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TMI Blog2014 (2) TMI 554X X X X Extracts X X X X X X X X Extracts X X X X ..... treaties on the scope of Section 40(a)(i) – Held that:- The OECD Model Convention Commentary has a role to play in construing the scope of provisions of the Indo-US tax treaty, only to the extent (i) the relevant provision, though based on OECD Model Convention, is not explained in the Technical Explanation to the US Model Convention, and (ii) specific reference is made to the OECD Model Convention Commentary, and the interpretation so given by the OECD Model Convention Commentary is not in conflict with the Technical Explanation to the US Model Convention - The case does not fit into any of the categories because while the relevant clause of the non-discrimination article is the same as art. 24(2) of the OECD Model Convention, the scope of non-discrimination is, as we will see a little later, well defined in the Technical Explanation and also because the scheme of non-discrimination in the OECD Model Convention and US Model Convention is materially different - a sound interpretation of a sub-article of non-discrimination article cannot be based on reading of that clause in isolation, but it would require that the non-discrimination clause as a whole, or even a treaty as a whole, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Spanish vendor has invoiced for samples, sketches and photographs, as also designing lines and collection material - Just because the vendor has developed and transferred technical designs or plans in respect of shoes or such other material, it does not mean that it is not a technical design - the amounts paid seem to be covered by the scope of article 13(4) inasmuch as the payment is made for services which are consultancy and technical services - The payments are made for designs, sketches and photographs but these designs, sketches and photographs are in the context of assessee's line of business and, as stated by the assessee himself, for the purposes of product development by the assessee - The matter remitted back to the CIT(A) for fresh adjudication. The payments are made for the purchases of goods, and as the recipients do not have any PE in India - the transactions do not lead to any taxability in India with respect to its business profits - Business profits of Spanish enterprises can only be brought to tax in India under article 7, when those enterprise have a PE in India in terms of article 5, and then also the taxability is restricted to the extent the profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deducted tax at source from payment to NV Muderi - failure to do so is to be visited with disallowance u/s 40(a)(i) of the Act - The relief granted by the CIT(A) is vacated and the disallowance by the AO is restored – Decided partly in favour of Revenue. - I.T.A. No.: 257/Agr/2013 - - - Dated:- 4-2-2014 - Bhavnesh Saini JM And Pramod Kumar AM,JJ. For the Appellant : Waseem Arshad For the Respondent : S. P. Satsangi ORDER Per Pramod Kumar: 1. By way of this appeal, the assessee appellant has challenged the correctness of learned Commissioner (Appeals)'s order dated 21 st March 2013, in the matter of assessment under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as 'the Act') for the assessment year 2008-09. Issue in appeal 2. Grievance raised by the Assessing Officer, in substance, is that, on the facts and in the circumstances of the case, learned Commissioner (Appeals) erred in deleting the disallowance of Rs 1,05,27,465 made under section 40(a)(ia) in respect of foreign remittances, accounted for under the head 'design and development expenses', without deducting tax at source. Preliminary issue regarding invoking rule 27 3. D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been suspended by the Hon'ble High Court of Andhra Pradesh and moreover, the said decision is with respect to section 40(a)(ia) applicable in respect of payment made to resident, while in case of the assessee (appellant), the provision applied is of section 40(a)(i) relating to payment made to non-resident and TDS provisions of resident and non-resident payee are based on different principles because under section 195 applicable to nonresident payee, tax at source is to be deducted on the sum chargeable under the provision of this Act, while in various TDS provisions relating to resident payees, tax at source is to be deducted on making of any specific type of payment as mentioned therein and hence, it cannot be said that the decision rendered in respect of the provision of section 40(a)(i) shall also apply in case of section 40(a)(i). Despite such difference in both sections, now since decision of the Hon'ble ITAT Special Bench, Vishakhapatnam has been suspended as interim measure by the Hon'ble Andhra Pradesh High court till final decision, it may not be proper to follow such decision till the final decision of the Hon'ble Andhra Pradesh High Court is delivered. Therefore, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 253(4) of the Income Tax Act, 1961, which allows the respondent, on being put to notice about the fact of an appeal having been filed against an order, to raise his grievances against the said order by filing the cross objections within stipulated time. Section 253(4) provides that, "(t)he Assessing Officer or the assessee, as the case may be, on receipt of notice that an appeal against the order ......... by the other party, may, notwithstanding that he may not have appealed against such order or any part thereof; within thirty days of the receipt of the notice, file a memorandum of cross-objections, verified in the prescribed manner, against any part of the order ........, and such memorandum shall be disposed of by the Appellate Tribunal as if it were an appeal presented within the time specified in sub-section (3) or sub-section (3A)". 8. The important distinction between the scope of a cross objection under section 253(4) and an objection under rule 27 is that while former calls into question correctness of a part of the operative order, the latter merely challenges a part of the reasoning adopted in the process of arriving at operating order, i.e. conclusion, even a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, whether or not such a procedure has been prescribed, it is only elementary that the manner in which rule 27 is invoked should be fair and reasonable. As learned Departmental Representative rightly states, if these issues are allowed to be raised without any prior intimation to the other party, the other party may not even have an opportunity to prepare on the issue sought to be raised. In any case, proviso to rule 11 which provides that "(p)rovided that the Tribunal shall not rest its decision on any other ground unless the party who is affected thereby has had a sufficient opportunity of being heard on that ground". It is, therefore, necessary that the affected party is properly put to notice in respect of the issues which are sought to be raised under rule 27. In our considered view, therefore, while the respondent may indeed raise any of the issues, with regard to the grounds decided against the assessee even though the assessee may not be in appeal or cross objection, the respondent can do so only by way of a written intimation to that effect duly served on the other party reasonable in advance, and, in a situation in which the other party seeks time for preparing or seeking ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e relevant period, and nothing remained payable at the end of the period, no part of these amounts could have been disallowed by the Assessing Officer if the payments were made to non-residents, in the light of the scope of section 40(a)(ia) read with judicial precedents in the cases of Merilyn Shipping Transport Vs ACIT (136 ITD SB 23) and CIT Vs Vector Shipping Services Pvt Ltd (Judgment dated 9.7.2013 in ITA N0. 122 of 2013) by Hon'be jurisdictional High Court. It is then contended that in the light of judicial precedents in the cases of Herbalife (supra) read with non discrimination clauses in the respective tax treaties with the countries in which recipients are based, the consequences of non tax withholding from payments to residents in treaty partner countries cannot be any harsher than consequences of non tax withholding from payments to domestic residents. This plea was rejected by the Commissioner (Appeals) on the short ground that the operation of Special Bench decision has been stayed by Hon'ble Andhra Pradesh High Court, and, therefore, "it may not be appropriate to follow such decision till final decision of Hon'ble Andhra Pradesh High Court is delivered". The asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first-mentioned Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises of that first-mentioned State are or may be subjected. 4. Except where the provisions of Article 10, paragraph 7 of Article 12, or paragraph 7 of Article 13, apply, interest, royalties and other disbursements paid by an enterprise of a Contracting State to a resident of the other Contracting State shall, for the purpose of determining the taxable profits of such enterprise, be deductible under the same conditions as if they had been paid to a resident of the first mentioned State. Similarly, any debts of an enterprise of a Contracting State shall, for the purpose of determining the taxable capital of such enterprise, be deductible under the same conditions as if they had been contracted to a resident of the first-mentioned State. India Italy DTAA ARTICLE 25- Non-Discrimination 1. The nationals of a Contracting State shall not be subjected in the oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directly or indirectly, by one or more residents, of the other Contracting State, shall not be subjected in the first-mentioned State to any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises of the first- mentioned State are or may be subjected. 4. Except where the provisions of paragraph 1 Article 9, paragraph 7 of Article 11 or paragraph 6 of Article 12 apply, interest, royalties and other disbursements paid by an enterprise of a Contracting State to a resident of the other Contracting State shall, for the purpose of determining the taxable profits of such enterprise, be deductible under the same conditions as if they had been paid to a resident of the first-mentioned State. India United Kingdom DTAA ARTICLE 26- Non-discrimination 1. The nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances are or may be subjected. 2. The taxation on a permanent es ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to grant to persons not resident in that State any personal allowances, reliefs, reductions and deductions for taxation purposes which are by law available only to persons who are so resident. 4. Except where the provisions of paragraph 1 of Article 10, paragraph 7 of Article 12, or paragraph 7 of Article 13, apply, interest, royalties and other disbursements paid by an enterprise of a Contracting State to a resident of the other Contracting State shall, for the purpose of determining the taxable profits of such enterprise, be deductible under the same conditions as if they had been paid to a resident of the first-mentioned State. Similarly, any debts of an enterprise of a Contracting State to a resident of the other Contracting State shall, for the purpose of determining the taxable capital of such enterprise, be deductible under the same conditions as if they had been contracted to a resident of the first-mentioned State. 5. Enterprises of a Contracting State, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first-mentioned Contracting State to any taxa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The provisions of this Article shall, notwithstanding the provisions of Article 2, apply to taxes of every kind and description. India Belgium DTAA Article 24 - Non-Discrimination 1. Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances and under the same conditions are or may be taxed. This provision shall, notwithstanding the provisions of Article 1, also apply to persons who are not residents of one or both of the Contracting States. 2. Subject to the provisions of paragraph 3 of Article 7, the taxation on a permanent establishment which an enterprise of a Contracting State has in the other Contracting State shall not be less favourably levied in that other State than the taxation levied on enterprises of that other State carrying on the same activities in the same circumstances or under the same conditions. 3. The provisions of paragraph 2 shall not be construed as preventing: (a) a Contracting State from charging the profits of a perman ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on Commentary as well, observes as follows: 73. This paragraph is designed to end a particular form of dis- crimination resulting from the fact that in certain countries the deduction of interest, royalties and other disbursements allowed without restriction when the recipient is resident, is restricted or even prohibited when he is a non-resident. The same situation may also be found in the sphere of capital taxation, as regards debts contracted to a non-resident. It is however open to Contracting States to modify this provision in bilateral conventions to avoid its use for tax avoidance purposes. 74. Paragraph 4 does not prohibit the country of the borrower from applying its domestic rules on thin capitalisation insofar as these are compatible with paragraph 1 of Article 9 or paragraph 6 of Article 11. However, if such treatment results from rules which are not compatible with the said Articles and which only apply to non- resident creditors (to the exclusion of resident creditors), then such treatment is prohibited by paragraph 4. 75. Also, paragraph 4 does not prohibit additional information requirements with respect to payments made to non-residents since these requireme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the section in the light of title thereof. Their Lordships observed that : "Sec. 40A is with the marginal note under the heading 'Expenses or payments not deductible in certain circumstances'. If the marginal note or heading is any indication, and it certainly is a relevant factor to be taken into consideration in construing the ambit of the section, then these payments mentioned therein are not deductible, according to the statute, in certain circumstances. Therefore, the heading of this section is a clear indication that certain payments and expenses which would be otherwise deductible would not be deductible except in certain circumstances indicated in the section....". It was thus considered appropriate to cover only such differentiation in the scope of these non-discrimination provisions as were discriminatory in character and in harmony with the heading of these treaty provisions. While articulating the school of thought drawing a line of distinction between differentiation and discrimination, and while dealing with the scope of non-discrimination clauses in Indo American tax treaty, a coordinate bench of this Tribunal, speaking through one of us (i.e. the Accountant Member) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iating treaty partner is aware of the US Model Convention and its accompanying Technical Explanation. As a corollary to this, when an expression appearing in the US Model Convention is being used in a tax treaty, and unless there is anything to the contrary is placed on record, this expression shall have the same meaning, intent and context as assigned to the expression in the Technical Explanation. Of course, when meaning, intent and context assigned in the OECD Model Convention Commentary is the same as assigned in the Technical Explanation to the US Model Convention, this debate about which is better guide to understand contemporaneous thinking on the issue is a non-starter. When there is no conflict between the approaches in these documents, a reference to the OECD Model Convention Commentary does not make a difference anyway, but when there is a conflict, howsoever basic or seemingly trivial, the OECD Model Convention Commentary has to give way to the Technical Explanation to the US Model Convention. 32. In view of the above discussions, in our considered view, the OECD Model Convention Commentary has a role to play in construing the scope of provisions of the Indo-US tax tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a distinction is unreasonable, arbitrary or irrelevant is a matter of judgment......" 35. It is thus clear that in order to establish discrimination, not only that a taxpayer has to demonstrate that he has been subjected to different treatment vis-a-vis other taxpayers, but also that the ground for this differentiation in treatment is unreasonable, arbitrary or irrelevant. 36. This principle on reasonableness of the differential treatment is also evident from the Technical Explanation issued by the treaty partner State, i.e. US, to art. 26(2) its Model Convention which, barring the opening words "except where the provisions of para 3 of art. 7 (business profits) apply" is exactly the same as art. 26(2) of Indo-US tax treaty. This Explanation, inter alia, observes as follows : "..........There are cases, however, where the two enterprises would not be similarly situated and differences in treatment may be warranted. For instance, it would not be a violation of the non-discrimination protection of para 2 to require the foreign enterprise to provide information in a reasonable manner that may be different from the information requirements imposed on a resident enterprise, becau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterprise vis-a-vis US enterprise, and yet it is not construed as an act of discrimination against the PEs of Indian enterprise. This strengthens our interpretation that to make out a case for discrimination, demonstrating differential treatment, by itself, cannot suffice. In our considered view, to establish a case discrimination, it is to be established that the basis of differentiation lacks any coherent relationship with the object ought to be achieved by the legal provision which is alleged to be discriminatory. 39. The Technical Explanation on the US Model Convention having recognized that "there are cases, however, where the two enterprises would not be similarly situated and differences in treatment may be warranted", what becomes very important and crucial is to take note of the dissimilarities in the position of a PE of the US company vis-a-vis an Indian enterprise, and to test reasonableness on the limitations on incentive deduction under s. 80HHE in the light of these dissimilarities. 40. This approach is quite in harmony with the concept of non- discrimination well founded in the Indian legal system. Guarantee against non-discrimination is one of the fundamental ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ors, however, hasten to add as follows : ".........However, not all differences in tax treatment, either between nationals of the two States or between residents of the two States, are violations of the prohibition against non-discrimination. Rather, the non-discrimination provisions .....would apply only if the nationals or residents of two States are similarly situated. Thus.....(it) does not cover indirect indiscrimination and does not introduce an all encompassing non-discrimination rule......." 42. In the light of the above discussions, we are of the considered view that a differential treatment to the PE of the US tax resident, by itself, cannot be treated as covered by the scope of rule prohibiting non-discrimination. The true test for deciding whether or not there is a non-discrimination is whether or not the resident enterprise and the PE of the other Contracting State, who are similarly situated, get the same tax treatment or not. There could indeed be different tax treatments to the PE of the other Contracting State and the enterprise of the source State, but, as long as such tax differentiation could be justified on the grounds of dissimilarities in their situation, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Texas Petroleum Corporation vs. 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 description, does not change the way in which the Courts should also approach the construction of any agreement." We are in considered agreement with this school of thought which lays down the proposition that, strictly speaking the principles of literal interpretation do not apply to the interpretation of tax treaties. To find the meaning of words employed in the tax treaties, we have to primarily look at the ordinary meanings given to those words in that context and in the light of its objects and purpose. Literal meanings of these term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th 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 vs. ITO Anr. (1981) 24 CTR (SC) 358 : (1981) 131 ITR 597 (SC) and even in this context of 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". Their Lordships observed as follows : "....................The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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....... (Emphasis by underlining supplied by us) 22. What has been decided thus in the context of Indo US tax treaty does not necessarily apply in the context of the other treaties as well. Within a few months of the aforesaid decision, that very bench of the Tribunal, consisting of the same quorum, observed so, in the case of Daimler Chrysler India Pvt Ltd Vs DCIT (120 TTJ 803), by stating that, "..... the decision in the case of Automated Securities Clearance Inc. (supra) was given in the context of Indo-USA tax treaty in which differentiation on the ground of reasonableness ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctivities in the same circumstances or under the same conditions. This provision shall not be construed as preventing a Contracting State from charging the profits of a PE which an enterprise of the other Contracting State has in the first- mentioned State at a rate of tax which is higher than that imposed on the profits of a similar enterprise of the first-mentioned Contracting State, nor as being in conflict with the provisions of para 4 of art. 7 of this Convention." Therefore, in our considered view it will be unnecessary for us to refer to the Commentary on OECD Model Convention, decision of any foreign jurisdiction or other jurisdiction if the provisions contained in the DTAA are capable of clear and unambiguous interpretation. Accordingly, we consider it unnecessary to examine the commentary or the technical explanation for coming to a conclusion in the matter. 8.4 The learned Departmental Representative referred to the Board Circular No. 621, dt. 19th Dec., 1991, issued after introduction of s. 80HHE in the IT Act. Reference is made to para No. 34 of the circular which states that with a view to provide fiscal incentives for export of computer software, a new s. 80HHE h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich contains deductions of general nature, and if provisions in the Act come in conflict with the treaty, the provisions of the Act are applicable only to the extent they are more beneficial to the assessee; if not, the provisions of the treaty shall prevail. The case of the learned Departmental Representative is that this decision has been rendered under s. 44C and, therefore, it is distinguishable. To our mind, the decision harmonises provisions of the treaty and the provisions contained in s. 44C of the Act. Similar exercise is involved in this case as the provisions of the Act and the treaty are required to be interpreted in a harmonious manner. Therefore, the ratio of this decision is applicable to the facts of the case before us. 8.6 There is also a dispute regarding the words "same activities" used in art. 26. The case of the learned counsel is that the assessee is engaged in the business of export of software in the same manner in which a number of Indian enterprises are exporting software. The fact that the assessee has been allowed to export software shows that the business does not fall in the prohibited category. Accordingly, the assessee's case has to be compared wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dered view that the Division Bench erred in coming to the conclusion that the assessee was not entitled to deduction under s. 80HHE. (Emphasis by underlining supplied by us now.) 23. Learned Departmental Representative's argument is, therefore, rejected for several reasons. The issue is covered against the revenue by the Special Bench decision in Rajeev Sureshbahi Gajwani's case (supra) and this decision binds this division bench. The theory of differentiation vs discrimination was relevant, relevant if it was, only for the India US tax treaty, primarily on the ground of reciprocity in treatment and on the ground of India US tax treaty institutionalizing the validity of differentiation in treatment by the US on the ground of reasonableness, and it may not apply to the other tax treaties. As held by a special bench in the case of Rajeev Sureshbhai Gajwani (supra), a different treatment to the foreign enterprise per se is enough to invoke the non- discrimination clause in the tax treaties. Finally, as opined in the UN and OECD Model Convention Commentaries, with which we are in considered agreement, deduction neutrality clause in non-discrimination provisions is designed to prima ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It is submitted that this provision is a general omnibus provision which covers all types of non-discrimination against nationals of a treaty partner country. We, however, are not inclined to accept this plea. A plain reading of this clauses shows that, in broad terms, the discrimination, which is prohibited under this clause, is nationals of the other Contracting State vis-a-vis nationals of the host State in the same circumstances and same conditions, and, therefore, for the discrimination, which is sought to be prohibited by art. 24, all that is relevant is that national of one of the Contracting State should not be discriminated against, for the reason of the nationality, in the other Contracting State. That is what was observed by a coordinate bench of this Tribunal in the case of Daimler Chrysler India Pvt Ltd Vs DCIT (120 TTJ 803). English House of Lords, in the cases of Boake Alleen Ltd. Ors. vs. HM Revenue Customs (2007) UKHL 25 (HL), has also followed the same approach and observed, with approval, that "In relation to art. 24(1) of the OECD Model Convention, which prohibits discrimination between residents on grounds of nationality, the commentary says that the 'und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s- -vis residents. 27. Learned counsel, as we have noted earlier as well, mainly relies upon Special Bench decision of this Tribunal in the case of Merilyn Shipping (supra) in this regard. It is, therefore, necessary to take a quick look at this judicial precedent, as also the subsequent developments, as well. 28. The issue which was referred to the Special Bench in this case was "whether Section 40(a)(ia) of the Income Tax Act, 1961 can be invoked only to disallow expenditure of the nature referred to therein which is shown as payable as on date of Balance Sheet or it can be invoked also to disallow such expenditure which become payable at any time during the relevant previous year and was actually paid within the previous year ?" In plain words, thus, the issue before this Special Bench was whether or not the disallowance in terms of section 40(a)(ia) for expenditure incurred by the assessee is relatable to payments made without compliance with tax withholding requirements is confined to the amounts remaining outstanding as at the end of the year or whether such disallowance can also be invoked in respect of expenditure relatable to payments made during the year. In the lead ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 40(a)(ia) of the Income Tax Act, 1961 could be made only in respect of such amount taken which are payable as on 31 st March of the year under consideration? 2. Whether the decision of Special Bench of the Tribunal in the case of Merilyn Shipping Transport vs. ACIT lays down the correct law? 31. Hon'ble Gujarat High Court rejected the majority view in Merilyn Shipping Transport's case and observed as follows:- 21. In the present case, we have no hesitation in accepting the contention that the provision must be construed strictly. This being a provision which creates an artificial charge on an amount which is otherwise not an income of the assessee, cannot be liberally construed. Undoubtedly if the language of the section is plain, it must be given its true meaning irrespective of the consequences. We have noticed that the provision makes disallowance of an expenditure which has otherwise been incurred and is eligible for deduction, on the ground that though tax was required to be deducted at source it was not deducted or if deducted, had not been deposited before the due date. By any intendment or liberal construction of such provision, the liability cannot be fastened i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on on part of the Parliament. Both these aspects we would address one after another. If one looks closely to the provision, in question, adverse consequences of not being able to claim deduction on certain payments irrespective of the provisions contained in Sections 30 to 38 of the Act would flow if the following requirements are satisfied:- (a) There is interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to resident or amounts payable to a contractor or sub-contractor being resident for carrying out any work. (b) These amounts are such on which tax is deductible at source under Chapter XVII-B. (c) Such tax has not been deducted or after deduction has not been paid on or before due date specified in sub-Section (1) of Section 39. For the purpose of current discussion reference to the proviso is not necessary. 24. What this Sub-Section, therefore, requires is that there should be an amount payable in the nature described above, which is such on which tax is deductible at source underChapter XVII-B but such tax has not been deducted or if deducted not paid before the due date. This provision no-where requi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ext, last date of such accounting period would assume considerable significance. However, this decision nowhere indicates that the events which take place during the accounting period should be ignored and the ascertainment of fulfilling a certain condition provided under the statute must be judged with reference to last date of the accounting period. Particularly, in the context of requirements of Section 40(a)(ia) of the Act, we see no warrant in the said decision of the Supreme Court to apply the test of payability only as on 31st March of the year under consideration. Merely because, accounts are closed on that date and the computation of profit and loss is to be judged with reference to such date, does not mean that whether an amount is payable or not must be ascertained on the strength of the position emerging on 31st March. 25. This brings us to the second aspect of this discussion, namely, whether this is a case of conscious omission and therefore, the legislature must be seen to have deliberately brought about a certain situation which does not require any further interpretation. This is the fundamental argument of the Tribunal in the case of M/s. Merilyn Shipping Tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ract also." 34. Upon hearing parties and upon perusing material on record, Hon'ble jurisdictional High Court was of the considered view that "we do not find that the Tribunal has committed any error in recording the finding on the facts, which were not controverted by the department and thus the question of law as framed does not arise for consideration in the appeal." In plain words what their Lordships did was simply rejection of question of law proposed by the Income Tax Department by observing that this question of law does not arise for consideration in the appeal. 35. Having noted the above, we must also take note of the fact that there is indeed an observation of Their Lordships to the effect that "this is to be noted, for disallowing expenses from business or profession on the ground that TDS has not been deducted, the amount should be payable and not which has been paid by the end of the year" but such an observation may probably stem from the fact that apparently income tax department did not question the law laid down by the Special Bench in the case of Merilyn Shipping Transport and that is precisely what the Special Bench had held. In these circumstances, the que ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act were attracted. As Their Lordships observed in unambiguous words, this question did not arise from the Tribunal's order and that was the reason why their Lordships decline to consider the same. As observed by Hon'ble Supreme Court in the case of CIT vs. Sun Engineering Works P. Ltd. (198 ITR 297) a " judgement must be read as a whole and the observations from the judgement have to be considered in the light of the question which were before this court" and that "a decision of this court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, the courts must carefully try to ascertain the true principle laid down by the decision of this court and not to pick out words or sentences from the judgement, divorced from the context of the questions under consideration by this court, to support their reasoning." What was thus expressed for analyzing decision of Hon'ble Supreme Court must equally apply in analyzing of Hon'ble High Court's judgement. It could thus be, by this school of thought, wholly inappropriate to proceed on the basis of the ratio of Merilyn Shipping Transport stands approved by the Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 40(a)(ia) must stand relaxed in the area falling within the jurisdiction of Hon'ble Allahabad High Court. It cannot, therefore, be said that there for the purposes of disallowance under section 40(a)(ia), so far as the assessee before us is concerned, it is necessary that the assessee should have deducted tax at sources so far as payments made during the relevant previous year are concerned. However, so far as payments made to the non-residents are concerned, it is an admitted position that the disallowance under section 40(a)(i) is also attracted as regards the payments made during the year itself without deduction of tax at source. To this extent, the current legal position, with respect to disallowance on account on not complying with tax withholding requirements, infringe deductibility neutrality. Even as we say, we make it clear that whatever we say here is, and shall always remain, subject to the esteemed views of Hon'ble Courts above on the scope of Section 40(a)(ia) as indeed on other related issues. We may also mention that, as fairly accepted by the learned counsel for the assessee, the issue on the scope of section 40(a)(i) vis- -vis the controversy on whether amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amounts in question could not be brought to tax in India as business profit either. The assessee submitted that since none of these amounts were taxable in India, and as held by Hon'ble Supreme Court in the case of GE India Technology Centre Pvt Ltd Vs CIT (327 ITR 456), the assessee did not have any obligation to deduct tax at source in India. It was thus argued that since there was no failure on the part of the assessee in deducting tax at source, disallowance under section 40(a)(i) could not be invoked. None of these submissions, however, impressed the Assessing Officer. He rejected the explanation of the assessee and proceeded to make the disallowance under section 40(a)(i) by observing, inter alia, as follows: Designing and development of shoes for international market is a very technical job and it requires a lot of data collection, development of trends in different areas depending upon the atmospheric and other conditions. It also requires knowledge of quality of leather and use of leather depending upon different parameters set by different countries. It requires managerial, technical and consultancy services in the nature of consultancy also. Such services fall unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent tax jurisdictions, and since tax treaties that India has entered into with those jurisdictions will have to be considered while examining the taxability in the hands of the recipients, we will bunch these cases for each tax jurisdiction separately. Payments made to Spanish residents 47. We will first take up the payments made by the assessee to the residents of the Kingdom of Spain. 48. During the relevant previous year, the assessee has made following payments, without any tax withholdings, to Spanish residents:- Sl.No. Name and Address of the Non Resident Country of residence Payment currency Amount in I Rs. 1 JAVIER VERA PALAO PADRE MANJON NO 28 ATICO AB 03600 ELDA ALICANTE SPAIN EURO 43,000.00 24,42,860 2 HORMAS AGUILERA SL AVDA H. BERNARDO HERRERO 41 APDO 22 03630 SAX ALICANTE SPAIN EURO 4,865.48 2,76,621 3 IMPRONTA DESIGN SLU VALENCIA 3, PALOMAR ALICANTE SPAIN EURO 7,500.00 4,24,800 4 BISANI SL PITAGORAS 7-1- PARQUE INDUSTRIAL 03203 ALICANTE SPAIN EURO 209.10 12,475 49. As far as payment o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... strial, commercial or scientific equipment, 10% of the gross amount of the royalties; (ii) in the case of fees for technical services and other royalties, 20% of the gross amount of fees for technical services or royalties. 3. The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work, including cinematographic films or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. 4. The term "fees for technical services" as used in this Article means payments of any kind to any person other than payments to an employee of the person making the payments and to any individual for independent personal services mentioned in Article 15 (Independent Personal Services), in consideration for the services of a technical or consultancy nature, including the provision of services of technical or other personnel. 5. The p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilable to him in the other Contracting State for the purpose of performing his activities; in that case, only so much of the income as is attributable to that fixed base may be taxed in that other State; or (b) if his stay in the other Contracting State is for a period or periods amounting to or exceeding in the aggregate 183 days in the relevant "taxable year"; in that case, only so much of the income as is derived from his activities performed in that other State may be taxed in that other State. 2. 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. Protocol dated 8 th February 1993 At the moment of signing the Convention between the Government of the Republic of India and the Government of the Kingdom of Spain for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to taxes on Income and on Capital, the undersigned have agreed upon the following provisions which shall be an integral part of the Convention. .............. ............... 7. The co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 th December 1990, and has, as such, come into force well after 1 st January 1990. The scope of definition of 'fees for technical services', which is referred to as 'fees for included services', is much narrower in scope as it is on 'make available' model. These provisions are reproduced below for ready reference: Article 12 - Royalties and fees for included services 1. Royalties and fees for included services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties and fees for included services may also be taxed in the Contracting State in which they arise and according to the laws of that State; but if the beneficial owner of the royalties or fees for included services is a resident of the other Contracting State, the tax so charged shall not exceed : (a) in the case of royalties referred to in sub-paragraph (a) of paragraph 3 and fees for included services as defined in this Article (other than services described in sub-paragraph (b) of this paragraph ): (i) during the first five taxable years for which this Convention has effect, (A) 15 per cent of the gross amount of the roya ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4, 'fees for included services' does not include amounts paid : (a) for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property other than a sale described in paragraph 3(a); (b) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in international traffic; (c) for teaching in or by educational institutions; (d) for services for the personal use of the individual or individuals making the payment; or (e) to an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professional services as defined in Article 15 (Independent personal services). ..................... [Emphasis underling supplied by us] 54. Learned Departmental Representative, apart from relying upon the stand of the Assessing Officer and assailing the impugned CIT(A)'s order as consisting of sweeping generalizations, has invited our attention to Hon'ble Calcutta High Court's judgment in the case of CIT Vs Davy Ashmore India Limited (190 ITR 626) it is only when there is an outright sale of drawings and designs that the con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not be appropriate for us to proceed on the basis that the payment is made to an individual and that it is taxable, taxable if it is, under article 15 of the treaty. This aspect of the matter is very important because in the event of the amount being of such a nature as to invite taxability under article, for this reason alone, it gets out of the ambit of scope of fees for technical services under the applicable tax treaty. 56. As regards the restricted scope of 'make available' clause in the Indo US tax treaty, which is applicable in the present case by the virtue of MFN clause discussed earlier in this decision, we see no support to assessee's case by this clause either. It is to be noted that under article 12(4)(b), the connotations of fees for included services, as it is termed under the Indo US tax treaty, includes consideration of services if such services, inter alia, "consist of the development and transfer of a technical plan or technical design". In the present case, the Spanish vendor has invoiced for samples, sketches and photographs, as also designing lines and collection material. Just because the vendor has developed and transferred technical designs or plans in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above remittance. At page 107, the assessee has merely furnished passport copy of one Alejandro Gil Fernandez but that is hardly sufficient to establish anything in support of the assessee's contention to the effect that the payment was made to a Spanish resident for rendering the independent professional services. There is also an undated and unsigned letter but it has no value at all. There is no specific findings in respect of this payment in the impugned order passed by the CIT(A). 61. In view of the above situation, we deem it fit and proper to remit this issue also to the file of the CIT(A) for specific findings on nature and taxability of this payment as well. 62. We now take up item no. 2 and item no. 4 in the list of payments to Spanish residents. 63. These two payments, i.e. payments to Hormas Aguilera SL and Bisani SL, are made against invoices raised by the respective concerns. Copies of relevant invoices are placed at pages 93 to 97 of the paper book. As these payments are made for the purchases of goods, and as the recipients do not have any PE in India, it is clear that these transactions do not lead to any taxability in India with respect to its business profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gard to the rival contentions and having perused the material on record, it is beyond doubt that the payment has been made to an individual and is made for cost contribution for developing collection of samples etc for various trade fairs. It is in this factual backdrop that we may take a look at the relevant provisions of Indo Italian tax treaty, which are reproduced below for ready reference: 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 of the other Contracting State may be taxed in that other 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 State, but if the recipient is the beneficial owner of the royalties, or fees for technical services, the tax so charged shall not exceed 20 per cent of the gross amount of the royalties or fees for technical services. 3. The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work, inclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... confusion about the exact nature of services for which the impugned payments are made. While in the written submissions filed, this payment is stated to be for offshore services, neither there is any material on record to show the nature of services nor supporting invoices indicate that fact. The invoice show that the arrangement is for cost contribution but what is the nature of this cost contribution is far from clear. There is, however, a letter from Renzi Massimo on record, which , inter alia, states that he has been supplying samples and sketches etc to the assessee to "enable them to seek information in respect of the fashion trends in Europe". These services, in the nature of legal position succinctly set out by a coordinate bench of this Tribunal in the case of Graphite India Ltd Vs DCIT (86 ITD 384), are clearly in the nature of professional services rendered by an individual, and, for this reason alone, the specific provisions of article 15 will come into play. We have also noted that its undisputed position that Renzi Massimo did not have a fixed base available to him regularly in India, nor did he stay in India for more than 183 days in the relevant previous year. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... servations. The observations we have made earlier, while remitting back some other adjudications on taxability, will also apply mutatis mutandis here as well. 72. We will take up the balance three payments to residents in Italy together as these three payments seem to be of similar nature and can be adjudicated together. 73. In all these three cases, i.e. payments of 3,900 to Eurolast SRL, of 159.50 to Suolifico Stella SRL and of 2,640 to Sperecas Zengarini SRL, the payments are made against invoices which are placed on record at pages 99 to 102 of+ the paper-book. As a plain look at the invoices would show, these transactions are in the nature of sale of various types of products and samples. As these payments are made for the purchases of goods, and as the vendors donot have any PE in India, it is clear that these transactions donot lead to any taxability in India with respect to its business profits. Business profits of such enterprises can only be brought to tax in India under article 7, when those enterprise have a PE in India in terms of article 5, and then also the taxability is restricted to the extent the profits are attributable to the PE. It is not even in disp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ases to hold good in law. Learned CIT(A) rightly deleted the same. Payment to Belgian resident 78. During the relevant previous year, the assessee had also made a payment to a Belgian resident by the name of NV. Muderi for 20,000, as detailed below, in respect of the Assessing Officer had made a disallowance under section 40(a)(i):- Sl.No. Name and Address of the Non Resident Country of residence Payment in Euros Amount in I Rs. 14 N V MUDERI GERAARDSBERGSESTEENWEG 5329400 NINOVE VOORDE BELGIUM EURO 20000 12,62,000 79. So far as this payment of 20,000 is concerned, we find that it has been made for 'design and development expenses' to a concern by the name of N V Muderi said to be owned by Kathleen, a Belgian national resident of Belgium. It has been confirmed by the Kathleen, though in a standard format, that he has been paid for providing the assessee samples and sketches etc to enable them to seek information in respect of fashion trends in Europe. 80. As we deal with this matter, it is appropriate to take a look at the relevant provisions in Indo Belgian tax treaty which is reproduced below ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kind made to any person, "other than .......any individual for independent personal services mentioned in Article 14, in consideration for services of a managerial, technical or consultancy nature" is covered by the scope of fees for technical services within meanings assigned under article 12(3)(b) of Indo Belgian tax treaty. In the present case, admittedly the payment is not made to an individual. The fact that the entity to which payment has been made is owned by an individual, even if that be so, does not, in our humble understanding, take that outside the ambit of article 12(3)(b). The services, for which the payment in question has been made, are also clearly in the nature of consultancy, even if not technical, services. On these facts, a view does seem to emerge that the amount paid was very well covered by the scope of article 12(3)(b) of India Belgian tax treaty, and the assessee ought to have deducted tax from the same. This view is also supported by a coordinate bench decision in the case of Sintex Industries Ltd (supra) in which it is held that payment made to a non-resident for providing fabric along with its details in writing, which can be used by assessee to process ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not all residents of the treaty partner country. Learned counsel's reliance on MSEB decision (supra) is misplaced because that was in the context of India UK tax treaty wherein expression used was only 'resident' and there was no mention of the expression 'individual' in the article related to independent personal services. What is decided in the context of one treaty does not necessarily apply in other treaties as well, particularly when the treaties are differently worded. 85. In the present case, we are dealing with a situation in which the payment has been made to N V Muderi, a business entity other than an individual, and, therefore, the provisions of article 14 donot come to the rescue of the assessee. In any case, the normal rule, as is articulated by the UN model convention commentary as well, that article 14 comes into play only when services are rendered by the individuals, whereas article 7 comes into play when services are rendered by entities other than individuals. 86. In view of the above discussions, as also bearing in mind entirety of the case, we are of the considered view that the assessee ought to have deducted tax at source from payment of 20,000 to NV Mu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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