TaxTMI 
TaxTMI 
2023 (7) TMI 81
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.... up as a lead case. ITA No. 1046/Mum./2023 Revenue's appeal - A.Y. 2017-18 3. In this appeal, the Revenue has raised the following grounds:- "1. On the facts and the circumstances of the case and in law, allowing tax relief in regard to income earned in Japan. The Ld. CIT(A) has not considered the provisions of Article 14A of India-Japan DTAA dealing with Independent Personal Services. As per the provision of Article 14A the income itself is not taxable, the tax credit in respect thereof is not allowable. 2. The appellant prays that the order of CIT(A) on the above ground be set-aside and that of the Assessing officer be restored. 3. The appellant craves leave to amend of alter any ground or add a new ground which may be necessary". 4. The only grievance of the Revenue is against the allowance of credit to the assessee of taxes which are withheld by the clients domiciled in Japan. 5. The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is a law firm. During the year under consideration, the assessee filed its return of income on 31/10/2017 declaring a total income of Rs. 90,38,34,944. The ret....
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....required to be withheld, as it was in the nature of independent personal services. Accordingly, the AO denied the foreign tax credit of Rs. 77,29,804 claimed by the assessee under section 90 of the Act. Further, the AO rejected the alternative claim of the assessee of reducing the turnover to the extent of the foreign tax credit, as the assessee has received the net amount in India, following the approach adopted in the case of the principal firm, i.e. Amarchand and Mangaldas and Suresh A Shroff & Co., for the assessment year 2014-15. 7. The learned CIT(A), vide impugned order, following the decision of the coordinate bench of the Tribunal rendered in the case of the principal firm for the assessment year 2014-15 allowed the claim of foreign tax credit under section 90 of the Act to the assessee, after finding the facts to be identical. Being aggrieved, the Revenue is in appeal before us. 8. During the hearing, the learned Authorised Representative placed reliance upon the decision of the coordinate bench rendered in the case of the principal firm. On the other hand, the learned Departmental Representative vehemently relied upon the order passed by the AO. 9. We have consi....
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....h the State of residence considers to be applicable". Essentially, therefore, it is open to the Assessing Officer to take a call on whether the taxes withheld in the treaty partner jurisdiction could be reasonably said to be in harmony with or in conformity with the provisions of the related tax treaty, and in a case in which he comes to the conclusion that the taxes so withheld in the treaty partner jurisdiction could indeed be reasonably said to be 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....
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....ties and fees for technical services shall be deemed to arise in a Contracting State when the payer is that Contracting State itself, a political sub- division, 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 Contracting State a permanent establishment or a fixed base 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 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 r....
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...., therefore, when a particular type of income is specifically covered by a treaty provision, the taxability of that type of income is governed by the specific provisions so contained in the treaty. However, it is equally well settled a legal position that a treaty is to be read as whole and, therefore, different articles cannot be read on a standalone basis dehors the scheme of the tax treaty. A coordinate bench of this Tribunal and speaking through one of us (i.e. the Vice President) has, in the case of Hindalco 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 "....
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....ver well established, can have priority over another principle of interpretation which is legally binding. The principle of generalia specialibus non derogant, i.e., general provisions do not override the specific provisions, is, therefore, required to be read for the purposes of individuals alone, so far as the provisions of article 14 are concerned, as is implicit in the scheme of the Indo-Japanese tax treaty as discussed above. Let us, in this background, take a look at the provision of article 12(4) once 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 indi....
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.... the one that we are in seisin of, i.e., in which specific provisions for professional services or independent personal services or included services exist under article 15, when services are rendered by the enterprise, article 5(2)(k) will come into play, and when services are rendered by an individual, article 15 will find application. Therefore, while we agree with the learned counsel that article 15 will not be applicable on the facts of the present case, this finding does not really come to the rescue of the assessee 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 ove....
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.... abroad in the computation of its income. 10. As we part with the matter, we may add that, in our humble understanding, so far as determination of question as to whether or not the taxation has been done in the source country "in accordance with the provisions of this Convention, may be taxed in ... (the source jurisdiction)", one has to take a judicious call as to whether the view so adopted by the source jurisdiction is a reasonable and bonafide view, which may or may not be the same (the as the legal position in the residence 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, differ....
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.... nature of contemporanea expositio in India and which our Hon'ble Courts above have referred to, with a great degree to respect and approval, from to time in taking calls on the provisions relating to the tax treaties, also it is stated, as we have noted earlier as well, that "Article 23 A and Article 23 B, however, do not require that the State of residence eliminate double taxation in "all cases" where the State of source has imposed its tax by applying to an item of income a provision of the Convention that is different from 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 juri....