the tax is deducted and paid. In a case where no such application is filed, then according to the judgment, the assessee is liable to deduct tax on the footing that the whole sum is chargeable to tax (observations of the Supreme Court at page 595). This observation has to be however reconciled and read with the answers given finally to the questions referred and the view expressed by the Supreme Court on the correctness of the judgment of the High Court. In the penultimate paragraph of the judgment, the Supreme Court upheld the answers given by the High Court that (1) the assessee in that c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... merely declares the liability of the assessee to deduct and pay the tax. (ii) since there is no application under sub-section (2) for determination of the appropriate proportion of the income (hidden or embedded income), and consequently no order under that sub-section, the provisions of section 248 are not attracted. (iii) but for that reason the appeal cannot be held invalid because in substance it is against the order under section 201(1) and (1A) to which the so called order under section 195(1) has been made an enclosure. The "order" under section 195(1) has to be incorporated into and read as part of the order under section 201(1) and (1A) and so read the effective appeal in law is the one against the said order. Can the tax be recovered from the assessee-company? 120. It was contended by Mr. Dastur for the assessee that in the absence of a notice of demand served on the assessee, the amount of tax in respect of which the assessee has been considered to be in default cannot be recovered. He pointed out that there is no provision in the Income-tax Act to recover the tax. According to him, the only course open to the Assessing Officer for recovering the tax was to pass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent order, or notice of demand, but because of the operation of the statute itself. The liability under section 195 or section 201 is at no time ambulatory, but is attracted immediately upon the happening of an event, viz., the failure to deduct tax. There is no further requirement of computation or assessment. Once the liability is incurred, no further demand is necessary to recover the tax, according to the Kerala High Court. Under the circumstances, we hold that the tax can be recovered from the assessee-company. 122. Mr. Kapila submitted that the income-tax authorities certainly could have treated the lead manager Merrill Lynch International Ltd. as a defaulter through an order passed on the assessee-company under section 163 making it the agent of Merrill Lynch but that was an option which they had and since under section 195(1), as it stands after the amendment made by the Finance Act, 1987 w.e.f. 1-6-1987, the assessee-company was more than a "statutory agent" under section 163, the position was a "a fortiori". The section, as it stood before the amendment, exempted agents constituted as such under section 163 of the Act from deducting tax from chargeable payments made to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of both the appeals before the CIT(A), against the column where the assessee is required to state the date of service of the notice of demand, the assessee-company has referred to tax "purportedly demanded from the appellant" and has also stated that no notice of demand has been served on it both in respect of the tax and interest. 125. We therefore find this issue against the assessee-company. Interest under section 201(1A) - Is the levy proper? 126. Mr. Dastur took up the contention that the levy of interest was invalid on two grounds: (a) that the assessee-company acted on the bona fide belief that the amount paid to Merrill Lynch was not taxable, and (b) the assessee-company acted honestly on the advice of M/s. Skadden, Arps, Slate, Megher Flom, Solicitors in not deducting tax, the opinion given by them being that there was first a sale to the lead managers and thereafter a sale by the lead managers to the investing public. He cited the judgment of the Madhya Pradesh High Court in Gwalior Rayon Silk Co. Ltd. v. CIT [1983] 140 ITR 832. 127. Mr. Kapila opposed the contention on the ground that the bona fide of the assessee-company was not relevant for decidi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "furnished package". (3) The services rendered by the lead managers/managers in connection with the GDR issue fall within the definition of "technical services" under section 9(1)(vii) of the Income-tax Act, 1961, read with Explanation 2 thereto. Those services are "managerial" or "consultancy" services. The management commission and selling concession/commission are therefore income of the lead managers/managers deemed to accrue or arise in India and accordingly, the assessee-company was liable to deduct tax under section 195(1). However, the underwriting services are not "technical" services. Therefore the underwriting Commission does not fall within section 9(1)(vii), insofar as it relates to the issue of GDRs outside USA. The assessee-company was not therefore liable to deduct tax therefrom under section 195(1). As regards the GDRs issued in USA to qualified institutional buyers, there was no underwriting and therefore what was paid as underwriting commission was not in fact so and therefore this part of the payment would be income by way of fees for technical services deemed to arise or accrue in India within the meaning of section 9(1)(vii) and accordingly the assessee-com ..... X X X X Extracts X X X X X X X X Extracts X X X X
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