M/S. ASHAPURA MINECHEM LTD, MUMBAI v. THE ADIT (IT) 1(1), MUMBAI

ITA 2508/MUM/2008 | 2008-2009
Pronouncement Date: 21-05-2010 | Result: Dismissed

Appeal Details

RSA Number 250819914 RSA 2008
Assessee PAN EMING1093T
Bench Mumbai
Appeal Number ITA 2508/MUM/2008
Duration Of Justice 2 year(s) 1 month(s) 11 day(s)
Appellant M/S. ASHAPURA MINECHEM LTD, MUMBAI
Respondent THE ADIT (IT) 1(1), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 21-05-2010
Appeal Filed By Assessee
Order Result Dismissed
Bench Allotted L
Tribunal Order Date 21-05-2010
Date Of Final Hearing 10-11-2009
Next Hearing Date 10-11-2009
Assessment Year 2008-2009
Appeal Filed On 10-04-2008
Judgment Text
ITA NO. 2508/MUM/08 ASSESSMENT YEAR 2008 09 PAGE 1 OF 31 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI L BENCH MUMBAI BEFORE SHRI PRAMOD KUMAR (ACCOUNTANT MEMBER) AND SHRI R S PADVEKAR (JUDICIAL MEMBER). ITA NO. 2508/MUM/08 ASSESSMENT YEAR 2008 09 ASHAPURA MINICHEM LIMITED .APPELLANT JEEVAN UD YOG BHAWAN 3 RD FLOOR DR D N ROAD MUMBAI 400 001 VS. ASSISTANT DIRECTOR OF INCOME TAX INTERNATI ONAL TAXATION 1 (1) MUMBAI . RESPONDENT APPELLANT BY : SHRI RAJAN VORA AND SMT SHEETAL SHAH RESPONDENT BY : SHRI A JIT KUMAR SINHA AND SHRI S K MAHAPATRA O R D E R PER PRAMOD KUMAR: 1. BY WAY OF THIS APPEAL THE APPELLANT HAS CALLED INTO QUESTION CORRECTNESS OF COMMISSIONER (APPEALS) ORDER DATED 25 TH FEBRUARY 2008 IN THE MATTER OF ASCE RTAINMENT OF TAX WITHHOLDING LIABILITY ON THE APPELLANT IN RESPECT OF A PAYMENT OF US $ 1 000 0000 MADE TO A CHINA ITA NO. 2508/MUM/08 ASSESSMENT YEAR 2008 09 PAGE 2 OF 31 BASED COMPANY BY THE NAME OF CHINA ALUMINUM INTERNATIONAL ENGINEERING CORP LTD (CAIECL IN SHORT) ON THE FOLLOWING GROUNDS : ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN DIRECTING TO DEDUCT TAX AT SOURCE FROM FOREIGN REMITTANCE 1. ERRED IN CONFIRMING THE ACTION OF THE AO IN HOLDING T HAT THE PAYMENT MADE TO CHINA ALUMINUM INTERNATIONAL ENGINEERING CORP LTD TOWARDS BAUXITE TESTING CHARES IS FEES FOR TECHNICAL SERVICES IN VIEW OF PARAGRAPH 4 OF ARTICLE 12 OF DTAA BETWEEN INDIA AND CHINA AS WELL AS PER THE PROVISIONS OF SECTION 9(1)( VII) OF THE INCOME TAX ACT 1961; 2. SHOULD HAVE APPRECIATED THAT THE FINAL REPORT OF THE BAUXITE TESTING IN RESPECT OF THE SAME SENT BY APPELLANT FROM INDIA WAS PREPARED BY THE FOREIGN COMPANY IN CHINA AND HENCE THE INCOME DOES NOT ACCRUE OR ARISE IN INDIA AND NOT TAXABLE IN THE HANDS OF THE FOREIGN PARTY; AND ITA NO. 2508/MUM/08 ASSESSMENT YEAR 2008 09 PAGE 3 OF 31 3. FAILED TO APPRECIATE THAT THE RECEIPT IN THE HANDS OF THE FOREIGN COMPANY IS IN THE NATURE OF BUSINESS INCOME AND SINCE THE FOREIGN COMPANY DOES NOT HAVE A PERMANENT ESTABLISHMENT IN INDIA T HE INCOME IS NOT CHARGEABLE TO TAX IN INDIA AND NO LIABILITY TO DEDUCT TAX ON PART OF THE APPELLANT HAS ARISEN. 2. THE MATERIAL FACTS GIVING RISE TO THIS APPEAL BEFORE US ARE AS FOLLOWS. THE APPELLANT BEFORE US IS AN INDIAN RESIDENT COMPANY BY THE NAME OF ASHAPURA MINICHEM LIMITED ( HEREINAFTER REFERRED TO AS AML OR THE INDIAN COMPANY ) AND THIS COMPANY ENTERED INTO AN AGREEMENT ON 5 TH APRIL 2007 WITH A CHINA BASED COMPANY BY THE NAME OF CHINA ALUMINUM INTERNATIONAL ENGINEERING CORP LTD ( HEREINAFT ER REFERRED TO AS CAIECL OR THE CHINESE COMPANY ). UNDER THE SAID AGREEMENT THE INDIAN COMPANY WHICH WAS IN THE PROCESS OF BUILDING A ALUMINA REFINERY WITH A CAPACITY OF 1000 KT/Y USING BAUXITE FROM GUJARAT STATE WAS TO PAY US DOLLARS ONE MILLION IN CONSIDERATION OF BAUXITE TESTING SERVICES BY THE CHINESE COMPANY IN ITS LABORATORIES AND FOR PREPARATION OF TEST REPORTS SO THAT THE PROCESS PARAMETERS IN ACCORDANCE WITH THE TEST REPORTS COULD BE DEFINED BY THE INDIAN COMPANY. THESE TEST REPORTS OF BAU XITE SAMPLES WERE TO COVER COMPLETE CHEMICAL COMPOSITION OF BAUXITE PHYSICAL PHASE CONSTITUTION OF BAUXITE ABRADABILITY TEST OF BAUXITE PRE DESILICATION OF ITA NO. 2508/MUM/08 ASSESSMENT YEAR 2008 09 PAGE 4 OF 31 BAUXITE DIGESTION PERFORMANCE TEST AND RED MUD SETTLING PERFORMANCE TEST. AT THE TIME OF MAKIN G REMITTANCE OF US $ 1 000 000 FOR THESE BAUXITE TESTING SERVICES TO THE CHINESE COMPANY THE INDIAN COMPANY MOVED AN APPLICATION UNDER SECTION 195 TO THE ASSISTANT DIRECTOR OF INCOME TAX INTERNATIONAL TAXATION CIRCLE 1 (1) [HEREINAFTER REFERRED TO AS THE ASSESSING OFFICER] REQUESTING HIM TO CERTIFY AND DECLARE THAT NO TAX WITHHOLDING IS REQUIRED TO BE MADE FROM THE AFORESAID REMITTANCE. IT WAS CONTENDED BY THE AML THAT THE CHINESE COMPANY COULD BE TAXED IN INDIA ONLY IN TERMS OF THE PROVISIONS OF THE INDIA CHINA DOUBLE TAXATION AVOIDANCE AGREEMENT 1 (HEREINAFTER REFERRED TO AS THE TREATY OR THE INDO CHINESE TAX TREATY) WHICH BEING BENEFICIAL TO THE ASSESSEE OVERRIDE THE PROVISIONS OF THE INDIAN INCOME TAX ACT 1961 (HEREINAFTER REFERRED TO AS THE ACT ) . IT WAS FURTHER SUBMITTED THAT THE RECEIPTS ON ACCOUNT OF BAUXITE TESTING SERVICE CHARGES WERE IN THE NATURE OF BUSINESS PROFITS OF THE CHINESE COMPANY WHICH IN VIEW OF THE PROVISIONS OF ARTICLE 7 OF THE TREATY COULD BE TAXED IN INDIA ONLY IN THE EVENT OF THE CHINESE COMPANY HAVING A PERMANENT ESTABLISHMENT IN INDIA. SINCE THE CHINESE COMPANY DID NOT HAVE ANY PERMANENT ESTABLISHMENT IN INDIA ACCORDING TO THE AMCL THE BUSINESS PROFITS OF THE CHINESE COMPANY COULD NOT BE TAXED IN INDIA. IT WA S FURTHER SUBMITTED THAT SINCE THE CHINESE COMPANY DID NOT HAVE ANY TAX LIABILITY IN INDIA NO TAXES ARE REQUIRED TO BE WITHHELD FROM THE REMITTANCE TO THE SAID COMPANY. NONE OF THESE SUBMISSIONS HOWEVER 1 (1995) 214 ITR STATUTES 160 ITA NO. 2508/MUM/08 ASSESSMENT YEAR 2008 09 PAGE 5 OF 31 IMPRESSED THE ASSESSING OFFICER. HE HELD THAT THE SERVICES RENDERED BY THE CHINESE COMPANY WERE IN THE NATURE OF FEES FROM TECHNIC AL SERVICES UNDER ARTICLE 12 OF THE INDO CHINA TAX TREATY AS ALSO UNDER SECTION 9(1)(VII) OF THE INDIAN INCOME TAX ACT 1961. THE ASSESSING OFFICER THUS CONCLUDED THAT IN T ERMS OF THE TREATY PROVISIONS THE INDIAN COMPANY WAS TO WITHHOLD TAX @ 10% OF THE GROSS AMOUNT OF REMITTANCE TO THE CHINESE COMPANY. AGGRIEVED BY THE STAND SO TAKEN BY THE ASSESSING OFFICER THE INDIAN COMPANY CHALLENGED THIS TAX WITHHOLDING LIABILITY AN D CARRIED THE MATTER IN APPEAL BEFORE THE COMMISSIONER (APPEALS ) BUT WITHOUT ANY SUCCESS. THE ASSESSEE IS AGGRIEVED AND IS IN FURTHER APPEAL BEFORE US. 3. THE BASIC THRUST OF ASSESSEES CONTENTIONS IS THAT SINCE NO PART OF THE TESTING SERVICES WAS R ENDERED IN INDIA THE CHINESE COMPANY DID NOT HAVE ANY TAX LIABILITY IN INDIA IN RESPECT OF THE BAUXITE TESTING CHARGES. BY WAY OF A DETAILED NOTE IT IS SUBMITTED THAT IN ORDER TO ATTRACT TAXABILITY UNDER SECTION 9 (1)(VII) OF THE INCOME TAX ACT 1961 NO T ONLY THAT THE SERVICES SHOULD BE UTILIZED IN INDIA BUT SHOULD ALSO BE RENDERED IN INDIA. IN SUPPORT OF THIS PROPOSITION LEARNED COUNSEL FOR THE ASSESSEE HAS MADE A REFERENCE IS MADE TO THE HONBLE SUPREME COURT JUDGMENT IN THE CASE OF ISHIKAWAJIMA HAR IMA HEAVY INDUSTRIES LTD. VS. DIT 2 AND OF HONBLE JURISDICTIONAL HIGH COURTS JUDGMENT IN THE CASE OF CLIFFORD CHANCE VS 2 (288 ITR 408) ITA NO. 2508/MUM/08 ASSESSMENT YEAR 2008 09 PAGE 6 OF 31 DCIT 3 . AS FAR AS TAXABILITY UNDER THE DOMESTIC LAW IS CONCERNED LEARNED COUNSEL PRIMARILY RELIES UPON HIS EXHAUSTIVE WRITTEN SUBMISSI ONS FILED BEFORE US. COMING TO THE TAXABILITY UNDER THE APPLICABLE TREATY PROVISIONS IT IS SUBMITTED THAT EVEN IN TERMS OF THE PROVISIONS OF ARTICLE 12 OF INDIA CHINA TAX TREATY TAXABILITY OF ROYALTY CAN ONLY ARISE WHEN NOT ONLY THE SERVICES ARE USED IN INDIA BUT ALSO RENDERED IN INDIA. ACCORDING TO THE LEARNED COUNSEL THE ONLY OTHER SITUATION IN WHICH IMPUGNED RECEIPT CAN BE TAXED IN INDIA UNDER ARTICLE 7 OF THE APPLICABLE TAX TREATY PROVISIONS IS WHEN THE SAID INCOME IS EARNED IN THE COURSE OF BUSIN ESS CARRIED ON BY THE ASSESSEE IN INDIA THOUGH A PERMANENT ESTABLISHMENT IN INDIA. LEARNED COUNSEL SUBMITS THAT IT IS NOT EVEN THE CASE OF THE REVENUE THAT THE CHINESE COMPANY HAD ANY PERMANENT ESTABLISHMENT IN INDIA AND THEREFORE THE BUSINESS PROFITS OF THE CHINESE COMPANY CANNOT BE TAXED UNDER ARTICLE 7 OF THE TAX TREATY. HE FAIRLY ACCEPTS THAT IN CASE IMPUGNED RECEIPT IS TO BE TAXED UNDER ARTICLE 12 AS FEES FOR TECHNICAL SERVICES THE EXISTENCE OR NON EXISTENCE OF THE PERMANENT ESTABLISHMENT WI LL BE WHOLLY IRRELEVANT. HE HOWEVER CONTENDS THAT ARTICLE 12 CANNOT BE APPLIED ON THE FACTS OF THE PRESENT CASE BECAUSE UNLESS THE SERVICES RENDERED BY RESIDENT OF ONE OF THE CONTRACTING STATES (I.E CHINA IN THE PRESENT CASE) ARE RENDERED IN THE OTHER CONTRACTING STATE (I.E INDIA IN THE PRESENT CASE) THE PAYMENT FOR THESE SERVICES CANNOT BE SUBJECTED TO TAX IN THAT SOURCE STATE (I.E. INDIA IN THE PRESENT CASE). IT IS SUBMITTED THAT 3 (318 ITR 297) ITA NO. 2508/MUM/08 ASSESSMENT YEAR 2008 09 PAGE 7 OF 31 SINCE THE TESTING SERVICES ARE ENTIRELY RENDERED IN CHINA AND SINCE NO PART OF SERVICES IS RENDERED IN INDIA THE TESTING SERVICES COULD NOT BE BROUGHT TO TAX IN INDIA IN TERMS OF PROVISION OF ARTICLE 12 OF THE TAX TREATY. IT IS CONTENDED THAT UNLIKE THE PROVISIONS IN MOST OTHER TAX TREATIES THE TAXABILITY OF FEES FOR TECH NICAL SERVICES IN THE INDIA CHINA TAX TREATY HAS AN ADDITIONAL REQUIREMENT OF PLACE OF PERFORMANCE IN THE SOURCE COUNTRY TO BE SATISFIED BEFORE IT CAN BE TAXED AS FEES FOR TECHNICAL SERVICES IN THE SOURCE COUNTRY. HE TAKES US THROUGH THE PROVISIONS OF I NDO CHINA TAX TREATY CHINA PAKISTAN TAX CONVENTION INDIA ISRAEL TAX CONVENTION INDIA SOUTH AFRICA TAX CONVENTION AND INDIA GERMANY TAX CONVENTION. HE DOES ALL THIS TO HIGHLIGHT THAT INDIA CHINA TAX TREATY IS UNIQUE IN ITS WORDINGS AND ITS SCOPE SO FA R AS THE TAXABILITY OF FEES FOR TECHNICAL SERVICES IS CONCERNED. WHEN HIS ATTENTION WAS INVITED TO THE DEEMING FICTION UNDER ARTICLE 12 (6) OF THE TREATY WHICH REQUIRES THE FEES FOR TECHNICAL SERVICES AS DEEMED TO HAVE ARISEN IN THE STATE OF WHICH PAYER IS RESIDENT LEARNED COUNSEL SUBMITTED THAT FEES FOR TECHNICAL SERVICES FOR THE PURPOSE OF ARTICLE 12 (6) CANNOT HAVE ANY OTHER MEANING THAN THE MEANING ASSIGNED UNDER ARTICLE 12(4) AND UNDER ARTICLE 12(4) PLACE OF PERFORMANCE TEST IS TO BE SATISFI ED BEFORE FTS CAN BE TAXED IN THE SOURCE STATE. IT IS REPEATEDLY EMPHASIZED THAT ARTICLE 12 (6) CAN COME INTO PLAY ONLY WHEN THE FEES FOR TECHNICAL SERVICES MEETS THE DEFINITION ASSIGNED TO THE SAID TERM UNDER ARTICLE 12 (4) AND SINCE PLACE OF PERFORM ANCE TEST MUST BE MET IN ORDER TO MEET THE DEFINITION ITA NO. 2508/MUM/08 ASSESSMENT YEAR 2008 09 PAGE 8 OF 31 UNDER ARTICLE 12 (4) UNLESS THE SERVICES ARE RENDERED IN THE OTHER CONTRACTING STATE THE SAME CANNOT BE COVERED BY ARTICLE 12 (6). WHEN IT IS POINTED OUT BY US THAT THIS APPROACH WILL RENDER ARTICLE 12(6) MEANINGLESS SINCE IN SUCH A CASE DEEMING CLAUSE TO THE EFFECT THAT SERVICES ARE DEEMED TO HAVE ARISEN IN THE OTHER CONTRACTING STATE CAN ONLY BE INVOKED WHEN SERVICES ARE PERFORMED IN THAT OTHER CONTRACTING STATE SOMETHING WHICH IS PATENTLY A BSURD LEARNED COUNSEL SUBMITS THAT IF WORDS OF THE TREATY RESULT IN AN ABSURDITY AT BEST TO THAT EXTENT IT IS TO BE TREATED AS UNWORKABLE. WE CANNOT CHANGE THE ENTIRE COMPLEXION OF TREATY PROVISION IN THE NAME OF MAKING A SEGMENT THEREOF WORKABLE. L EARNED COUNSEL THUS URGES US TO HOLD THAT IN TERMS OF THE PROVISIONS OF THE APPLICABLE TAX TREATY THE PAYMENT IN QUESTION WERE NOT LIABLE TO BE TAXED IN INDIA. LEARNED DEPARTMENTAL REPRESENTATIVE ON THE OTHER HAND RELIES UPON THE ORDERS OF THE AUTHOR ITIES BELOW TAKES US THROUGH THE SAME AND URGES US TO CONFIRM THE SAME. AS FAR AS TAXABILITY UNDER THE DOMESTIC LAW IS CONCERNED IT IS SUBMITTED THAT IN CASE WE ARE TO PROCEED ON THE BASIS THAT THE ROYALTIES OR FEES FOR TECHNICAL SERVICES CAN ONLY BE TA XED IN INDIA ONLY WHEN NOT ONLY THE SERVICES ARE UTILIZED IN INDIA BUT ALSO RENDERED IN INDIA THE SOURCE RULE WILL CEASE TO HAVE ANY MEANING. IT IS CONTENDED THAT THE JUDGMENTS OF HONBLE SUPREME COURT IN THE CASE OF ISHIKAWAJIMA 4 AND OF HONBLE BOMBAY H IGH COURT IN THE CASE OF CLIFFORD 4 (SUPRA) ITA NO. 2508/MUM/08 ASSESSMENT YEAR 2008 09 PAGE 9 OF 31 CHANCE 5 ARE CLEARLY CONTRARY TO THE LEGISLATIVE INTENT AND THE DOUBTS IF ANY HAVE BEEN SET AT REST BY THE RETROSPECTIVE AMENDMENT IN EXPLANATION TO SECTION 9(1)(VII) AS INTRODUCED BY THE UNION BUDGET . IT IS SUBMITTED T HAT ONCE THE PROPOSED AMENDMENTS ARE CARRIED OUT THESE JUDICIAL PRECEDENTS WILL NO LONGER CONSTITUTE GOOD LAW. (WE MAY ADD THAT THE PROPOSED AMENDMENTS RELIED UPON BY THE LEARNED DEPARTMENTAL REPRESENTATIVE ON WHICH HAVE ALSO HEARD THE LEARNED COUNSEL FO R THE ASSESSEE ARE SINCE CARRIED OUT AND LEGISLATIVE PROCESS FOR THE SAME IS DULY COMPLETED.) AS FAR AS LEARNED COUNSELS ARGUMENTS ON TREATY PROVISIONS ARE CONCERNED LEARNED DEPARTMENTAL REPRESENTATIVE MAINLY CONTENDS THAT THE DEEMING PROVISION OF ARTIC LE 12(6) IS QUITE CLEAR AND CATE GORICAL AND W E ARE URGED TO GIVE IT A SENSIBLE AND REASONABLE MEANING WHICH MAKES THE PROVISION WORKABLE RATHER THAN MAKING THE PROVISION REDUNDANT. IT IS SUBMITTED THAT WHEN PAYMENT IS MADE TO A CHINESE ENTERPRISE IS MADE BY AN INDIAN ENTERPRISE THE FEES FOR TECHNICAL SERVICES IS DEEMED TO HAVE ARISEN IN INDIA. IN CASE WE ARE TO PROCEED ON THE BASIS THAT SUCH DEEMING PROVISION CAN ONLY BE INVOKED WHEN THE SERVICES BY CHINESE ENTERPRISE ARE RENDERED IN INDIA THIS DEEMIN G CLAUSE WILL BE RENDERED MEANINGLESS AS ONE CANNOT DEEM SOMETHING WHICH EXISTS IN REALITY ANYWAY. WHICHEVER WAY WE EXAMINE THE ISSUE WHETHER UNDER THE INCOME TAX ACT 1961 OF UNDER THE INDIA CHINA TAX TREATY ACCORDING TO THE LEARNED DEPARTMENTAL REPR ESENTATIVE THE PAYMENT FOR 5 (SUPRA) ITA NO. 2508/MUM/08 ASSESSMENT YEAR 2008 09 PAGE 10 OF 31 TESTING FEES IS LIABLE TO BE TAXED IN INDIA. WE ARE THUS URGED TO CONFIRM THE FINDINGS OF THE AUTHORITIES BELOW AND DECLINE TO INTERFERE IN THE MATTER. 4. WE HAVE GIVEN OUR CAREFUL CONSIDERATION TO THE RIVAL CONTENTIONS PERUS ED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTUAL MATRIX OF THE CASE AS ALSO THE APPLICABLE LEGAL POSITION. 5. AS REGARDS THE TAXABILITY UNDER THE DOMESTIC LAW WE HAVE NOTED THAT SECTION 9(1)(VII) PROVIDES THAT INCOME BY WAY OF FEES FOR TECHNICAL SERVICES PAYABLE BY INTER ALIA A PERSON WHO IS A RESIDENT EXCEPT WHERE THE FEES ARE PAYABLE IN RESPECT OF SERVICES UTILISED IN A BUSINESS OR PROFESSION CARRIED ON BY SUCH PERSON OUTSIDE INDIA OR FOR THE PURPOSES OF MAKING OR EARNING ANY INCOME FROM AN Y SOURCE OUTSIDE INDIA WILL BE DEEMED TO ACCRUE OR ARISE IN INDIA. THERE IS ALSO NO DISPUTE THAT THE FEES RECEIVED BY THE ASSESSEE IS COVERED BY THE SCOPE OF FEES FOR TECHNICAL SERVICES UNDER EXPLANATION 2 TO SECTION 9(1)(VII) WHICH PROVIDES THAT FOR PURPOSES OF THIS CLAUSE 'FEES FOR TECHNICAL SERVICES' MEANS ANY CONSIDERATION (INCLUDING ANY LUMP SUM CONSIDERATION) FOR THE RENDERING OF ANY MANAGERIAL TECHNICAL OR CONSULTANCY SERVICES (INCLUDING THE PROVISION OF SERVICES OF TECHNICAL OR OTHER PERSONNE L). THERE IS ALSO NO ITA NO. 2508/MUM/08 ASSESSMENT YEAR 2008 09 PAGE 11 OF 31 DISPUTE THAT THE EXCLUSION CLAUSE SET OUT IN THE SAID DEFINITION IS NOT ATTRACTED. 6. THE CASE OF THE ASSESSEE HOWEVER IS THAT SINCE THE SERVICES ARE NOT RENDERED IN INDIA THE PROVISIONS OF SECTION 9(1)(VII) CANNOT BE INVOKED. T HE MAIN SUPPORT FOR THIS PROPOSITION IS ASSESSEES RELIANCE ON ON HONBLE BOMBAY HIGH COURTS JUDGMENT IN THE CASE OF CLIFFORD CHANCE VS. DCIT 6 . IT IS THEREFORE NECESSARY TO DEAL WITH THIS CASE IN SOME DETAIL. 7. IN THE CASE OF CLIFFORD CHANCE THE APPELLANT AN ENGLISH LAW FIRM WAS RENDERING LEGAL SERVICES IN CONNECTION WITH THREE PROJECTS IN INDIA NAMELY BHADRAVATI POWER PROJECT VIZAG POWER PROJECT AND RAVIVA OIL AND GAS FIELD PROJECT. WHILE THE CLAIM OF THE ASSESSEE WAS THAT ONLY SUCH PORTION OF THE FEES RECEIVED IN CONNECTION WITH THESE PROJECTS IS TAXABLE IN INDIA AS IS ATTRIBUTABLE TO SERVICES PERFORMED IN INDIA THE ASSESSING OFFICER OPINED THAT THE TOTAL FEES RECEIVED FOR THE INDIA PROJECT WHETHER THE WORK WAS DONE IN INDIA OR OUTSIDE I NDIA WAS TAXABLE IN INDIA. WHEN THIS DISPUTE FINALLY TRAVELLED BEFORE THE HONBLE BOMBAY HIGH COURT IT WAS INTER ALIA CONTENDED BY THE ASSESSEE THAT THE PLACE OF UTILIZATION OF SERVICE IS NOT RELEVANT BUT PLACE OF PERFORMANCE OF THE SERVICE IS WHAT 6 (SUPRA) ITA NO. 2508/MUM/08 ASSESSMENT YEAR 2008 09 PAGE 12 OF 31 WO ULD BE DETERMINATIVE ( OF TAXABILITY ).. AND RELIANCE WAS PLACED ON HONBLE SUPREME COURTS JUDGMENT IN THE CASE OF ISHIKAWAJIMA HARIMA HEAVY INDUSTRIES LTD. VS. DIT 7 THEIR LORDSHIPS NOTED THAT THE TAXABILITY IS TO BE DETERMINED UNDER SECTION 9(1)(VII) OF THE ACT AND OBSERVED AS FOLLOWS : THE APEX COURT HAD OCCASION TO CONSIDER THE ABOVE QUESTION IN THE CASE OF ISHIKAWAJIMA HARIMA [2007] 288 ITR 408 (SC) WHEREIN WHILE INTERPRETING THE PROVISIONS OF SECTION 9(1)(VII)(C) OF THE ACT THE SUPREME COURT HELD AS UNDER (PAGE 444) : SECTION 9(1)(VII)(C) OF THE ACT STATES THAT A PERSON WHO IS A NON RESIDENT WHERE THE FEES ARE PAYABLE IN RESPECT OF SERVICES UTILIZED IN A BUSINESS OR PROFESSION CARRIED ON BY SUCH PERSON IN INDIA OR FOR THE PURPOSES OF MA KING OR EARNING ANY INCOME FROM ANY SOURCE OF INDIA. READING THE PROVISION IN ITS PLAIN SENSE AS PER THE APEX COURT IT REQUIRES TWO CONDITIONS TO BE MET THE SERVICES WHICH ARE 7 SUPRA ITA NO. 2508/MUM/08 ASSESSMENT YEAR 2008 09 PAGE 13 OF 31 THE SOURCE OF THE INCOME THAT IS SOUGHT TO BE TAXED HAS TO BE RENDERED IN INDIA AS WELL AS UTILIZED IN INDIA TO BE TAXABLE IN INDIA. BOTH THE ABOVE CONDITIONS HAVE TO BE SATISFIED SIMULTANEOUSLY. THUS FOR A NON RESIDENT TO BE TAXED ON INCOME FOR SERVICES SUCH A SERVICE NEEDS TO BE RENDERED WITHIN INDIA AND HAS TO BE PART OF A BUSINESS OR PROFESSION CARRIED ON BY SUCH PERSON IN INDIA. IN THE ABOVE JUDGMENT THE APEX COURT OBSERVED THAT (PAGE 444): SECTION 9(1)(VII) OF THE ACT MUST BE READ WITH SECTION 5 THEREOF WHICH TAKES WITHIN ITS PURVIEW THE TERRITORIAL NEXUS ON TH E BASIS WHEREOF TAX IS REQUIRED TO BE LEVIED NAMELY (A) RESIDENT; AND (B) RECEIPT OF ACCRUAL OF INCOME. ACCORDING TO THE APEX COURT THE GLOBAL INCOME OF A RESIDENT ALTHOUGH IS SUBJECTED TO TAX THE GLOBAL INCOME OF A NON RESIDENT MAY NOT BE. THE ANSWER TO THE QUESTION WOULD DEPEND UPON THE NATURE OF THE CONTRACT AND THE PROVISIONS OF THE DTA. WHAT IS RELEVANT IS RECEIPT OR ACCRUAL OF INCOME AS WOULD BE EVIDENT FROM A PLAIN READING OF SECTION 5(2) OF THE ACT SUBJECT TO THE COMPLIANCE WITH 90 DAYS RULE. ITA NO. 2508/MUM/08 ASSESSMENT YEAR 2008 09 PAGE 14 OF 31 AS PER THE ABOVE JUDGMENT OF THE APEX COURT THE INTERPRETATION WITH REFERENCE TO THE NEXUS TO TAX TERRITORIES ALSO ASSUMES SIGNIFICANCE. TERRITORIAL NEXUS FOR THE PURPOSE OF DETERMINING THE TAX LIABILITY IS AN INTERNATIONALLY ACCEPTED PRINCIPLE. AN END EAVOUR SHOULD THUS BE MADE TO CONSTRUE THE TAXABILITY OF A NON RESIDENT IN RESPECT OF INCOME DERIVED BY IT. HAVING REGARD TO THE INTERNATIONALLY ACCEPTED PRINCIPLE AND THE DTAA NO EXTENDED MEANING CAN BE GIVEN TO THE WORDS INCOME DEEMED TO ACCRUE OR AR ISE IN INDIA AS EXPRESSED IN SECTION 9 OF THE ACT. SECTION 9 INCORPORATES VARIOUS HEADS OF INCOME ON WHICH TAX IS SOUGHT TO BE LEVIED BY THE REPUBLIC OF INDIA. WHATEVER IS PAYABLE BY A RESIDENT TO A NON RESIDENT BY WAY OF FEES FOR SERVICES THUS WOULD NO T ALWAYS COME WITHIN THE PURVIEW OF SECTION 9(1)(VII) OF THE ACT. IT MUST HAVE SUFFICIENT TERRITORIAL NEXUS WITH INDIA SO AS TO FURNISH A BASIS FOR IMPOSITION OF AX. WHEREAS A RESIDENT WOULD COME WITHIN THE PURVIEW OF SECTION 9(1)(VII) OF THE ACT A NON RE SIDENT WOULD NOT AS SERVICES OF A NON RESIDENT TO A RESIDENT UTILIZED IN INDIA MAY NOT HAVE MUCH RELEVANT IN DETERMINING WHETHER THE INCOME OF THE NON RESIDENT ACCRUES OR ARISES IN INDIA. IT MUST HAVE A DIRECT LINK BETWEEN THE SERVICES RENDERED IN INDIA. WHEN SUCH A LINK IS ITA NO. 2508/MUM/08 ASSESSMENT YEAR 2008 09 PAGE 15 OF 31 ESTABLISHED THE SAME MAY AGAIN BE SUBJECTED TO ANY RELIEF UNDER THE DTAA. A DISTINCTION MAY ALSO BE MADE BETWEEN RENDITION OF SERVICES AND UTILIZATION THEREOF. WITH THE ABOVE UNDERSTANDING OF LAW LAID DOWN BY THE APEX COURT IF ONE T URNS TO THE FACTS OF THE CASE IN HAND AND EXAMINES THEM ON THE TOUCHSTONE SECTION 9(1)(VII)(C) WHICH CLEARLY STATESWHERE THE FEES ARE PAYABLE IN RESPECT OF SERVICES UTILIZED IN A BUSINESS OR PROFESSION CARRIED ON BY SUCH PERSON IN INDIA OR FOR THE PURPOS ES OF MAKING OR EARNING ANY INCOME FROM ANY SOURCE IN INDIA. IT IS THUS EVIDENT THAT SECTION 9(1)(VII)(C) READ IN ITS PLAIN ENVISAGES THE FULFILLMENT OF TWO CONDITIONS : SERVICES WHICH ARE SOURCE OF INCOME SOUGHT TO BE TAXED IN INDIA MUST BE (I) UTILI ZED IN INDIA AND (II) RENDERED IN INDIA. IN THE PRESENT CASE BOTH THESE CONDITIONS HAVE NOT BEEN SATISFIED SIMULTANEOUSLY. 8. IT IS THUS CLEAR THAT THE JUDGMENT OF HONBLE BOMBAY HIGH COURT 8 RESTS ON THE LEGAL PREMISES THAT UNDER SECTION 9(1)(VII) SERVICES WHICH ARE SOURCE OF INCOME SOUGHT TO BE TAXED IN INDIA MUST BE (I) UTILIZED IN INDIA; AND (II) RENDERED IN INDIA AND THE CONCEPTUAL PREMISES THAT 8 CLIFFORD CHANCE VS DCIT (SUPRA) ITA NO. 2508/MUM/08 ASSESSMENT YEAR 2008 09 PAGE 16 OF 31 TERRITORIAL NEXUS FOR THE PURPOSE OF DETERMINING THE TAX LIABILITY IS AN INTERNATIONALLY ACCEPTE D PRINCIPLE. LEARNED COUNSEL HAS LAID LOT OF EMPHASIS ON THESE TWO PRINCIPLES. 9. THE LEGAL PROPOSITION CANVASSED BY THE LEARNED COUNSEL HOWEVER DOES NO LONGER HOLD GOOD IN VIEW OF RETROSPECTIVE AMENDMENT W.E.F. 1 ST JUNE 1976 IN SECTION 9 BROUGHT OUT BY THE FINANCE ACT 2010. UNDER THE AMENDED EXPLANATION TO SECTION 9(1) AS IT EXISTS ON THE STATUTE NOW IT IS SPECIFICALLY STATED THAT THE INCOME OF THE NON RESIDENT SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA UNDER CLAUSE (V) OR CLAUSE (VI) OR CLAUSE ( VII) OF SECTION 9(1) AND SHALL BE INCLUDED IN HIS TOTAL INCOME WHETHER OR NOT (A) THE NON RESIDENT HAS A RESIDENCE OR PLACE OF BUSINESS OR BUSINESS CONNECTION IN INDIA; OR (B) THE NON RESIDENT HAS RENDERED SERVICES IN INDIA. IT IS THUS NO LONGER NECESSAR Y THAT IN ORDER TO ATTRACT TAXABILITY IN INDIA THE SERVICES MUST ALSO BE RENDERED IN INDIA. AS THE LAW STANDS NOW UTILIZATION OF THESE SERVICES IN INDIA IS ENOUGH TO ATTRACT ITS TAXABILITY IN INDIA. TO THAT EFFECT RECENT AMENDMENT IN THE STATUTE HAS V IRTUALLY NEGATED THE JUDICIAL PRECEDENTS SUPPORTING THE PROPOSITION THAT RENDITION OF SERVICES IN INDIA IS A SINE QUA NON FOR ITS TAXABILITY IN INDIA. ITA NO. 2508/MUM/08 ASSESSMENT YEAR 2008 09 PAGE 17 OF 31 10. THE CONCEPT OF TERRITORIAL NEXUS FOR THE PURPOSE OF DETERMINING THE TAX LIABILITY IS RELEVANT ON LY FOR A TERRITORIAL TAX SYSTEM IN WHICH TAXABILITY IN A TAX JURISDICTION IS CONFINED TO THE INCOME EARNED WITHIN ITS BORDERS. UNDER THIS SYSTEM ANY FOREIGN INCOME THAT IS EARNED OUTSIDE OF ITS BORDERS IS NOT TAXED BY THE TAX JURISDICTION BUT THEN APART FROM TAX HEAVENS THE ONLY PROMINENT COUNTRIES THAT ARE CONSIDERED TERRITORIAL TAX SYSTEMS ARE FRANCE BELGIUM HONG KONG AND THE NETHERLANDS AND IN THOSE COUNTRIES ALSO THIS SYSTEM COMES WITH CERTAIN ANTI ABUSE RIDERS. IN OTHER MAJOR TAX SYSTEMS THE SO URCE AND RESIDENCE RULES ARE CONCURRENTLY FOLLOWED. ON A CONCEPTUAL NOTE SOURCE RULE OF TAXATION REQUIRES AN INCOME SOURCED FROM A TAX JURISDICTION TO BE TAXED IN THIS JURISDICTION AND RESIDENCE RULE OF TAXATION REQUIRES INCOME EARNED FROM WHEREVER TO BE TAXED IN THE TAX JURISDICTION IN WHICH EARNER IS RESIDENT. IN THE US TAX SYSTEM THIS RESIDENCE RULE IS FURTHER STRETCHED TO COVER US TAXATION OF ALL ITS CITIZENS IRRESPECTIVE OF THEIR DOMICILE AND THE SOURCE RULE IS ALSO CONCURRENTLY FOLLOWED. IT IS THIS CONFLICT OF SOURCE AND RESIDENCE RULES WHICH HAS BEEN THE FUNDAMENTAL JUSTIFICATION OF MECHANISM TO RELIEVE A TAXPAYER WHETHER UNDER A BILATERAL TREATY OR UNDER DOMESTIC LEGISLATIONS OF THE DOUBLE TAXATION EITHER BY WAY OF EXCLUSION OF INCOME FROM THE SCOPE OF TAXABILITY IN ONE OF THE COMPETING JURISDICTIONS OR BY WAY OF TAX CREDITS. EXCEPT IN A SITUATION IN WHICH A TERRITORIAL METHOD OF TAXATION IS FOLLOWED WHICH IS USUALLY ALSO A LOWEST COMMON FACTOR IN TAXATION POLICIES OF TAX HEAVENS SOU RCE RULE IS AN INTEGRAL PART OF THE TAXATION ITA NO. 2508/MUM/08 ASSESSMENT YEAR 2008 09 PAGE 18 OF 31 SYSTEM AND ANY DOUBLE JEOPARDY DUE TO INHERENT CLASH OF SOURCE AND RESIDENCE RULE TO A TAXPAYER IS RELIEVED ONLY THROUGH THE SPECIFIED RELIEF MECHANISM UNDER THE TREATIES AND THE DOMESTIC LAW. IT IS THUS FALLA CIOUS TO PROCEED ON THE BASIS THAT TERRITORIAL NEXUS TO A TAX JURISDICTION BEING SINE QUA NON TO TAXABILITY IN THAT JURISDICTION IS A NORMAL INTERNATIONAL PRACTICE IN ALL TAX SYSTEMS . THIS SCHOOL OF THOUGHT IS NOW SPECIFICALLY SUPPORTED BY THE RETROSPECTIV E AMENDMENT TO SECTION 9. 11. IT IS THUS CLEAR THAT HONBLE BOMBAY HIGH COURTS JUDGMENT IN THE CASE OF CLIFFORD CHANCE 9 IS NO LONGER GOOD LAW AS THERE HAVE BEEN AMENDMENTS IN LAW IN CONSONANCE WITH THE SCHOOL OF THOUGHT DISCUSSED ABOVE AND THESE AMEN DMENT UNAMBIGUOUSLY NEGATE THE PRINCIPLE OF TERRITORIAL NEXUS WHICH IS TH E UNDERSTRUCTURE OF LINE OF REASONING ADOPTED BY THE HONBLE COURTS ABOVE . IT IS NO LONGER NECESSARY THAT IN ORDER TO INVITE TAXABILITY UNDER SECTION 9(1)(VII) OF THE ACT THE SERV ICES MUST BE RENDERED IN THE INDIAN TAX JURISDICTION. IN OUR CONSIDERED VIEW THEREFORE THE INCOME OF THE CHINESE COMPANY BY WAY OF IMPUGNED RECEIPT OF FEES FOR TECHNICAL SERVICES FROM AN INDIAN COMPANY IS TO BE DEEMED TO ACCRUE OR ARISE IN INDIA UNDER SECTION 9(1)(VII) OF THE ACT. IT IS ACCORDINGLY LIABLE TO BE TAXED IN INDIA UNDER THE DOMESTIC TAX LAW. 9 (SUPRA) ITA NO. 2508/MUM/08 ASSESSMENT YEAR 2008 09 PAGE 19 OF 31 12. THE NEXT ISSUE TO BE EXAMINED BY US IS WHETHER OR NOT THE INCOME EARNED BY THE CHINESE COMPANY IS LIABLE TO BE TAXED IN INDIA UNDER ARTICLE 12 O F THE INDIA CHINA TAX TREATY. 13. ARTICLE 12 OF THE INDIA CHINA TAX TREATY PROVIDES AS FOLLOWS: ROYALTIES AND FEES FOR TECHNICAL SERVICES 1. ROYALTIES OR 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 CONTRACTING STATE. 2. HOWEVER SUCH ROYALTIES OR FEES FOR TECHNICAL SERVICES MAY ALSO BE TAXED IN THE CONTRACTING STATE IN WHICH THEY ARISE AND ACCORDING TO THE LAWS OF THAT CONTRACTING STATE BUT IF THE RECI PIENT IS THE BENEFICIAL OWNER OF THE ROYALTIES OR FEES FOR TECHNICAL SERVICES THE TAX SO CHARGED SHALL NOT EXCEED 10 PER CENT OF THE GROSS AMOUNT OF THE ROYALTIES OF FEES FOR TECHNICAL SERVICES. 3. THE TERM 'ROYALTIES' AS USED IN THIS ARTICLE MEANS PAYM ENT OF ANY KIND RECEIVED AS A CONSIDERATION FOR THE USE OF OR THE RIGHT TO USE ANY ITA NO. 2508/MUM/08 ASSESSMENT YEAR 2008 09 PAGE 20 OF 31 COPYRIGHT OF LITERARY ARTISTIC OR SCIENTIFIC WORK INCLUDING CINEMATOGRAPH FILMS AND FILMS OR TAPES FOR RADIO OR TELEVISION BROADCASTING ANY PARENT TRADE MARK DESIGN OR M ODEL 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 ANY PAYMENT FOR THE PROVISION OF SERVICES OF MANAGERIAL TECHNICAL OR CONSULTANCY NATURE BY A RESIDENT OF A CONTRACTING STATE IN THE OTHER CONTRACTING STATE BUT DOES NOT INCLUDE PAYMENT FOR ACTIVITIES MENTIONED IN PARA GRAPH 2(K) OF ARTICLE 5 AND ARTICLE 15 OF THE AGREEMENT. 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 CONTRAC TING STATE IN WHICH THE ROYALTIES OF 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 PROPERT Y OR CONTRACT IN RESPECT OF WHICH THE ROYALTIES OR FEES FOR TECHNICAL SERVICES ARE PAID IS EFFECTIVELY CONNECTED WITH SUCH PERMANENT ITA NO. 2508/MUM/08 ASSESSMENT YEAR 2008 09 PAGE 21 OF 31 ESTABLISHMENT OR FIXED BASE. IN SUCH CASE THE PROVISIONS OF ARTICLE 7 OR ARTICLE 14 AS THE CASE MAY BE SHALL APPLY. 6. ROYALTIES OR FEES FOR TECHNICAL SERVICES SHALL BE DEEMED TO ARISE IN A CONTRACTING STATE WHEN THE PAYER IS THE GOVERNMENT OF THAT CONTRACTING STATE A POLITICAL SUBDIVISION A LOCAL AUTHORITY THEREOF OR A RESIDENT OF THAT CONTRACTING STATE. WHERE HOWEVER T HE PERSON PAYING THE ROYALTIES OR FEES FOR TECHNICAL SERVICES WHETHER HE IS A RESIDENT OF A CONTRACTING STATE OR NOT HAS IN A CONTACTING STATE A PERMANENT ESTABLISHMENT OR A FIXED BEST IN CONNECTION WITH WHICH THE LIABILITY TO PAY THE ROYALTIES OR FEES F OR TECHNICAL SERVICES WAS INCURRED AND SUCH ROYALTIES OR FEES FOR TECHNICAL SERVICES ARE BORNE BY SUCH PERMANENT ESTABLISHMENT OR FIXED BASE THEN SUCH ROYALTIES OR FEES FOR TECHNICAL SERVICES SHALL BE DEEMED TO ARISE IN THE CONTRACTING STATE IN WHICH THE PERMANENT ESTABLISHMENT OR FIXED BASE IS SITUATED. 7. WHERE BY REASON OF A SPECIAL RENLATIONSHIP BETWEEN THE PAYER AND THE BENEFICIAL OWNER OR BETWEEN BOTH OF THEM AND SOME OTHER PERSON THE AMOUNT OF THE ROYALTIES OR FEES FOR TECHNICAL SERVICES HAVING REGARD TO THE USE RIGHT OR INFORMATION FOR WHICH THEY ARE PAID EXCEEDS THE AMOUNT WHICH WOULD HAVE BEEN AGREED UPON BY THE PAYER AND THE BENEFICIAL OWNER IN THE ABSENCE OF SUCH RELATIONSHIP THE PROVISIONS OF THIS ARTICLE SHALL APPLY ONLY TO THE LAST MENT IONED ITA NO. 2508/MUM/08 ASSESSMENT YEAR 2008 09 PAGE 22 OF 31 AMOUNT. IN SUCH CASE THE EXCESS PART OF THE PAYMENTS SHALL REMAIN TAXABLE ACCORDING TO THE LAWS OF EACH CONTRACTING STATE DUE REGARD BEING HAD TO THE OTHER PROVISIONS OF THIS AGREEMENT. 14. A PLAIN READING OF THE ABOVE TREATY PROVISIONS SHOW THA T UNDER ARTICLE 12 (4) SHOWS THAT WHAT IS COVERED BY THE BASIC DEFINITION OF THE EXPRESSION FEES FOR TECHNICAL SERVICES IS THE PROVISION OF SERVICES OF MANAGERIAL TECHNICAL OR CONSULTANCY NATURE BY A RESIDENT OF A CONTRACTING STATE IN THE OTHER CONTRA CTING STATE. IN OTHER WORDS TECHNICAL SERVICES BEING PROVIDED BY RESIDENT OF ONE OF THE CONTRACTING STATE IN THE OTHER CONTRACTING STATE IS WHAT WILL BE COVERED BY THE BASIC RULE UNDER ARTICLE 12 (4). THE EXPRESSION PROVISION OF SERVICES IS NOT DEFINE D OR ELABORATED ANYWHERE IN THE TAX TREATY. THE ARGUMENT OF THE LEARNED COUNSEL IS THAT PROVISION OF SERVICES SHOULD BE CONSTRUED AS RENDITION OF SERVICES BUT WE WILL COME TO THAT ASPECT A LITTLE LATER. 15. IT IS ALSO IMPORTANT TO TAKE NOTE OF THE DEEMING FICTION UNDER ARTICLE 12(6) OF THE TREATY. THIS ARTICLE INTER ALIA PROVIDES THAT ROYALTIES OR FEES FOR TECHNICAL SERVICES SHALL BE DEEMED TO ARISE IN A CONTRACTING STATE WHEN THE PAYER IS THE GOVERNMENT OF THAT CONTRACTING STATE A POLITICAL S UBDIVISION A LOCAL AUTHORITY THEREOF OR A RESIDENT OF THAT CONTRACTING STATE. IN OTHER WORDS IRRESPECTIVE OF THE SITUS OF TECHNICAL SERVICES HAVING BEEN RENDERED ACCORDING TO THIS TREATY PROVISION THE ITA NO. 2508/MUM/08 ASSESSMENT YEAR 2008 09 PAGE 23 OF 31 FEES FOR TECHNICAL SERVICES WILL BE DEEMED TO HAVE ACCRUED IN THE TAX JURISDICTION IN WHICH PERSON MAKING THE PAYMENT IS LOCATED. THAT IS A TYPICAL MANIFESTATION OF THE SOURCE RULE THAT WE HAVE DISCUSSED EARLIER IN THIS ORDER IN THE CONTEXT OF DOMESTIC LAW PROVISIONS AND WHICH IN PRINCIPLE REQUIRES TAX ABILITY OF AN INCOME IN THE TAX JURISDICTION IN WHICH IT IS SOURCED. NORMALLY THE SOURCE OF AN INCOME IS THE COUNTRY IN WHICH PERSON MAKING THE PAYMENT IS LOCATED. THERE COULD OF COURSE BE SITUATIONS IN WHICH A PAYMENT RELATED TO BUSINESS OR PROFESSION BEING CARRIED OUT IN ONE COUNTRY IS BEING MADE BY A RESIDENT OF ANOTHER COUNTRY WHO IS CARRYING OUT SUCH BUSINESS OR PROFESSION IN THE FIRST COUNTRY. IN THESE SITUATIONS EVEN THOUGH THE PAYMENT IS NOT RECEIVED FROM A RESIDENT OF THE FIRST COUNTRY THE TR UE SOURCE OF EARNING IS LOCATED IN THE FIRST COUNTRY. SECOND LIMB OF ARTICLE 12(6) TAKES CARE OF SUCH SITUATIONS AND MAKES THE MANIFESTATION OF SOURCE RULE EVEN MORE UNAMBIGUOUS. IT PROVIDES THAT EVEN WHEN PERSON MAKING THE PAYMENT IS NOT RESIDENT OF THE OTHER CONTRACTING STATE BUT THE PAYMENT IS BEING MADE BY HIM IN CONNECTION WITH A PERMANENT ESTABLISHMENT OR FIXED BASE IN THE OTHER CONTRACTING STATE SUCH ROYALTIES AND FEES FOR TECHNICAL SERVICES WILL BE DEEMED TO HAVE ACCRUED IN THE OTHER CONTRACTING STATE. IN SUCH A SITUATION THE TRUE SOURCE JURISDICTION WILL BE THAT OTHER CONTRACTING STATE EVEN THOUGH THE PAYMENT MAY BE MADE FROM OUTSIDE BOTH THE CONTRACTING STATES AND THEREFORE THE INCOME IS DEEMED TO HAVE ACCRUED IN THAT OTHER CONTRACTING STAT E. ITA NO. 2508/MUM/08 ASSESSMENT YEAR 2008 09 PAGE 24 OF 31 16. WHEN WE PUT IT TO THE LEARNED COUNSEL THAT IN VIEW OF THE DEEMING FICTION OF ARTICLE 12(6) IT IS NOT REALLY NECESSARY TO GO INTO THE BROADER QUESTION ABOUT THE MERITS OF HIS ARGUMENTS ON THE SCOPE OF ARTICLE 12(4) AND PROCEED ON THE BASIS THAT THE PAYMENTS MADE BY AN INDIAN COMPANY WILL BE DEEMED TO HAVE ARISEN IN INDIA EVEN UNDER THE INDO CHINA TAX TREATY HE HAS SUBMITTED THAT ONCE A FEES FOR TECHNICAL SERVICE IS NOT COVERED BY THE BASIC PROVISIONS OF ARTICLE 12(4) WHICH IS CONFINED TO SERVICES HAVING BEEN RENDERED IN THE SOURCE STATE THERE IS NO OCCASION OF INVOKING ARTICLE 12 (6). IT IS SUBMITTED THAT THE DEEMING PROVISION FOR ARTICLE 12(6) IS CONFINED TO WHAT IS ALREADY COVERED BY ROYALTIES AND FEES FOR TECHNICAL SERVICES WHICH ARE NEATLY DEFINED IN ARTICLE 12(4) AND IT DOES NOT SEEK TO EXTEND THE SCOPE OF THE SAID BASIC DEFINITION. IT IS ONLY AFTER 12(4) IS SATISFIED THAT THE DEEMING FICTION CAN BE INVOKED. HE INVITES OUR ATTENTION TO CORRESPONDING ARTICLE OF CHINA PAKISTAN TAX TREATY 10 I .E. ARTICLE 13 WHICH DOES NOT HAVE ANY SUCH DEEMING FICTION BUT WHICH PROVIDES THAT THE TERM FEES FOR TECHNICAL SERVICES AS USED IN THIS ARTICLE MEANS ANY CONSIDERATION (INCLUDING ANY LUMP SUM CONSIDERATION) FOR THE PROVISION OF RENDERING OF ANY MAN AGERIAL TECHNICAL OR CONSULTANCY SERVICES BY A RESIDENT OF ONE OF THE CONTRACTING STATE IN THE OTHER CONTRACTING STATE. IT IS POINTED OUT THAT IN CHINA PAKISTAN TAX TREATY THERE IS NO ADDITIONAL SOURCE RULE I.E. DEEMING FICTION FOR THE FEES FOR TECHNI CAL SERVICES EVEN THOUGH THERE IS A DEEMING 10 93 TNI 250 - 8; D O C 93 - 31887 ITA NO. 2508/MUM/08 ASSESSMENT YEAR 2008 09 PAGE 25 OF 31 FICTION OF SOURCE RULE FOR ROYALTIES. IT IS THUS POINTED OUT THAT CHINESE TAX TREATIES WHICH DO NOT GENERALLY HAVE FEES FOR TECHNICAL SERVICES CLAUSE HAVE A PLACE OF PERFORMANCE TEST OR NEGATION OF SOUR CE RULE IN SEVERAL TAX TREATIES. WE ARE URGED TO RECOGNIZE THIS UNDERLYING PRINCIPLE IN CHINESE TAX TREATIES. IT IS ALSO POINTED OUT THAT THIS PHENOMENON IS NOT UNIQUE TO CHINESE TAX TREATIES. OUR ATTENTION IS INVITED TO INDIA ISRAEL TAX TREATY 11 WHICH PR OVIDES UNDER ARTICLE 13(5) THAT FEES FOR TECHNICAL SERVICES WILL BE DEEMED TO ARISE IN A CONTRACTING STATE ONLY WHEN SERVICES ARE RENDERED IN THAT STATE AND THE PAYER IS RESIDENT OF THAT STATE. A REFERENCE IS THEN MADE TO INDIA SAUDIA ARABIA TAX TREA T Y IN WHICH A SPECIFIC PROVISION FOR TAXABILITY OF FEES FOR TECHNICAL SERVICES IS SAID TO BE ALTOGETHER ABSENT WHICH ACCORDING TO THE LEARNED COUNSEL SHOWS THAT IT IS NOT AT ALL NECESSARY THAT THE SOURCE RULE MUST EXTEND TO ALL PAYMENTS FOR FEES FOR T ECHNICAL SERVICES. 17. WE ARE UNABLE TO SEE ANY MERITS IN THIS LINE OF ARGUMENTS EITHER . WHETHER A PARTICULAR INCOME IS TO BE COVERED BY THE BENEFITS OF A TAX TREATY OR NOT IS ESSENTIALLY A DECISION AT THE LEVEL OF THE GOVERNMENTS AND IT DEPENDS ON SE VERAL CONSIDERATIONS ALL OF WHICH DO NOT NECESSARILY REFLECT SOUND TAXATION OR SOUND ECONOMIC POLICIES. JUST BECAUSE INDIA DOES NOT SEEK A SOURCE TAXATION RIGHT IN TAX TREATY WITH SAUDIA ARABIA OR BECAUSE PAKISTAN GIVES UP A SOURCE TAXATION RIGHT IN TA X TREATY WITH CHINA 11 96 TNI 162 - 4 1; DOC 96 - 23188 ITA NO. 2508/MUM/08 ASSESSMENT YEAR 2008 09 PAGE 26 OF 31 IT CANNOT INFLUENCE AS TO WHAT IS THE SCOPE OF INDIA CHINA TAX TREATY. IT IS NOT AT DESIRABLE TO BE INFLUENCED WITH WHAT HAS BEEN DECIDED IN OTHER TAX TREATIES ENTERED INTO BY THE CONTRACTING STATES. AS REGARDS THE REFERENCES TO INDIA ISRAEL AND INDIA SAUDIA ARABAIA TAX TREATIES 12 THEREFORE THESE ARE TAX TREATIES WITH DIFFERENT COUNTRIES AND WHATEVER IS DECIDED IN THESE TAX TREATIES DOES NOT INFLUENCE THE SCOPE OF TAX TREATY BEFORE USAS FAR AS CHINA PAKISTAN TAX TREATY 13 IS CONCERNED WE HAVE NOTED THAT WHILE CHINA PAKISTAN TAX TREATY REFERS TO PROVISION OF RENDERING OF ANY MANAGERIAL TECHNICAL OR CONSULTANCY SERVICES (EMPHASIS SUPPLIED BY US) INDIA CHINA TAX TREATY REFERS TO PROVISION OF SERVICES OF MANAGERIAL TECHNICAL OR CONS ULTANCY SERVICES. THE SCOPE THE EXPRESSION PROVISION OF SERVICES HAS TO BE SOMETHING WIDER THAN PROVISION OF RENDERING OF SERVICES. IF AT ALL THIS CONTRAST WITH CHINA PAKISTAN TAX TREATY SHOWS SOMETHING THIS CONTRAST SHOWS THAT THE INDIA CHINA TAX T REATY INTENDS TO FOLLOW THE SOURCE RULE WHILE CHINA PAKISTAN TAX TREATY GIVES UP THE SOURCE RULE FOR FEES FOR TECHNICAL SERVICES. THE DIFFERENCE BETWEEN THESE TWO CLAUSES CAN HARDLY BE MISSED AND IT BECOMES ALL THE MORE CLEAR WHEN ONE TAKES INTO ACCOUNT THE FACT THAT WHILE THERE IS A DEEMING FICTION CLAUSE IN ARTICLE 12(6) OF INDIA CHINA TAX TREATY TAKING CARE OF THE SITUATIONS IN WHICH PAYMENTS ARE MADE BY PERSONS NOT RESIDENT IN THE OTHER CONTRACTING STATE THOUGH THEY HAVE A PERMANENT ESTABLISHMENT O R FIXED BASE IN THE OTHER CONTRACTING STATE THERE IS NO SUCH CORRESPONDING CLAUSE IN CHINA 12 SUPRA 13 SUPRA ITA NO. 2508/MUM/08 ASSESSMENT YEAR 2008 09 PAGE 27 OF 31 PAKISTAN TAX TREATY. IT IS THUS CLEAR FROM THE MATERIAL PLACED BEFORE US THAT WHILE INDIA CHINA TAX TREATY FOLLOWS THE SOURCE RULE IN THE MATTER OF FEES FOR TECH NICAL SERVICES PAKISTAN CHINA TAX TREATY DOES NOT DO SO. THATS A CONSCIOUS CHOICE BY THE RESPECTIVE GOVERNMENTS AND JUST BECAUSE CHINA PAKISTAN HAVE NEGOTIATED A BILATERAL TAX TREATY IN A PARTICULAR MANNER IT DOES NOT MEAN THAT INDIA CHINA TAX TREATY S HOULD ALSO B E CONSTRUED ON THE SAME BASIS. 18. WE HAVE ALSO NOTED THAT ANY OTHER MEANING BEING ASSIGNED TO THE SCOPE EXPRESSION FEES FOR TECHNICAL SERVICES WILL RENDER ARTICLE 12(6) MEANINGLESS. WHEN WE PUT THIS PROPOSITION TO THE LEARNED COUNSEL FOR THE ASSESSEE HE COULD NOT POINT OUT ANY SITUATIONS IN WHICH IN SUCH A SITUATION ARTICLE 12(6) WILL HAVE ANY APPLICATION BUT THEN HE ADDED THAT MERELY BECAUSE A PROVISION WILL BE RENDERED INFRUCTUOUS HE SHOULD NOT BE SHY OF GIVING THE TREATY A CORRECT LITERAL INTERPRETATION. WE DONOT THINK THAT WILL BE A CORRECT APPROACH FOR US. IN THE CASE OF HINDALCO INDUSTRIES LTD VS ACIT 14 THIS TRIBUNAL HAD AN OCCASION TO SET OUT THE PRINCIPLES ON THE BASIS OF WHICH TAX TREATIES ARE TO BE INTERPRETATED. SUMMARZING THESE PRINCIPLES AND SPEAKING THROUGH ONE OF US (I.E. THE ACCOUNTANT MEMBER) THIS TRIBUNAL HAS OBSERVED AS FOLLOWS: THE SCHOOL OF THOUGHT EMERGING FROM THE ABOVE DISCUSSIONS 14 9 4 ITD 242 ITA NO. 2508/MUM/08 ASSESSMENT YEAR 2008 09 PAGE 28 OF 31 LEADS US TO CONCLUDE THAT THE PRINCIPLES GOVERNING INTERPRETATION OF TAX TREATI ES CAN BE BROADLY SUMMED UP AS FOLLOWS : * A TAX TREATY IS AN AGREEMENT AND NOT TAXING STATUTE EVEN THOUGH IT IS AN AGREEMENT ABOUT HOW TAXES ARE TO BE IMPOSED. THE PRINCIPLES ADOPTED IN THE INTERPRETATION OF STATUTORY LEGISLATION ARE NOT APPLICABLE IN I NTERPRETATION OF TREATIES. * A TAX TREATY IS TO BE INTERPRETED IN GOOD FAITH IN ACCORDANCE WITH THE ORDINARY MEANING GIVEN TO THE TREATY IN THE CONTEXT AND IN THE LIGHT OF ITS OBJECTS AND PURPOSE. * A TAX TREATY IS TO REQUIRED TO BE INTERPRETED AS A WHOL E 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 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 VALEAT QUAM PEREAT I.E. IN SUCH ITA NO. 2508/MUM/08 ASSESSMENT YEAR 2008 09 PAGE 29 OF 31 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 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 EMPLOYE D IN THE TREATY ARE TO BE GIVEN A GENERAL MEANING GENERAL TO LAWYERS AND GENERAL TO LAYMAN ALIKE. * WHEN A TAX TREATY DOES NOT DEFINE A TERM EMPLOYED IN IT AND THE CONTEXT OF THE TREATY SO REQUIRES IT CAN BE GIVEN A MEANING DIFFERENT FROM DOMESTIC LAW MEANING THEREOF. THE MEANING OF THE UNDEFINED TERMS IN A TAX TREATY SHOULD BE DETERMINED BY REFERENCE TO ALL OF THE RELEVANT INFORMATION AND ALL ON THE RELEVANT CONTEXT. THERE CANNOT HOWEVER BE ANY RESIDUAL PRESUMPTION IN FAVOUR OF A DOMESTIC LAW MEANIN G OF A TREATY TERM. (EMPHASIS SUPPLIED BY US BY UNDERLINING) ITA NO. 2508/MUM/08 ASSESSMENT YEAR 2008 09 PAGE 30 OF 31 19. IN VIEW OF THE ABOVE A LITERAL INTERPRETATION TO A TAX TREATY WHICH RENDERS TREATY PROVISIONS UNWORKABLE AND WHICH IS CONTRARY TO THE CLEAR AND UNAMBIGUOUS SCHEME OF THE TREATY HAS TO BE AVOIDED. IN ANY CASE EVEN ON MERITS WE ARE OF THE CONSIDERED VIEW THAT THE SCOPE OF THE EXPRESSION PROVISION FOR SERVICES IS MUCH WIDER IN SCOPE THAT THE EXPRESSION PROVISION FOR RENDERING OF SERVICES AND WILL COVER THE SERVICES EVEN WHEN THESE A RE NOT RENDERED IN THE OTHER CONTRACTING STATE AS LONG AS THESE SERVICES ARE USED IN THE OTHER CONTRACTING STATE. THEREFORE THE TECHNICAL SERVICES IN QUESTION ARE CLEARLY COVERED BY ARTICLE 12(4) OF THE TREATY. THIS POSITION IS FURTHER CLARIFIED AND IS SPECIFICALLY COVERED BY THE DEEMING FICTION UNDER ARTICLE 12(6) AS WELL. THE IMPUGNED PAYMENT TO THE CHINESE COMPANY THEREFORE IS COVERED BY THE SCOPE OF FEES FOR TECHNICAL SERVICES WITHIN MEANINGS ASSIGNED TO THAT EXPRESSION UNDER ARTICLE 12 OF THE I NDIAN CHINA TAX TREATY AND IS TAXABLE IN INDIA AS SUCH. 20. FOR THE DETAILED REASONS SET OUT ABOVE WE ARE OF THE CONSIDERED VIEW THAT THE IMPUGNED PAYMENT WAS TAXABLE IN INDIA UNDER THE PROVISIONS OF THE INDIAN INCOME TAX ACT 1961 AS ALSO UNDER THE P ROVISIONS OF THE APPLICABLE INDIA CHINA TAX TREATY. THE TAX WITHHOLDING LIABILITY OF THE APPELLANT UNDER SECTION 195 BEING IN THE NATURE OF VICARIOUS LIABILITY THEREFORE DID EXTEND TO DEDUCTION OF TAX AT SOURCE ITA NO. 2508/MUM/08 ASSESSMENT YEAR 2008 09 PAGE 31 OF 31 FROM THE PAYMENT OF US $ 1 000 000 MAD E TO THE CHINESE COMPANY. WE THEREFORE APPROVE THE CONCLUSIONS ARRIVED AT BY THE LEARNED CIT(A) AND DECLINE TO INTERFERE IN THE MATTER. 21. IN THE RESULT THE APPEAL IS DI SMISSED . P RONOUNCED IN THE OPEN COURT TODAY ON 21 ST DAY OF MAY 2010. SD/XX SD/XX (R S PADVEKAR) (PRAMOD KUMAR) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI; 21 ST DAY OF MAY 20 10. COPY FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION) MUMBAI 4. COMMISSIONER (APPEALS) MUMBAI 5. DEPA RTMENTAL REPRESENTATIVE L BENCH ITAT MUMBAI 6. GUARD FILE TRUE COPY BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUN AL MUMBAI BENCHES MUMBAI