TMI Blog2020 (12) TMI 776X X X X Extracts X X X X X X X X Extracts X X X X ..... ble bonafide view which is not manifestly erroneous- even though it is not the same as is the view taken by the residence jurisdiction. That aspect alone, however, is not the sole determinative factor in the present context since we have already held that, on the peculiarities of Indo Japanese tax treaty provisions, the legal fees paid to a partnership firm of lawyers can indeed be subjected to levy of tax under article 12 as the exclusion clause under article 12(4) does not get triggered for payments to persons other than individuals, and the provisions of article 14 are required to be read in harmony with the provisions of article 12(4). - ITA No. 2613/Mum/19 - - - Dated:- 18-12-2020 - Pramod Kumar (Vice President) And Pavan Kumar Gadale (Judicial Member) Dr. S M Lala, Dishesh Shrivastava, and Harsh Bafna for the appellant S S Iyengar for the respondent ORDER Per Pramod Kumar , VP : 1. By way of this appeal, the assessee appellant has challenged the correctness of the order dated 7th March 2019 passed by the learned Commissioner (Appeals) in the matter of assessment under section 143(3) of the Income Tax Act, 1961, for the assessment year 2014- 15. 2. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P.) Ltd. Vs DCIT [(2017) 84 taxmann.com 108 (Kol)]. The foreign tax credit of ₹ 80,55,856 was thus declined. Aggrieved, the assessee carried the matter in appeal before the learned Commissioner (Appeals), but without any success. Learned Commissioner (Appeals) referred to certain emails exchanged between the assessee and his Japanese clients, which show that the assessee had consistently taken a stand that the assessee could only be taxed under article 14 in Japan, and since the assessee admittedly did not have a fixed base in Japan for more than 183 days, which is sine qua non for taxation under that article, no taxes could legitimately be withheld from the payments in question. Learned Commissioner (Appeals) noted that the taxes withheld by the Japanese clients were contrary to the scheme of the Indo Japanese tax treaty, and, therefore, the assessee was not entitled to any foreign tax credit for the same. The action of the Assessing Officer was thus confirmed, and infact further fortified, by the learned Commissioner (Appeals). The assessee is not satisfied and is in further appeal before us. 4. We have heard Dr. Lala, learned counsel for the assessee, and Shri Iyengar, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not in harmony with the scheme of taxation in that tax treaty, he can decline the foreign tax credit under article 23(2)(a). The question, therefore, that we really need to adjudicate upon is whether the assessee could reasonably be said to be taxable in Japan under article 12, in respect of the professional income earned in Japan, of the Indo Japanese tax treaty. It is when the answer to this question is in the affirmative that the granting of the tax credit in respect of taxes so paid abroad could be considered, of course on merits, in the hands of the assessee. 6. Let us begin by taking a look at article 12 and article 14 of the Indo Japanese tax treaty, as they are relevant for the purposes of our adjudication on this core question. These provisions are reproduced below: ARTICLE 12- ROYALTIES FEES FOR TECHNICAL SERVICES 1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State. 2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that Contracting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties 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 fixed base is situated. 7. Where, by reason of special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties or fees for technical services, having regard to the use, right or information for which they are paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention. [Emphasis, by underlining, supplied by us] ARTICLE 14- INDEPENDENT PERSONAL SERVICES 1. Income derived by a resident of a Contracting State in respect of professional services or other activities of an ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dalco Industries Ltd Vs ACIT [(2005) 94 ITD 242 (Mum)], observed that 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, and this principle was reiterated in another coordinate bench decision in the case of DCIT Vs Boston Consulting Group Pte Ltd [(2005) 94 ITD 31 (Mum)]. Hon'ble Supreme Court, in the case of K.P. Varghese v. ITO [(1981) 131 ITR 597 (S.C.)] and even in the context of the 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 . When such are the views of the Hon'ble Supreme Court on the interpretation of taxing statutes, essentially the tax treaties, which are to be subject to less rigid rules of interpretation, cannot be subjected to literal interpreta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... again. This article makes it clear that so far as the exclusion clause of an income from professional activities is concerned, i.e. income taxable under article 14 as independent personal services, only when the income is so earned by an individual. The exclusion clause, under article 12(4), covers only payments to to any individual for independent personal services referred to in article 14 . It is also important to bear in mind the fact that the normally an exclusion clause for independent personal services, as embedded in the article dealing with the fees for technical services, would cover only what is taxable under the head' independent personal services'. It does indicate that under the scheme of this treaty, what is taxable under article 14 is only the professional income of an individual and not of entities other than individuals. While on this aspect of the matter, it is important to take note of the fact that there is a school of thought to the effect that article 14 comes into play only for individuals while article 7 is for entities other than individuals, and it is for this reason that article 14 was finally removed from the OECD Model Convention. Taking note ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee since, as we have already held, the assessee did have a P.E. in India under article 5(2)(k) of the India-UK tax treaty, and, accordingly, profits attributable to the P.E. are taxable under article 7 of the India-UK tax treaty. 9. In view of these discussions, there is a valid school of thought that in the scheme of the Indo Japanese tax treaty, article 14 for independent personal services holds the field for the individuals only- particularly in the light of the exclusion clause under article 12(4) being restricted to payment of fees for professional services to individuals alone. There is no dispute that the provisions of article 14 and article 12 are overlapping inasmuch as what is termed as professional service could also be covered by the fees for technical service- particularly as the definition of the fees for technical services is on 'classical model' of much wider scope and not on the 'make available model' now in vogue in many tax treaties. The only reason for which exclusion from article 12 was canvassed by the Assessing Officer was that rather specific provisions of article 14 have to make way for rather general provisions of article 12, but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dence jurisdiction. While it is indeed desirable that there should be uniformity in tax treaty interpretation in the treaty partner jurisdictions, it may not always be possible to do so in view of a large variety of variations, such as the sovereignty of judicial systems, domestic law overrides on the treaty provisions, the legal framework in which the treaties are to be interpreted, and the judge-made law in the respective jurisdictions etc. In a situation in which a transaction by resident of one of the contracting states is to be examined in both the treaty partner jurisdictions, from the point of view of taxability of income arising therefrom, different treatments being given by the treaty partner jurisdictions will result in incongruity and undue hardship to the assessee. On the subject uniformity of interpretation in the treaty partner jurisdictions, Lord Denning, in the case of Corocraft, said: If such be the view of the American Courts, we surely should take the same view. This convention should be given the same meaning throughout all the countries who were parties to it (1 Q.B. 616). The importance of uniformity of interpretation of expressions which are used in global ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that which the State of residence considers to be applicable [Emphasis, by underlining, supplied by us]. Therefore, it was a position well visualized by the multilateral bodies, developing the treaty provision in question, that in all the cases in which the interpretation of the residence country about the applicability of a treaty provision is not the same as that of the source jurisdiction about that provision, and yet the source country has levied taxes- whether directly or by way of tax withholding, the tax credit cannot be declined. To put a question to ourselves, what could possibly be the situations in which views of the source and residence jurisdictions may differ about the applicability of a treaty taxation provision, and yet the residence country could still provide the related tax credits. In our humble understanding, for the detailed reasons set out above, these are the cases in which the treaty partner source jurisdiction has taken a reasonable bonafide view which is not manifestly erroneous- even though it is not the same as is the view taken by the residence jurisdiction. That aspect alone, however, is not the sole determinative factor in the present context since ..... X X X X Extracts X X X X X X X X Extracts X X X X
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