TMI Blog2010 (5) TMI 523X X X X Extracts X X X X X X X X Extracts X X X X ..... ina tax treaty - That’s a conscious choice by the respective Governments, and just because China Pakistan have negotiated a bilateral tax treaty in a particular manner, it does not mean that India China tax treaty should also be construed on the same basis - . In the case of Hindalco Industries Ltd Vs ACIT this Tribunal had an occasion to set out the principles on the basis of which tax treaties are to be interpretated The impugned payment to the Chinese company, therefore, is covered by the scope of “fees for technical services” within meanings assigned to that expression under Article 12 of the Indian China tax treaty, and is taxable in India as such – The appeal of the assessee is dismissed - ITA No. 2508/Mum/08 - - - Dated:- 21-5-2010 - Shri Pramod Kumar (Accountant Member), J And Shri R S Padvekar (Judicial Member), J Appellant by : Shri Rajan Vora, and Smt Sheetal Shah Respondent by : Shri Ajit Kumar Sinha and Shri S K Mahapatra ORDER Per Pramod Kumar: 1. By way of this appeal, the appellant has called into question correctness of Commissioner (Appeals) order dated 25th February 2008, in the matter of ascertainment of tax withholding liabili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation under section 195 to the Assistant Director of Income Tax International Taxation Circle 1 (1) [hereinafter referred to as the Assessing Officer ] requesting him to certify and declare that no tax withholding is required to be made from the aforesaid remittance. It was contended by the AML that the Chinese company could be taxed in India only in terms of the provisions of the India China Double Taxation Avoidance Agreement1 (hereinafter referred to as the treaty or the Indo Chinese tax treaty ), which, being beneficial to the assessee, override the provisions of the Indian Income Tax Act, 1961 (hereinafter referred to as the Act ). It was further submitted that the receipts on account of bauxite testing service charges were in the nature of business profits of the Chinese company which, in view of the provisions of Article 7 of the treaty, could be taxed in India only in the event of the Chinese company having a permanent establishment in India. Since the Chinese company did not have any permanent establishment in India, according to the AMCL, the business profits of the Chinese company could not be taxed in India. It was further submitted that since the Chinese company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny cannot be taxed under Article 7 of the tax treaty. He fairly accepts that, in case impugned receipt is to be taxed under Article 12 as fees for technical services , the existence, or non existence, of the permanent establishment will be wholly irrelevant. He, however, contends that Article 12 cannot be applied on the facts of the present case, because unless the services rendered by resident of one of the contracting States (i.e China in the present case) are rendered in the other contracting State (i.e India in the present case), the payment for these services cannot be subjected to tax in that source state (i.e. India in the present case). It is submitted that part of services is rendered in India, the testing services could not be brought to tax in India in terms of provision of Article 12 of the tax treaty. It is contended that, unlike the provisions in most other tax treaties, the taxability of fees for technical services in the India China tax treaty has an additional requirement of place of performance in the source country, to be satisfied before it can be taxed as fees for technical services in the source country. He takes us through the provisions of Indo China tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le Supreme Court in the case of Ishikawajima4 and of Hon ble Bombay High Court in the case of Clifford any, have been set at rest by the retrospective amendment in Explanation to Section 9(1)(vii), as introduced by the Union Budget. It is submitted that once the proposed amendments are carried out, these judicial precedents will no longer constitute good law. (We may add that the proposed amendments relied upon by the learned Departmental Representative, on which have also heard the learned counsel for the assessee, are since carried out and legislative process for the same is duly completed.) As far as learned counsel s arguments on treaty provisions are concerned, learned Departmental Representative mainly contends that the deeming provision of Article 12(6) is quite clear and categorical, and we are urged to give it a sensible and reasonable meaning which makes the provision workable rather than making the provision redundant. It is submitted that when payment is made to a Chinese enterprise is made by an Indian enterprise, the fees for technical services is deemed to have arisen in India. In case we are to proceed on the basis that such deeming provision can only be invoked w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l fees received for the India Project, whether the work was done in India or outside India, was taxable in India. When this dispute finally travelled before the Hon ble Bombay High Court, it was, inter alia, contended by the assessee that the place of utilization of service is not relevant but place of performance of the service is what Hon ble Supreme Court s judgment in the case of Ishikawajima Harima Heavy Industries Ltd. vs. DIT [2007] 288 ITR 408 (SC ), Their Lordships noted that the taxability is to be determined under section 9(1)(vii) of the Act, and observed as follows : The apex court had occasion to consider the above question in the case of Ishikawajima Harima [2007] 288 ITR 408 (SC), wherein, while interpreting the provisions of section 9(1)(vii)(c) of the Act, the Supreme Court held as under (page 444) : Section 9(1)(vii)(c) of the Act states that a person who is a non-resident, where the fees are payable in respect of services utilized in a business or profession carried on by such person in India, or for the purposes of making or earning any income from any source of India . Reading the provision in its plain sense, as per the apex court it requ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AA. A distinction may also be made between rendition of services and utilization thereof. With the above understanding of law laid down by the apex court, if one turns to the facts of the case in hand and examines them on the touchstone, section 9(1)(vii)(c) which clearly states where the fees are payable in respect of services utilized in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India . It is thus, evident that section 9(1)(vii)(c), read in its plain, envisages the fulfillment of two conditions : services, which are source of income sought to be taxed in India must be (i) utilized in India, and (ii) rendered in India. In the present case, both these conditions have not been satisfied simultaneously. 8. It is thus clear that the judgment of Hon ble Bombay High Court rests on the legal premises that, under section 9(1)(vii), services, which are source of income sought to be taxed in India, must be (i) utilized in India; and (ii) rendered in India and the conceptual premises that internationally accepted principle . Learned counsel has laid lot of emphasis on these two principles. 9. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mestic legislations, of the double taxation ‐ either by way of exclusion of income from the scope of taxability in one of the competing jurisdictions or by way of tax credits. Except in a situation in which a territorial method of taxation is followed, which is usually also a lowest common factor in taxation policies of tax heavens, source rule is an integral part of the taxation residence rule, to a taxpayer is relieved only through the specified relief mechanism under the treaties and the domestic law. It is thus fallacious to proceed on the basis that territorial nexus to a tax jurisdiction being sine qua non to taxability in that jurisdiction is a normal international practice in all tax systems. This school of thought is now specifically supported by the retrospective amendment to section 9. 11. It is thus clear that Hon ble Bombay High Court s judgment in the case of Clifford Chance9 is no longer good law, as there have been amendments in law in consonance with the school of thought discussed above and these amendment unambiguously negate the principle of territorial nexus which is the understructure of line of reasoning adopted by the Hon ble Courts above. It is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for technical services arise, through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein; and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent or Article 14, as the case may be, shall apply. 6. Royalties or fees for technical services shall be deemed to arise in a Contracting State when the payer is the Government of that Contracting State, a political subdivision a local authority thereof or a resident of that Contracting State. Where, however the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contacting State a permanent establishment or a fixed best in connection with which the liability to pay the royalties or fees for technical services was incurred, and such royalties or fees for technical services are borne by such permanent establishment or fixed base then such royalties or fees for technical services shall be deemed to arise in the Contracting State in which the permanent establishment or fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carried out in one country is being made by a resident of another country who is carrying out such business or profession in the first country. In these situations, even though the payment is not received from a resident of the first country, the true source of earning is located in the first country. Second limb of Article 12(6) takes care of such situations and makes the manifestation of source rule even more unambiguous. It provides that even when person making the payment is not resident of the other contracting state but the payment is being made by him in connection with a permanent establishment or fixed base in the other contracting state, such royalties and fees for technical services will be deemed to have accrued in the other contracting state. In such a situation, the true source jurisdiction will be that other contracting state even though the payment may be made from outside both the contracting states, and, therefore, the income is deemed to have accrued in that other contracting state deeming fiction of Article 12(6), it is not really necessary to go into the broader question about the merits of his arguments on the scope of Article 12(4) and proceed on the basis th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not is essentially a decision at the level of the Governments and it depends on several considerations ‐ all of which do not necessarily reflect sound taxation or sound economic policies. Just because India does not seek a source taxation right in tax treaty with Saudia Arabia, or because Pakistan gives up a source taxation right in tax treaty with China, not at desirable to be influenced with what has been decided in other tax treaties entered into by the contracting states. As regards the references to India Israel and India Saudia Arabaia tax treaties12 , therefore, these are tax treaties with different countries and whatever is decided in these tax treaties does not influence the scope of tax treaty before usAs far as China Pakistan tax treaty13 is concerned, we have noted that while China Pakistan tax treaty refers to provision of rendering of any managerial, technical or consultancy services (emphasis supplied by us) , India China tax treaty refers to provision of services of managerial, technical or consultancy services . The scope the expression provision of services has to be something wider than provision of rendering of services . If at all this contrast w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... meaning given to the treaty in the context and in the light of its objects and purpose. * * A tax treaty is to required to be interpreted as a whole, which essentially implies that the provisions of the treaty are required to be construed in harmony with each other. * * The words employed in the tax treaties not being those of a regular Parliamentary draughtsman, the words need not examined in precise grammatical sense or in literal sense. Even departure from plain meaning of the language is permissible whenever context so requires, to avoid the absurdities and to interpret the treaty ut res magis valeat quam pereat i.e., in such * * A literal or legalistic meaning must be avoided 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 genera ..... X X X X Extracts X X X X X X X X Extracts X X X X
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