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TMI Blog2020 (12) TMI 776X X X X Extracts X X X X X X X X Extracts X X X X ..... an alternate plea, assessee pleads that, in the event of the assessee being declined the tax credit in respect of the taxes so withheld in Japan, the assessee should at least be allowed a deduction, for the said amount, in computation of its professional income. 3. The issue in appeal lies in a rather narrow compass of material facts. The assessee before us is one of India's well-known law firms and is assessed to tax in the status of a partnership firm. The return filed by the assessee was subjected to scrutiny assessment proceedings. In the course of these scrutiny assessment proceedings, it was, inter alia, noticed that the assessee had claimed a foreign tax credit of Rs. 80,55,856 in respect of taxes withheld by its clients in Japan. The taxes so withheld were at the rate of 10% on gross billing amounts, by treating the professional fees earned by the assessee in Japan as taxable in Japan, i.e. the source country, under article 12 of Indo-Japanese tax treaty. The Assessing Officer, however, was of the view that credit for such taxes withheld in Japan was not admissible to the assessee, for the reason that the income so earned by the assessee could only have been taxable u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he income of that resident an amount equal to the Japanese tax paid in Japan, whether directly or by deduction" [Emphasis, by underlining, supplied by us]. What essentially follows is that when in accordance with the provisions of Indo Japanese tax treaty, any income of Indian resident is taxed in Japan, the Indian resident will get the deduction, in the computation of his tax liability, taxes paid by the assessee in Japan- whether paid directly by the assessee or whether taxes were withheld in Japan. There are many other conditions attached to this basic provision, but, for our present purposes, those conditions are not really relevant. That brings us to the question as to what are the connotations of "in accordance with the provisions" of the tax treaty. In the case of Nav Bharat Vanijya Vs CIT [(1980) 123 ITR 865 (Cal)], Hon'ble Calcutta High Court has observed that "(t)he words 'in accordance with', mean being in agreement or harmony with; in conformity to: vide the Compact Edition of the Oxford English Dictionary, Vol. I, page 62". In paragraph 32.5 of the OECD Model Convention Commentary, 2017, as indeed in its earlier versions, it is, inter alia, stated that "Art ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 amount to any person other than payments to an employee of a person making payments and to any individual for independent personal services referred to in article 14, in consideration for the services of a managerial, technical or consultancy nature, including the provisions of services of technical or other personnel. 5. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise, through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein, and the right, property or contract in respect of which the royalties or fees ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting State but only so much of it as is attributable to that fixed base or is derived in that other Contracting State during the aforesaid period or periods. 2. The term 'professional services' includes especially independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, surgeons, lawyers, engineers, architects, dentists and accountants. 7. Undoubtedly, there are overlapping areas in the definition of fees for technical services under article 12(4), which covers' technical, management and consultancy services' vis-à-vis the definition of professional services income from which can be taxed under article 14 as 'income from independent personnel services'. This overlapping is recognized in article 12(4) itself, as it provides that where fees from technical services sought to be taxed under article 12 include any item of income which is dealt with in article 14, article 12 will yield to those specific provisions in respect of that fee for technical service which can be taxed as income from independent services under article 14. That treaty approach is in consonance with the well ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of professional services, the results arrived at will be in conflict with the well-established principle that the treaty is to be read as a whole and the provisions of the treaty are to be construed in harmony with each other, inasmuch as while article 12(4) exclusion clause proceeds on the basis that article 14 applies to individuals alone, the article 14 will then be applicable to all the entities- including the partnership firms and corporate entities. That will be clearly incongruous. In any case, we have not been able to find even any conceptual justification for excluding one class of eligible taxpayers, i.e. individuals, from the application of provisions of article 12. Whatever holds good for the exclusion of individuals earning income taxable under article 14 must hold good for the other taxpayers earning income taxable under article 14 as well- unless, of course, article 14 is treated as applicable to the individuals alone. Therefore, unless the provisions of article 14 are held to be applicable only for individuals, the exclusion clause under article 12(4) being confined to the individuals earning income taxable under article 14 does not make sense. The principles ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons in which article 5 will apply in respect of the professional services and the situations in which article 15 of the India-UK tax treaty, which is in pari materia article 14 of the U.N. Model Convention, will apply, we find guidance from the following observations made in the U.N. Model Convention Commentary: - "The Group discussed the relationship between article 14 and sub- paragraph 3(b) of article 5. It was generally agreed that remuneration paid directly to an individual for his performance of activity in an independent capacity was subject to the provisions of article 14. Payments to an enterprise in respect of the furnishing by that enterprise of the activities of employees or other personnel are subject to articles 5 and 7. The remuneration paid by the enterprise to the individual who performed the activities is subject either to article 14 (if he is an independent contractor engaged by the enterprise to perform the activities) or article 15 (if he is an employee of the enterprise). If the parties believe that further clarification of the relationship between article 14 and articles 5 and 7 is needed, they may make such clarification in the course of negotiations." 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es other than Indo Japan tax treaty, and the provisions of the Indo Japan tax treaty are not in pari materia with the provisions of those tax treaties. These judicial precedents deal with the tax treaties that India has entered into with China, U.K. and the USA, but then all the three treaties are, in the material respects, differently worded vis-à-vis the Indo-Japanese tax treaty that we are presently dealing with. It is, therefore, not even necessary, even if we have our reservations on correctness of these decisions, to refer the matter to the larger bench for reconsideration of the principle laid down therein. Suffice to say, on the facts of this case, the conclusions arrived at by the Japanese tax authorities, directing tax withholdings from the payments made to the assessee by its Japanese clients, cannot be said to unreasonable or incorrect. In the light of these discussions, as also bearing in mind entirety of the case, we hold that the assessee was wrongly declined tax credit of Rs. 80,55,856 on the facts of this case. We, therefore, direct the Assessing Officer to grant the said tax credit to the assessee. As we have upheld the plea of the assessee with respect to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, it can be concluded that the interpretation given in the United States is manifestly erroneous it is not desirable to reach a different conclusion, and I find no compelling reason for doing so." That situation is to be best avoided, and it can only be so avoided when unless the view of the treaty partner jurisdiction is wholly unreasonable or, to borrow the words of Canadian Federal Court, "manifestly erroneous," it should be adopted, at least in respect of that transaction, by the other treaty partner as well. Here is a case in which not only the source country jurisdiction has taken the view that the legal fees received by the assessee are taxable under article 12 of the Indo Japan tax treaty, but, as discernable from the facts as recorded by the authorities below, the Japanese tax authorities have consciously taken a call rejecting the plea of the assessee for non-taxation, and even proceeded against the assessee's Japanese clients for interest and penalties for non- deduction of tax at source from the payments in question. This view, in the light of the detailed reasons set out above, is a reasonable view in the context of Indo Japan tax treaty and, at the minimum, not a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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