TaxTMI 
TaxTMI 
2003 (8) TMI 165
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.... known as, Enron Project. MSEB was a beneficiary of the proceeds of a loan granted by the International Bank for Reconstruction & Development (IBRD, in short) to Government of India. It appears that under the terms of this loan arrangement, a part of this loan was to be used for payment of legal advisory fees to Freshfields. As to the nature of services rendered by Freshfields to MSEB, following extracts from 'Appendix A' to the aforesaid 'Contract for Legal Services' throw sufficient light on the same: "The Services The Services to be provided by the Legal Advisor (i.e., Freshfields) will be to act as legal advisor to the client (i.e., Maharashtra State Electricity Board) in relation to the project (i.e., Enron Project) and in particular, but without limitation to undertake the following assignments: - review the state of discussions/correspondence between the Client and Enron as at 1st March 1993; - assist the Client in negotiations for the finalization of the Power Purchase Agreement relating to the Project and related documentation; and - generally review the commercial and financial arrangements proposed for the Project and advise on their legal implications. The s....
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....unication, i.e., letter dated 16th June 1994, the Assessing Officer had also observed that in any event the MSEB cannot derive any benefit from Article 15 of the DTAA because man days spent by the Freshfields are more than '90' i.e., in excess of the time limit set out in Article 15. The Assessing Officer's observations inter alia were: Please note that Article 15 will note come to your rescue as M/s. Freshfields sent number of people and stayed more than the number of man-days permitted. Your calculation of man-days does not fit into normal prudent calculation of man-days. However, you are free to calculate the man-days as per advise given to you and take the matter further in appeal. However, in our view man-days mentioned in the DTAA agreement means if a person spends a man-day in India, it will be counted as a man-day and if five people spend a man-day in India, it will be counted as five man-days and not as one man-day as argued by you. 4. This aspect of the matter is, strictly speaking, not really relevant for our deliberations as the CIT(A) has, in the impugned order, observed that 'it would be logical to assume presence going by solar days and not man-days' and the re....
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....onsulting chambers. So, the services rendered by Freshfields, by their very nature, may also be viewed as 'independent personal services'. But the payments made to Freshfields would be covered by Article 15 only if it can be treated as individual." 8. The CIT(A) thus concluded that the payments to Freshfields are covered by the scope of Article 15 and, accordingly, the action of the Assessing Officer in directing the MSEB to deduct the tax at source @ 30 per cent was justified. 9. The assessee tax deductor is aggrieved and in second appeal before us. 10. We have heard Shri Chappgar, learned counsel of the assessee, and Shri Udhayakumaran, learned Commissioner (DR), at considerable length. We have also carefully perused the material before us and duly deliberated upon factual matrix of the case as also the applicable legal position. 11. Before we deal with the core issue in the appeal, we deem it desirable to reproduce the relevant provisions of the applicable Indo-UK Double Taxation Avoidance Agreement as follows: Article 13. Royalties and fees for technical services. -(1) Royalties and fees for technical services arising in a Contracting State and paid to a resident....
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....blishment or fixed base. In such a case, the provisions of Article 7 (business profits) or Article 15 (independent personal services), as the case may be, shall apply. (6) Royalties and fees for technical services shall be deemed to arise in a Contracting State where the payer is that State itself, a political subdivision, a local authority or a resident of that 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 obligation to make the payments was incurred and the payments are borne by that permanent establishment or fixed base, then the 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, owing to a special relationship between the payer and some other person, the amount of the royalties or fees for technical services paid exceeds for whatever reason the amount which would have been paid in the absence of such relationship, the provisions of this Article shall apply only to the ....
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....de in both the Contracting States or in neither of them, he shall be deemed to be a resident of the Contracting State of which he is a national; (d) if he is a national of both Contracting States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement. (3) Where by reason of the provisions of paragraph (1) of this Article a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident of the Contracting State in which its place of effective management is situated. 13. A careful perusal of the above provision, particularly of article 4(3) which specifically refers to 'a person other than an individual', leaves no doubt about the fact that the expression 'resident of a contracting state' is not confined to individual residents but also extends its scope to non-individuals such as firms, companies and other entities since the question of 'place of effective management' can only arise in respect of such entities. It would thus follow that the provisions of Article 15 will even apply to such entities as well, in addition to 'individuals', as the aforesaid articl....
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....ices are performed in that other State and if: (a) he is present in that other State for a period or periods aggregating to 90 days in the relevant fiscal year; or (b) he, or the partnership, has a fixed base regularly available to him, or it, in that other State for the purpose of performing his activities; but in each case only so much of the income as is attributable to those services. (2) For the purposes of paragraph 1 of this Article an individual who is a member of a partnership shall be regarded as being present in the other State during days on which, although he is not present, another individual member of the partnership is so present and performs professional services or other independent activities of a similar character in that State. (3) The term "professional services" includes independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, surgeons, lawyers, engineers, architects, dentists and accountants. 15. The material difference between this Article vis-à-vis the relevant article in applicable DTAA is that the words 'an individual, whether in his own capacity or as a member of ....
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....f any manual skill, as in painting and sculpture or surgery, skill controlled by the intellectual skill of the operator, as distinguished from an occupation which is substantially the production or sale of arrangements for the production or sale of commodities'. This definition, barring the words "as distinguished from an occupation which is substantially the production or sale or arrangements for the production or sale or arrangements for the production or sale of commodities" is incidentally the same as assigned by Scrutton LJ in Inland Revenue Commissioner v. Maxse [1919] KB 647 referred to in LB Curzon's Law Directory. Referring to Hon'ble Bombay High Court's judgment in the case of Sakharam Narayan Kherdekar v. City of Nagpur Corpn. AIT 1964 Bom. 200, at page 210, the Law Lexicon further states that 'an activity to be profession must be one carried on by an individual by his personal skill, intelligence and dependent on individual characteristics'. Black's Law Dictionary (5th Edition) defines profession as 'a vocation or occupation requiring special, usually advanced, education and skill e.g. in law and medicine and observes that 'the labour and skill involved in a profession ....
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....haran v. Peter & Karunakar AIR 1984 SC 1700 observed that "...Whatever may be the popular conception or misconception regarding the role of today's lawyers and the alleged narrowing of gap between a profession on one hand and a trade or business on the other, it is trite that, traditionally, lawyers do not carry on trade or business nor do they render services to the 'customers'. Keeping all these factors in mind, as also the observations of Hon'ble Supreme Court, we are of the considered view that the services rendered by Freshfields are distinctly in the nature of professional services. 19. Once we come to a finding that the services in question constitute 'professional services', the natural corollary to this finding is that the provisions of Article 15 are to be applied in this case which specifically deal with 'professional services'. 20. As to revenue's contention that the provisions of Article 13 will be applicable in this case because these services, whether or not in the nature of 'professional services', are also covered by the scope of Article 13 being in the nature of 'managerial, technical or consultancy services', suffice to say that the provisions of Article 15....
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....isions indicating the legislative intent to overrule or set aside the particular provision". This principle has also been dealt with by Kolkata SMC Bench, in the case of Asstt. CIT v. Executors of the Estate of Bhagwan Devi Sarogi [2001] 79 ITD 539, wherein Hon'ble Vice President Shri Garg has inter alia observed that "To sole such a conflict (or competing claims of sections), one has to resort to interpretations of law and the famous dictum is where there is a general provision which, if applied in its entirety, would neutralize a special provision dealing with the same subject-matter, the special provision must be read as a proviso to the general provision and the general provision, insofar as it is inconsistent with the special provisions, must be deemed not to apply". I am in respectful agreement with the views expressed by the Hon'ble Vice President Garg. Similar views, were also expressed in the case of ITO (TDS) v. Titagarh Steels Ltd. [2001] 79 ITD 532 (Kol.) wherein while articulating the view of Kolkata C Bench, I had observed as follows: "It is fairly well settled in law that general provisions do not override specific provisions, as aptly described by the maxim 'g....
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....ing would result in 400 days. There cannot be more than 365 days in a year. Therefore this system of multiple counting leads to absurdity. Therefore it should be avoided. Suffice to say that we are in considered agreement with the above views and that we see no reasons to take any other view of the matter than the view so taken by our esteemed colleagues. In our considered view, multiple counting of days would indeed go against the object of Article 15(1)(a) of the India UK DTAA which is to provide criterion for substantial and permanent presence in a contracting state, as opposed to a transient and fleeting one. 23. We may now deal with the ratio of Hon'ble Supreme Court's judgment in the case of Transmission Corpn. of A.P. Ltd. v. CIT [1999] 239 ITR 587 wherein Their Lordships have inter alia observed as follows: 8. The scheme of sub-sections (1),(2) and (3) of section 195 and section 197 leaves no doubt that the expression "any other sum chargeable under the provisions of this Act" would mean 'sum' on which income-tax is leviable. In other words, the said sum is chargeable to tax and could be assessed to tax under the Act. Consideration would be - whether payment of sum to....
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....ourt has upheld as correct the answer given by the Andhra Pradesh High Court that the obligation of the assessee to deduct tax at source 195 limited only to the appropriate portion of income chargeable under the Act. In our humble understanding of the section in the light of the judgment, the position appears to be like this. The sum paid to the non-resident may be either fully or partly chargeable to income-tax. It is fully chargeable (pure income) undoubtedly the tax is to be charged at the appropriate rate on the whole 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 portion." 26. We are in considered agreement with the views so expressed by our distinguished colleagues and would only add the observations of Their Lordships or the ratio of the judgment do not affect that position that in a case where no portion of payment is exigible to tax, the question of application of section 195(2) does not arise, because, as the section itself categorically provides that it comes to play "where the person responsible for paying any sum ....
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....expression 'chargeable under the provisions of this Act' cannot include an income, which in terms of the specific provisions of the applicable Double Taxation Avoidance Agreement, is not exigible to tax in India. 28. While deliberating upon the impact of Hon'ble Supreme Court's certain observations in Transmission Corpn. of A.P. Ltd. 's case we are also reminded of the observations of Justice Bhat in the case of SRF Finance Ltd. v. CBDT [1995] 211 ITR 861 (Delhi) that 'it is well settled rule of construction that judgments must be read as a whole and observations from the judgments should be considered in the light of the questions which were before the Court'. Referring to the judgment of Hon'ble Supreme Court in the case of CIT v. Sun Engg. Works (P.) Ltd. [1992] 198 ITR 297, Their Lordships observed that "As observed by the Supreme Court in CIT v. Sun Engineering Works (P.) Ltd. [1992] 107 CTR (SC) 209/[1992] 198 ITR 297 (SC), it is neither desirable nor permissible to pick out a word or a sentence from the judgment of the Supreme Court, divorced from the context of question under consideration and treat it to be the complete law declared by the Supreme Court. A decision o....
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....se of the assessee was that the payments to non-resident did not constitute 'pure income' or 'income simpliciter'. The observations made by the Hon'ble Supreme Court, therefore, cannot have any application is a case where the income is claimed to be not included in total income exigible to tax in India which admittedly was not the case before the Hon'ble Supreme Court. In any event, in our considered view, Hon'ble Supreme Court's observations should not be used as a blind man's walking stick, as it would amount to if we are to be guided by those observations alone without examining the facts of the situation where the observations are to be applied. For these reasons also, Hon'ble Supreme Court's observations in the case of Transmission Corpn. of A.P. Ltd. have no application in the matter. 32. As regards revenue's suggestion that assessee's interests are not adversely affected by deducting the tax at source by way of abundant caution, since the recipient can always file an income-tax return and get the refund in case the income embedded in payments to non-resident is held to be not exigible to tax in India, we are unable to see any substance in this plea for the simple reason t....