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TMI Blog2005 (3) TMI 708X X X X Extracts X X X X X X X X Extracts X X X X ..... y event, Memorandum of Understanding concerning fees for included services in Article 12 dated 12th September, 1989, attached to and forming part of the India US tax treaty, specifically mentions that scope of Article 12(4b) may extend to, inter alia, technical training . Example (6) given in the MoU States that the fees for training the employees of the Indian company constitutes fees for included services and is, therefore, taxable in the source country as well. The reasoning for this conclusion, as given in the said MoU, is that the services are technical, and the technical knowledge is made available to the Indian company . The assessee s defence against taxability of these receipts in the source country primarily consists of reliance on the scope of exclusion clause set out in Article 12(5)( a ) of the Indo US tax treaty. The exclusion clause, relied upon by the assessee, provides that the services which are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of a property, are not to be treated as fees for included services exigible to tax in the source country. The only rider is that the exclusion clause will not extend to the sale of proper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appellant. R.S. Sabnis for the Respondent. ORDER Pramod Kumar, Accountant Member - The main issue requiring our adjudication in these appeals is as to whether or not the training fees paid to a US based company, which is said to be integral to the purchase of know-how from that company, is taxable in India. The assessee s core contention is that in view of the scope of article 12(5)( a ) of the India USA Double Taxation Avoidance Agreement, the same is not taxable in India. 2. Let us first set out, very briefly, the material facts giving rise to this dispute before us. The assessee had entered into a technical assistance agreement with one M/s. Reynolds (Europe) Limited, USA. Under this arrangement, the assessee had to pay US $ 50,000 (net of taxes), each calendar quarter year, as fees for technical services and another US $ 12,500, each calendar quarter year, as basic fees for training of Hindalco s (assessee s) personnel at the works of Reynolds and/or its affiliated companies out of India . For training at Hindalco in excess of 120 man days, the training fees was payable @US $ 850 per person per day, while for training at Reynolds subsidiaries outside India, the training fees w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion clause in section 12(5)( a ) is squarely applicable. Learned counsel for the assessee has laid good deal of emphasis on his arguments on the scope of expression property appearing in article 12(5)( a ). His line of reasoning is like this. The expression property is admittedly not defined in the India US tax treaty, and, on that basis, reliance is placed on article 3(2) which lays down that any term, when not defined in the treaty shall have, unless the context otherwise requires or the competent authorities agree to a common meaning pursuant to the mutual agreement procedure laid down under article 27, the same meaning which it has under the laws of the State concerning the taxes to which convention applies. It is thus contended that the expression property shall have the same meaning as it has in the context of Indian laws. Reliance is then placed on the definition given in the Law Lexicon which defines property as generic term for all that a person has dominion over . It is indeed most comprehensive of all terms which can be used, inasmuch as it is indicative and descriptive of all terms which can be used, inasmuch as it is indicative and descriptive of every possible interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed counsel canvasses the non-taxability of training fees paid to REL in India. We are urged to hold so, and to thereby vacate the orders of the CIT(A) upholding appellant s withholding tax liability from payments on account of payments for training services which are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale or property i.e., know-how. 5. Learned Departmental Representative, on the other hand, relies upon the orders of the authorities below and contends that the payment for training of personnel is taxable as fees for included services and the same is not covered by the exclusion clause set out in article 12(5)( a ). He however fairly accepted that on identical facts the matter has been restored to the file of the CIT(A) for examining whether the training could be considered to be the service that is ancillary and subsidiary, as well as inextricably and essentially linked to the sale of know-how, but, then, it is also pointed out that there is no finding in the said Tribunal s order to the effect that sale of know-how constitutes sale of property for the purpose of article 12(5)( a ) of the DTAA. It is contended that restoration for the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uthorities below and decline to interfere in the matter. 6. We have given our thoughtful consideration to the rival contentions and the provisions of the India US DTAA (187 ITR St. 102) as also to the principles governing interpretation of these provisions. It is useful to reproduce the relevant extracts from the India United States Double Taxation Avoidance Agreement which, in article 12(4) and (5), provides as follows : Article 12(4) For the purposes of this article, "fees for included services" means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services : ( a )are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph (3) is received; or ( b )make available technical knowledge, experience, skill, know-how, or processes, or consists of the development and transfer of a technical plan or technical design. Article 12(5) Notwithstanding paragraph (4), "fees for included services" does not include amounts paid : ( a )for services that are ancillary and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e India US tax treaty. 8. There is no dispute about the fact that article 12(5)( a ) can only be pressed in service only when the payment is made for "services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale or property, other than a sale described in paragraph 3( a )", but the key question then is what are the connotation of the expression property in the present context. Does the context in which this expression is used in the tax treaty require a rather legalistic and somewhat liberal view of this expression? Will the expression sale of property in the this context mean and include sale of a property, which may constitute property in utterly legalistic connotation of that expression, but where the sale consideration itself is taxable in the source country as a revenue item? Are we to do read the words used in a tax treaty in a mechanical manner or we are to give effect to the same in the light of the underlying, but clearly discernible, scheme of tax treaty? These are the key issue which will eventually, in our view, decide the taxability of impugned training fees in the hands of the REL and which, in turn, will decide whether or no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the treaty, Goulding J. in IRC v. Exxon Corpn. [1982] STC 356 at page 359, observed : "In coming to the conclusion, I bear in mind that the words of the Convention are not those of a regular Parliamentary draughtsman but a text agreed on by negotiations between the two contracting Governments. Although I am thus constrained to do violence to the language of the Convention, I see no reasons to inflict a deeper wound than necessary. In other words, I prefer to depart from the plain meaning of language only in the second sentence of article XV and I accept the consequence (strange though it is) that similar words mean different things in the two sentences." 13. In a later judgment, Harman J. in Union Taxas Petroleum Corporation v. Critchley [1988] STC 69, affirmed the above observations of Goulding J. and added : "I consider that I should bear in mind that this double tax agreement is an agreement. It is not a taxing statute, although it is an agreement about how taxes should be imposed. On that basis, in my judgment, this agreement should be construed as ut res magis valeat quam pereat, as should all agreements. The fact that the parties are high contracting parties , to use an old ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enactment, instead of the substantive legislation taking a well known form of an Act of Parliament, it has the form of a treaty. In other words, form and language found suitable for embodying an international agreement, at the stroke of a pen, also the form and language of a municipal legislative instrument. It is rather like saying that, by Act of Parliament, a woman shall be a man. Inconveniences may ensue. One inconvenience is that the interpreter is likely to be required to cope with disorganised composition instead of precision drafting........ "........ The interpretation of a treaty imported into municipal law by indirect enactment was described by Lord Wilberforce as being unconstrained by technical rules of English law, or by English legal precedent, but conducted on the broad principles of general acceptation . This echoes optimistic dictum of Lord Widgery, C.J. that the words are to be given their general meaning, general to lawyer and laymen alike...... the meaning of diplomat rather than the lawyer ." 16. Hon ble Supreme Court, in the case of K.P. Varghese v. ITO [1981] 131 ITR 597 and even in the context of interpretation of taxing statutes, have held that the task of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bject to less rigid rules of interpretation, cannot be subjected to literal interpretation in isolation with the context in which the words have been employed. 17. It is also important to bear in mind that the provisions of tax treaties are required to be read as a whole and not in isolation with each other. The Court s duty is to give effect to the provisions of the treaty in its natural meaning, and not to interpret them in isolation. It is done in their context and in the light of the object and purpose of the treaty. The context in which the words are used is, therefore, of the paramount importance. General words and phrases, therefore, however wide and comprehensive in their literal sense, must be construed as being limited to the actual objects of the enactment. Therefore, what is really needed in the context of interpretation of treaties is that a holistic view of the matter is taken. This exercise essentially requires that the provisions of the treaty are required to be treated in a harmonious manner. The same principle applies to the interpretation of the taxing statutes as well. It is fundamental principle of interpretation that a statute must be read as a whole, notwiths ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s (Page 114 onwards), the application of Article 3(2) involves a three stage process : ( a )Does the treaty provide a definition of the term ? ( b )If the treaty does not provide a definition, what is the domestic meaning of the term ? ( c )Does the context of the treaty require a meaning different from the domestic meaning ? Learned authors have then discussed the complexity, which is not apparent from the description of the said process, in the above three stage process. Coming to the issue of context of the treaty requiring a different meaning from the meaning under the domestic law , learned authors State that, For this purpose, it is necessary to consider what are the alternative meanings for the term for purposes of treaty and whether one of these meanings is more appropriate in the context of the treaty than the domestic law meanings. Matters that should be considered in this analysis include............ the purpose of the relevant provisions of the treaty (Emphasis supplied by us). The observations which follow, in our considered view, are even more important. The same are reproduced below : "Some international tax scholars argue that in applying Article 3(2), undefined ter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quired 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 be 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 veleat quam pereat i.e., in such a manner as to make it workable rather than redundant. -A literal or legalistic meaning must be avoided when the basic object of the treaty might be defeated or frustrated 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 general meaning - general to lawyers and ge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof. When sale is of a property set out in Article 12(3)( a ), the services which are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of such a property, continue to be regarded as fees for included services exigible to tax in the source country. 23. The easily discernable common thread in all the transactions visualized in Article 12(3)( a ) is that all these transactions are such that when sale takes place by the resident of one Contracting State to the resident of the other Contracting State, consideration of sale is taxable under Article 12 in the source country as well. Article 12(3)( a ) and ( b ) only defi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot taxable in the source country. Article 12(5)( b ) provides for exclusion of services which are ancillary and subsidiary to the rental of ships, aircraft, containers and other equipment used in connection with operation of ships or aircraft in international traffic. The principal transaction in this case is the operation of ships and aircraft in international traffic, but, under article 8 of the Indo US tax treaty, the profits derived from operations of ships and aircraft are only taxable in the country of fiscal domicile, and source rule has no application on such profits. Since main activity itself does not lead to taxability in the source country, but is taxable only in the country of domicile, the same principle also applies on the services subsidiary and integral to the main activity. The principle thus is that the subsidiary and integral transactions have to take colours from the principal transaction itself and are not to be viewed in isolation, so far as taxability in the source country is concerned. 26. There are only two clauses, so far as exclusion of ancillary services from the scope of the fees for included services exigible to tax in the source country, in the treat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from plain meaning of the language is permissible whenever context so requires, to avoid the absurdities and to interpret the treaty in its proper perspective. Some violence with the language of the treaty may also be unavoidable as was found permissible in Exxon Corporation s case ( supra ). Hon ble Supreme Court s observations in Azadi Bachao Andolan s case ( supra ) recognize the fact that one inconvenience is that the interpreter is likely to be required to cope with is disorganised composition instead of precision drafting . 30. Viewed in this perspective, in our considered view, prima facie the context and the setting in which sale of property is used in article 12(5)( a ) requires this expression to have limited meaning in the sense that only sale of such property is covered by this clause which does not lead to taxability of the sale proceeds on source rule basis. Any other view of the matter may perhaps lead to incongruous result that while the principal transaction of sale of the know-how will be taxable in the source country, a subsidiary transaction of imparting the training to use the know-how will not be taxable in the source country on the ground that it is inextrica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtained in order to ask whether context suggests a differential interpretation and, in the light of the weight given to the alternative interpretation, whether the context requires a different interpretation. (4)If question (2) is answered in the negative, but the term is applied in domestic law outside the scope of tax laws envisaged by the treaty, the general rules of interpretation should apply. Therefore, even when connotations of a treaty term are to be adopte as per the domestic law in the country of taxability, it cannot be done so as a thoughtless and mechanical process. Such meaning needs to be ascer- tained in order to ask whether context suggests a differential interpretation and, in the light of the weight given to the alternative interpretation, whether the context requires a different interpretation of the said term. Therefore, it is not merely the task if lifting the meaning of that term as per the domestic law in the country of application and applying the same without having regard to the totality of circumstances and scheme of things in the tax treaty. That would be, in fact, truly a case of making a fortress out of the dictionary - although a legal dictionary in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contextual meaning. It is also important, as we have noted in the same context and in the same paragraph, that even the school of thought advocating supremacy of domestic law meaning only argues that the interpretation in favour of the contextual or treaty meaning cannot be restored to without discharging the onus to justify the same. It is nobody s case, not even the staunch supporters of the domestic law meaning s supremacy, that the contextual meaning can be ignored altogether in favour of the domestic law meaning. In the case before, we have already set out the reasons as to why, in our considered view, the interpretation of the treaty by adopting the domestic law meaning of the term property will result in an absurdity as to how the same can be avoided by giving the expression property a meaning which the present context, in our considered view, the said expression warrants and justifies. In the context of the interpretation of article 12(5)( a ) of the India US tax treaty, the meaning of the expression sale of property should be confined to only such a sale which does not lead to taxability of sale proceed on source rule basis as in article 12. The arguments of the learned co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , that "Every new discovery nor argumentative novelty cannot undo or compel reconsid- eration of a binding precedent.... A decision does not loose its authority merely because it was badly argued, inadequately considered or fallaciously reasoned...." Similarly in the case of Kesho Ram Co. v. Union of India [1989] 3 SCC 151, it was stated by the Supreme Court thus (page 160): that "The binding effect of a decision of this Court does not depend upon whether a particular argument was considered or not, provided the point with reference to which the argument is advanced subsequently was actually decided in the earlier decision...." In such a situation, we are of the views that the objection raised by the assessee are devoid of any sustainable merits. In any event, having carefully gone through the said order passed by the co-ordinate bench, we are in most respectful agreement with the views so expressed our esteemed colleagues and we endorse and adopt the same. The arguments of the learned counsel on this issue do not meet our approval. 33. A lot of emphasis has been laid by the assessee on the order passed by another co-ordinate bench, in assessee s own case, restoring the matter to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch s decision. 36. It is also important to appreciate that the above observations were made in the context of the following observations in the preceding paragraphs : "8.Reference was also made to the decision of the Tribunal in assessee s own case being ITA Nos. 5019 and 5020/B/95 dated 18-10-2002. In this case, Tribunal held that training was not only the ancillary and subsidiary services, but was also inextricably and essentially linked to the sale of plant. In such a case, the payment for consideration for the services stand excluded from the definition of fees for technical services as per the Double Taxation Avoidance Agreement for United Kingdom. 9.As per the prescription of section 9(1), income arising directly or indirectly through or from any business connection in India is deemed to accrue or arise in India. The charging section 4 as well as section 5 defining the total income are expressly made subject to the provisions of the Act, which means they are subject to the provisions of section 90. By necessary implication, it is subject to the terms of the Double Taxation Avoidance Agreement, if any, entered into by the Government of India with foreign countries. Even assumi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... matter has not been considered in sufficient details by the authorities below. We also make it clear that our observations above do not denude the CIT(A) of his powers to objectively consider any such pleas as may be taken by the assessee during the course of hearing before him. Therefore, having given our findings on what is argued before us and in deference to the decision of the co-ordinate bench, we see no harm in restoring this matter to the file of the CIT(A) for adjudication de novo. While examining the issue de novo , the CIT(A) shall consider whether or not the training is ancillary and subsidiary, as well as inextricably and essentially linked to the sale of know-how. The CIT(A) shall also examine whether or not the sale of know-how constitutes sale of property, in the light of our observations hereinabove and also in the light of the whatever submissions the assessee may wish to make, and deal with the same by way of a speaking order after giving adequate opportunity to the assessee to present its case. 38. In due deference to the order passed by the co-ordinate bench, we restore the matter to the file of the CIT(A) for examination de novo. While doing so, the CIT(A) sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tional quality and whereas RII is agreeable to disclose and provide to HINDALCO the know-how, process technology and providing technical assistance as above , the said agreement is entered into. The very purpose of the agreement is thus to make available the "technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design" which is clearly covered by the scope of Article 12(4). It is clearly covered by the definition of the expression fees for technical services . The taxability of amounts of US $ 14,00,000 is thus confirmed and approved. 44. The only other issue that we are left with now is the question of taxability of reimbursement of incidental expenses. Following the view taken by the Hon ble Kerala High Court in the case of Cochin Refineries Ltd. v. CIT [1996] 222 ITR 354 and in assessee s own case, a co-ordinate bench of this Tribunal, to which one of us was a party, has approved the revenue s stand that even reimbursement of incidental expenses is required to be treated as a part of the fees for technical services for the purpose of the India US tax treaty. We see no reasons to take any other ..... X X X X Extracts X X X X X X X X Extracts X X X X
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