Income Tax Appellate Tribunal - Mumbai
Deputy Commissioner Of Income Tax vs Boston Consulting Group Pte. Ltd. on 4 February, 2005
Equivalent citations: [2005]94ITD31(MUM), [2006]280ITR1(MUM), (2005)93TTJ(MUM)293
ORDER
Pramod Kumar, A.M.
1. The appeal is filed by the Revenue and is directed against the order dt. 17th Oct., 2000 passed by the CIT(A), in the matter of assessment under Section 143(3) of the IT Act, 1961 (hereinafter referred to as 'the Act') for the asst. yr. 1997-98.
2. The grievances raised by the Revenue are as follows:
"1. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in holding that the income of the assessee amounting to Rs. 40,50,000 representing gross receipts from Indian clients is not liable to be taxed in India in terms of the DTAA between India and Singapore.
2. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in not appreciating the facts that as per Article 7(3) of the DTAA between India and Singapore, the income of the assessee from business is to be computed in accordance with the provisions of and subject to the limitations of the taxation laws of that state, which includes Section 44D which provides for taxation of income on gross basis."
3. Whatever be the wordings of these grounds of appeal, in our considered view, the actual issue we are required to adjudicate in this appeal is whether or not the limitation on deduction for expenses, as set out in Section 44D of the IT Act, will apply in a case where the related income is not in the nature of 'fees for technical services' so far as meaning of the said expression under the applicable bilateral tax Treaty is concerned but, on the tests laid down under Expln. 2 to Section 9 (vii) of the Act, such an income could be treated as 'fees for technical services'. Learned representatives fairly agree with us that it is this issue which constitutes core of the controversy, and arguments of the learned representatives canvass their respective points of view on this issue. As for the first ground of appeal, as rightly pointed out by Mr. Vyas, it is not even the assessee's case, nor the finding of the CIT(A), that the income of the assessee, to the extent attributable to the permanent establishment in India, is not liable to tax in India. This grievance is clearly ill-conceived and calls for no adjudication. Our concern is, therefore, confined to the issue regarding applicability of limitation on deduction of expenses, set out under Section 44D, on the facts of this case.
4. Let us first take a look at the material facts on record. The assessee is a company incorporated in Singapore and carries out its business in India through a branch office. There is no dispute that its India branch office constitutes its 'permanent establishment' (PE, in short) in India, and, therefore, the profit attributable to the PE are taxable in India. The assessee-company is engaged in the business of rendering strategy consulting services, such as business strategy, marketing and sales strategy, portfolio strategy etc. to its clients in India and abroad. The assessee filed its income tax return for the asst. yr. 1997-98 on 27th Nov., 1997 disclosing a loss of Rs. 4,02,59,543 and claiming a tax refund of Rs. 2,50,341 which was deducted at source. During the course of scrutiny assessment proceedings, the AO noticed that the assessee-company had received Rs. 1,41,48,885 as gross professional receipts, out of which Rs. 1,00,98,885 were received from the foreign companies, and the balance Rs. 40,50,000 were received from Indian companies. The AO further noticed that the assessee had claimed expenditure of Rs. 5,44,08,428 to earn the said professional receipts. The AO also took note of the position that in terms of provisions of Article 7(3) of the India-Singapore DTAA (DTAA, in short), admittedly in accordance with which profits of the PE were to be computed, deduction of expenses were to be allowed in accordance with and subject to the limitations in the domestic law i.e. Indian IT Act. It was in this background that the AO was of the view that limitation set out in Section 44D, which provides for taxation of fees for technical services on gross basis, is applicable on the facts of the case, though, as the section itself sets out, only in the cases of such fees received from Indian concerns and the Government of India. The AO, thus, concluded that, so far as the fees received from Indian concerns is concerned, the same is taxable on gross basis, though at a concessional rate of 20 per cent in terms of the provisions of Section 115A of the Act. As regards the fees received from foreign companies, however, the AO, in computation of taxable income or, to put it appropriately, in computation of loss to be carried forward, allowed deduction of related expenses incurred by the assessee. Since the expenses incurred on fees earned from Indian concerns and expenditure incurred on fees earned from foreign concerns could not be segregated, nor could it be allocated on any other basis, these expenses were allocated on the basis of quantum of fees earned on pro rata basis. The AO, thus, completed the assessment in two parts (i) computing the taxable income of the assessee at Rs. 40,50,000 and taxing the same at concessional rate of 20 per cent in terms of Section 115A of the Act., (ii) computing loss to be carried forward at Rs. 2,87,35,585 (i.e. Rs. 1,00,98,885 being professional fees received from foreign concerns minus Rs. 3,88,34,470 being pro rata expenditure incurred on earning the said fees). Aggrieved by the assessment order so passed by the AO, the assessee challenged the order in appeal before the CIT(A). In the said appellate order, the CIT(A) observed that the receipts in question cannot be treated as 'fees for technical services' for the purpose of Article 12 of the DTAA, and that the same are being attributable to assessee's PE in India, are to be taxed in India in terms of the provisions of the DTAA. The CIT(A) further noted that Article 7(3) lays down that the taxability of business profits is on net basis, i.e., after deducting the expenditure incurred in earning the professional receipts, and not on gross basis. It was in the background of these observations that the CIT(A) concluded that, since income is to be computed on net basis and since in the present case there is a net loss, "there is no income liable to be taxed in the hands of the appellant company in terms of the DTAA with Singapore". The learned CIT(A) did not anywhere deal with the core issue of applicability of limitation on deduction of expenses under Section 44D of the Act. However, since he rejected the AO's point of view, the applicability of Section 44D can only be inferred to have been rejected in effect sub silentio. The action of the AO, in applying Section 44D while computing the profits attributable to the Indian PE, was, thus, reversed by the CIT(A). Revenue is aggrieved, and is in appeal before us.
5. Shri D.S. Venupani, learned Senior Departmental Representative, appeared for the appellant-Revenue, and Shri Dinesh Vyas, learned Senior advocate, along with Shri P.C. Tripathi, advocate, appeared for the respondent-assessee. Learned representatives have been heard at considerable length, material on record carefully perused, and large number of judicial precedents cited at the bar, as also factual matrix of the case, duly considered.
6. There is no controversy before us on whether or not the provisions of the India-Singapore DTAA will apply to the facts of this case or not. Rightly so, because the law is trite that in a case India has entered into a DTAA with any other country so far as the assessees which are covered by such an agreement are concerned, the provisions of the IT Act, 1961, will apply only to the extent to which provisions of the IT Act are more beneficial to the assessee. It is a settled legal position that whenever there is a conflict between the provisions of the tax Treaty and the domestic law, the provisions of the tax Treaty will prevail. These tax treaties have a significant place in the scheme of the Indian income-tax legislation, inasmuch as these treaties lay down an alternate scheme of taxation, so far as the beneficiaries of the applicable tax Treaty are concerned. These alternate paradigms are entirety optional to the assessee because it cannot be thrust upon an assessee and the provisions of the Indian IT Act continue to be applicable to the extent these provisions are more favourable to the assessees. Once the assessee chooses to be covered by the provisions of an applicable tax Treaty, it is not open to Revenue to thrust the provisions of the Act on the assessee. Revenue, therefore, cannot dispute the taxability in the hands of the assessee being examined on the touchstone of the principles implicit in the scheme of India-Singapore tax Treaty.
7. There is also no dispute that the provisions of Article 7 are applicable on the facts of this case, inasmuch as what is sought to be taxed by the AO is the profit earned by the assessee to the extent the same is attributable to the assessee's PE in India. In other words, the parties are unanimous that profits of the PE are to be computed in terms of the provisions of Article 7 of the DTAA. The scheme of Article 7, so far as relevant to the dispute before us is concerned, is like this. Generally speaking, profits of enterprise of a Contracting State are only to be taxed in that Contracting State (i.e. country of domicile) but one of the exceptions to this general rule is that where such an enterprise carries on the business in the other Contracting State through a permanent establishment (PE) situated in the other Contracting State (i.e., the source country), only so much of profits as are attributable to the PE are taxable in that Contracting State (i.e., the source country) also. The case before us falls in this exception. The profits attributable to the Indian PE are, therefore, taxable in India. There is no dispute on this aspect of the matter. The next step is quantification of these profits. The profits attributable to the PE are to be computed as if the PE is a separate and distinct enterprise dealing wholly independently with the enterprise of which it is a PE. The deductions are required to be given, while computing such profits attributable to the PE, for expenses which are incurred, in the source country or elsewhere, for the purpose of the PE. This aspect of the matter also does not pose any difficulty. The scheme of allowability of these deductions further provides that such deductions are to be allowed "in accordance with the provisions of, and subject to the limitation of, taxation laws of that State (i.e., the source country)". It is this provision of the Treaty which has given rise to the dispute before us. The dispute is confined to the manner in which the provisions of the Article 7(3) are to be applied, more particularly the manner in which "limitations of the taxation' laws of the other State (in which the PE is operating)" are to be construed, for the purpose of allowing deduction for the expenses incurred for the PE for determining profits of the PE, under Article 7(3). One of the limitations on deduction of expenses in the Indian IT Act is set out in Section 44D, which, inter alia, lays down that, notwithstanding anything contained in Sections 28 to 44C, a foreign company is not to be allowed any deduction of expenditure "in computing the income by way of royalty or fees for technical services" earned from Indian Government or an Indian concern under an agreement entered into between 1st April, 1976 to 31st March, 2003. Explanation (a) to Section 44D further provides that for the purpose of Section 44D, 'fees for technical services' shall have the same meaning as in Expln. 2 to Section 9 (vii). Revenue's contention is that this limitation on deduction of expenses, which prohibits deduction of any expenses in computation of income by way of royalties and fees for technical services is applicable in the present case also. It is contended that in view of provisions of Article 7(3) of the tax Treaty, limitation on deduction of expenses are also to be applied while computing the profits attributable to the PE, and that the only condition precedent for invoking this limitation is that the fees for technical services received in the instant case should meet the description of that term under Expln. 2 to Section 9 (vii). Revenue contends that it is an admitted position that, on the touchstone of definition of 'fees for technical services' under Expln. 2 to Section 9 (vii), the receipts by the assessee are required to be treated as 'fees for technical services'. Therefore, according to the Revenue, the limitation on deduction of expenses, as set out under Section 44D, is to be invoked. On the other hand, stand of the assessee is that Section 44D is not applicable on the facts of this case and in a situation, when, as per the tax Treaty provisions, the fees receipts do not answer the description of 'fees for technical services' in terms of the Treaty definition of that term. The dispute is whether or not the limitation set out in Section 44D will apply to the facts of this case. Therefore, the issue requiring our adjudication is whether or not the limitation on deduction for expenses, as set out in Section 44D of the IT Act, will apply in a case where the related income is not in the nature of 'fees for technical services' so far as meaning of the said expression under the applicable bilateral tax Treaty is concerned but, on the tests laid down under Expln. 2 to Section 9 (vii) of the Act, such an income could be treated as 'fees for technical services'.
8. We consider it desirable to reproduce Article 7 and Article 12 of the applicable tax Treaty and Section 44D and Section 115A of the Indian IT Act, as they stood at the material point of time, which provide as follows :
Article 7-Business profits
1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is directly or indirectly attributable to that permanent establishment.
2. Subject to the provisions of para 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall, in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. In any case where the correct amount of profits attributable to a permanent establishment is incapable of determination or the determination thereof presents exceptional difficulties, the profits attributable to the permanent establishment may be estimated on a reasonable basis.
3. In the determination of the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere, in accordance with the provisions of and subject to the limitations of the taxation laws of that State.
4. Insofar as it has been customary in the Contracting State to determine the profits to be attributed to a permanent establishment on the basis of an apportionment of the total profits of the enterprise to its various parts, nothing in para 2 shall preclude that Contracting State from determining the profits to be taxed by such an apportionment as may be customary; the method of apportionment adopted shall, however, be such that the result shall be in accordance with the principles contained in this article.
5. No profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise.
6. For the purpose of the preceding paragraphs, the profits to be attributed to the permanent establishment shall be determined by the same method year by year unless there is good and sufficient reason to the contrary.
7. Where profits include items of income which are dealt with separately in other articles of this agreement, then the provisions of those articles shall not be affected by the provisions of this article.
8. For the purpose of para 1, the term "directly or indirectly attributable to the permanent establishment" includes profits arising from transactions in which the permanent establishment has been involved and such profits shall be regarded as attributable to the permanent establishment to the extent appropriate to the part played by the permanent establishment in those transactions; even if those transactions are made or placed directly with the overseas head office of the enterprise rather than with the permanent establishment.
Article 12 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 :
(a) in the case of royalties in para 3(a) and fees for technical services as defined in this article (other than services described in sub-para (b) of this paragraph), 15 per cent of the gross amount of the royalties and fees;
(b) in the case of royalties referred to in para 3(b) and fees for technical services as defined in this article that are ancillary and subsidiary to the enjoyment of property for which royalties under para 3(b) are received, 10 per cent of the gross amount of the royalties and fees.
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 :
(a) any copyright of a literary, artistic or scientific work, including cinematograph film or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right property or information;
(b) any industrial, commercial or scientific equipment, other than payments derived by an enterprise from activities described in para 4(b) or 4(c) of Article 8.
4. The term "fees for technical services" as used in this article means payments of any kind to any person in consideration for services of a managerial, technical or consultancy nature (including the provision of such services through technical or other personnel) if such services :
(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in para 3 is received; or
(b) make available technical knowledge, experience, skill, know-how or processes, which enables the person acquiring the services to apply the technology contained therein; or
(c) consist of development and transfer of a technical plan or technical design, but excludes any service that does not enable the person acquiring the service to apply the technology contained therein.
For the purposes of (b) and (c) above, the person acquiring the service shall be deemed to include an agent, nominee, or transferee of such person.
5. Notwithstanding para 4, "fees for technical services" does not include payments :
(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 para 3(a);
(b) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft 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;
(e) to an employee of the person making the payment or to any individual or firm of individuals (other than a company) for professional services as defined in Article 14;
(f) for the services rendered in connection with an installation or structure used for the exploration or exploitation of natural resources referred to in para 2(j) of Article 5;
(g) for services referred to in paras 4 and 5 of Article 5.
6. The provisions of paras 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 State independent personal services from a fixed base situated therein, and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 or Article 14, as the case may be, shall apply.
7. Royalties and fees for technical services shall be deemed to arise in a Contracting State -when the payer is that State itself, a political sub-division, a local authority, a statutory body or a resident of that State. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for 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 State in which the permanent establishment or fixed base is situated.
8. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of royalties or fees for technical services paid exceeds the amount which would have been paid in the absence of such relationship, the provisions of this article shall apply only to the last-mentioned 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.
Section 44D of the IT Act, 1961 "Special provisions for computing income by way of royalties, etc., in the case of foreign companies.-Notwithstanding anything to the contrary contained in Sections 28 to 44C, in the case of an assessee, being a foreign company,--
(a) the deductions admissible under the said sections in computing the income by way of royalty or fees for technical services received from Government or an Indian concern in pursuance of an agreement made by the foreign company with Government or with the Indian concern before the 1st day of April, 1976, shall not exceed in the aggregate twenty per cent of the gross amount of such royalty or fees as reduced by so much of the gross amount of such royalty as consists of lump sum consideration for the transfer outside India of, or the imparting of information outside India in respect of, any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process or trade mark or similar property;
(b) no deduction in respect of any expenditure or allowance shall be allowed under any of the said sections in computing the income by way of royalty or fees for technical services received from Government or an Indian concern in pursuance of an agreement made by a foreign company with Government or with the Indian concern after the 31st day of March, 1976, but before the 1st day of April, 2003.
Explanation : For the purposes of this section,-
(a) "fees for technical services" shall have the same meaning as in Expln. 2 to Clause (vii) of Sub-section (1) of Section 9;
(b) "foreign company" shall have the same meaning as in Section 80B;
(c) "royalty" shall have the same meaning as in Expln. 2 to Clause (vi) of Sub-section (1) of Section 9
(d) royalty received from Government or an Indian concern in pursuance of an agreement made by a foreign company with Government or the Indian concern after the 31st day of March, 1976, shall be deemed to have been received in pursuance of an agreement made before the 1st day of April, 1976, if such agreement is deemed, for the purposes of the proviso to Clause (vi) of Sub-section (1) of Section 9, to have been made before the 1st day of April, 1976."
115A. Tax on dividends, royalty and technical service fees in the case of foreign companies.-(1) Where the total income of-
(a)............
(b) a non-resident (not being a company) or a foreign company, includes any income by way of royalty or fees for technical services received from Government or an Indian concern in pursuance of an agreement made by the foreign company with Government or the Indian concern after the 31st day of March, 1976, and where such agreement is with an Indian concern, the agreement is approved by the Central Government or where it relates to a matter included in the industrial policy for the time being in force, of the Government of India, the agreement is in accordance with that policy, then, subject to the provisions of Sub-sections (1A) and (2), the income-tax payable shall be the aggregate of,-
(A) the amount of income-tax calculated on the income by way of royalty, if any, included in the total income, at the rate of thirty per cent;
(B) the amount of income-tax calculated on the income by way of fees for technical services, if any, included in the total income, at the rate of thirty per cent; and (C) the amount of income-tax with which it would have been chargeable had its total income been reduced by the amount of income by way of royalty and fees for technical services.
Explanation : For the purposes of this section,-
(a) "fees for technical services" shall have the same meaning as in Expln. 2 to Clause (vii) of Sub-section (1) of Section 9;
9. It is also necessary to bear in mind the principles governing the interpretation of tax treaties. These principles are somewhat liberal vis-a-vis the rigid principles of interpretation of statutes. DTAAs are international agreements entered into between States. The conclusion and interpretation of such conventions is governed by public international law, and particularly, by the Vienna Convention on the Law of Treaties of 23rd May, 1969. The rules of interpretation contained in the Vienna Convention,' being customary international law, also apply to the interpretation of tax treaties. This view also finds mention in the Tribunal's order in the case of Modern Threads India Ltd. v. Dy. CIT (1999) 63 TTJ (Jp)(TM) 601 : (1999) 69 ITD 115 (Jp)(TM). Article 31(1) of the Vienna Convention States that "A Treaty shall be interpreted in good faith in accordance with the ordinary meaning given to the terms of the Treaty in their context and in the light of its object and purpose".
10. Elaborating upon the principles governing interpretation of tax treaties, Lord Denning, in Bulmer Ltd. v. S.A. Bollinger (1972) 2 All ER 1226, said ".......The Treaty ......... is quite unlike any of the enactments we have been accustomed....... It lays down general principles. It expresses aims and purposes.....what are English Courts to do when they are faced with a problem of interpretation ? They must follow the European pattern. No longer must they examine the words in meticulous detail. No longer must they argue about the precise grammatical sense. They must look to the purpose or intent........"
11. Echoing these views and justifying his departure from the plain meaning of the words used in the Treaty, Goulding J., in IRC v. Exxon Corporation (1982) STC 356 at p. 359, observed:
"In coming to the conclusion, I bear in mind that the words of the convention are not those of a regular Parliamentary draughtsman but a text agreed on by negotiations between the two contracting Governments. Although I am thus, constrained to do violence to the language of the convention, I see no reasons to inflict a deeper wound than necessary. In other words, I prefer to depart from the plain meaning of language only in the second sentence of Article XV and I accept the consequence (strange though it is) that similar words mean different things in the two sentences."
12. In a later judgment, Harman J. in Union Texas Petroleum Corporation v. Critchley (1988) STC 69, affirmed the above observations of Goulding J. and added :
"I consider that I should bear in mind that this double tax agreement is an agreement. It is not a taxing statute, although it is an agreement about how taxes should be imposed. On that basis, in my judgment, this agreement should be construed as ut res magis valeat quam pereat, as should all agreements. The fact that the parties are 'high contracting parties', to use an old 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 which ought to be interpretated in good faith and ut res magis valeat quam pereat, i.e., to make it workable rather than redundant.
13. Hon'ble Supreme Court, in the case of Union of India and Anr. v. Azadi Bachao Andolan and Anr. (2003) 263 ITR 706 (SC), had an occasion to deal with the principles governing the interpretation of tax treaties. In this regard, Hon'ble Supreme Court held that the principles adopted in the interpretation of treaties are not the same as those adopted in the interpretation of statutory legislation. Their Lordships quoted, with approval, following passage from the judgment of the Federal Court of Canada in the case of John N. Gladden v. Her Majesty, the Queen 85 DTC 5188, at p. 5190 wherein the emphasis is on the 'true intentions' rather than 'literal meaning of the words employed'.
"Contrary to an ordinary taxing statute, a tax Treaty or convention must be given a liberal interpretation with a view to implementing the true intentions of the parties. A literal or legalistic interpretation must be avoided when the basic object of the Treaty might be defeated or frustrated insofar as the particular items under consideration are concerned."
In the said judgment, as noted by Their Lordships at p. 743, the Federal Court of Canada recognised that "we cannot expect to find the same nicety or strict definition as in modern documents, such as deeds, or Acts of Parliaments, it has never been habit of those engaged in diplomacy to use legal accuracy but rather to adopt more liberal terms".
14. In Azadi Bachao Andolan's case (supra), Their Lordships also quoted, with approval, Fancis Bennion's certain observations in his work 'Statutory Interpretation' (Butterworths, 1992 Edn. at p. 461). Extracts from the said observations are as follows :
"With indirect enactment, instead of the substantive legislation taking a well known form of an Act of Parliament, it has the form of a Treaty. In other words, form and language found suitable for embodying an international agreement, at the stroke of a pen, also the form and language of a municipal legislative instrument. It is rather like saying that, by Act of Parliament, a woman shall be a man. Inconveniences may ensue. One inconvenience is that the interpreter is likely to be required to cope with disorganisied 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'."
15. Hon'ble Supreme Court, in the case of K.P. Varghese v. ITO (1981) 131 ITR 597 (SC) and even in the 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 task of interpretation of a statutory enactment is not a mechanical task. It is more than a mere reading of mathematical formulae because few words possess the precision of mathematical symbols. It is an attempt to discover the intent of the legislature from the language used by it and it must always be remembered that language is at best an imperfect instrument for the expression of human thought and, as pointed out by Lord Denning, it would be idle to expect every statutory provision to be 'drafted with divine prescience and perfect clarity'. We can do no better than repeat the famous words of Judge learned Hand when he said :
......it is true that the words used, even in their literal sense, are the primary and ordinarily the most reliable source of interpreting the meaning of any writing : be it a statute, a contract or anything else. But 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.' We must not adopt a strictly literal interpretation of........but we must construe its language having regard to the object and purpose which the legislature had in view in enacting that provision and in the context of the setting in which it occurs. We cannot ignore the context and the collection of the provisions in which........, appears, because, as pointed out by Judge learned Hand in the most felicitous language : interpret'.... the meaning of a sentence may be more than that of the separate words, as a melody is more than the notes, and no degree of particularity can ever obviate recourse to the setting in which all appear, and which all collectively create......."
When such are the views of the Hon'ble Supreme Court on the interpretation of taxing statutes, essentially the tax treaties, which are to be subject to less rigid rules of interpretation, cannot be subjected to literal interpretation in isolation with the context in which the provisions of the Treaty are set out.
16. Hon'ble Madras High Court in the case of CIT v. VR. S.R.M. Firms and Ors. (1994) 208 ITR 400 (Mad), has held that "tax treaties are...... considered to be mini legislation containing in themselves all the relevant aspects or features which are at variance with the general taxation laws of the respective countries". It is also important to bear in mind that the provisions of tax treaties are required to be read as a whole and not in isolation with each other. The Court's duty is to give effect to the provisions of the Treaty in its natural meaning, and not to interpret them in isolation. It is done in their context and in the light of the object and purpose of the Treaty. The context in which the words are used is, therefore, of the paramount importance. General words and phrases, therefore, however wide and comprehensive in their literal sense, must be construed as being limited to the actual objects of the enactment. Therefore, what is really needed in the context of interpretation of treaties is that a holistic view of the matter is taken. This exercise essentially requires that the provisions of the Treaty are required to be treated in a harmonious manner. The same principle applies to the interpretation of the taxing statutes as well. It is fundamental principle of interpretation that a statute must be read as a whole, notwithstanding that every section of the statute is a substantive enactment in itself. A co-ordinate Bench of this Tribunal, in the case of Ensco Maritime Ltd. v. Dy. CIT (2004) 91 TTJ (Del) 1 : (2004) 91 ITD 459 (Del), at pp. 476-477) and while dealing with the principles of interpretation of treaties, has, inter alia, observed as follows :
"...... it would be necessary to bear in mind that the tax treaties should be interpreted unconstrained by the technical rules of law or precedents, on the broad principles of general expectation. The process of interpretation should take into account the fact that the language of the Treaty has not been chosen by Parliamentary draftsman. Treaties have been drafted by the diplomats who do not use the language in a precise legislative manner as the legal draftsman do while drafting the statutes. The Treaty results from negotiations and compromise with the two conflicting interests. Interpretation of such treaties must depend upon the text and the context. If text is the texture, context is what gives the colour. That interpretation is best which makes the textual interpretation match contextual one. Where an expression has not been defined in a tax Treaty, the same would have to be interpreted in harmony with the Treaty read as a whole......."
We are in respectful agreement with the views so expressed by the co-ordinate Bench, and these views are in concurrence with our understanding, as explained above, on the issue.
17. The school of thought emerging from the above discussions leads us to conclude that the principles governing interpretation of tax treaties 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 interpretation 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 required to be interpreted as a whole, which essentially implies that the provisions of the Treaty are required to be construed in harmony with each other.
The words employed in the tax treaties not being those of a regular Parliamentary draughtsman, the words need not be examined in precise grammatical sense or in literal sense. Even departure from plain meaning of the language is permissible whenever context so requires, to avoid the absurdities and to interpret the Treaty ut res magis valeat quam pereat, i.e., in such a manner as to make it workable rather than redundant.
A literal or legalistic meaning must be avoided when the basic object of the Treaty might be defeated or frustrated insofar as particular items under consideration are concerned.
It is inevitable that interpreter of a tax Treaty is likely to be required to cope with disorganised composition instead of precision drafting. Therefore, the words employed in the Treaty are to be given a general meaning - general to lawyers and general to layman alike.
18. Let us now deal with the core issue in appeal before us.
19. Section 44D was brought on the statute, w.e.f. 1st April, 1976, by the Finance Act, 1976. By the same Finance Act, Section 115A was also introduced. Section 44D, as we have already seen, provides for taxation of royalties and fees for technical services on gross basis and without allowing any deduction for expenses incurred in earning the said income. Section 115A, on the other hand, provides for a special rate of tax on certain incomes including the income from royalties and fees for technical services. The provisions of these two sections are required to be read together inasmuch as while one section lays down that no deductions are permissible in computation of income from, inter alia, royalties and fees for technical services, the other section provides for a lower rate of tax from the said income. These are complementary provisions in that sense. These two sections are to be read in conjunction and not in isolation. Explaining the scope and nature of these sections, Board Circular No. 202, dt. 5th July, 1976 [(1976) 105 ITR (St) 17] stated that :
"Special provision for computing income by way of royalties and technical service fees in the case of foreign companies-New Section 44D.
26.1 Hitherto, income by way of royalties received under agreements made after the 31st March, 1961, and approved by the Central Government was taxed in the hands of foreign companies at the rate of 52.5 per cent (income-tax 50 per cent plus surcharge 2.5 per cent). Income by way of technical service fees received under agreements made after the 29th Feb., 1964, and approved by the Central Government was also taxed at the same rate. In either case, the taxable income was determined on net basis, i.e., after allowing deduction in respect of costs and expenses incurred for earning the income.
26.2 The Finance Act has inserted a new Section 44D in the IT Act, 1961, which lays down special provisions for computing income by way of royalties and fees for technical services received by foreign companies from Indian concerns...
26.3 As regards royalties and technical service fees received under agreements made on or after the 1st April, 1976 (other than agreements which though made on or after that date or regarded as having been made before that date as explained in para 26.2) no deduction will be allowed in computing the income from the aforesaid sources, regardless of whether the agreement has been.......
36.1.........income by way of royalty or fees for technical services received by them from Indian concerns in pursuance of approved agreements made on or after the 1st April, 1976, will now be charged to tax at flat rates applicable on the gross amount of such income. The rates of income-tax to be applied in respect of such income have been specified in new Section 115A of the IT Act and are as follows :................
(iii) Income by way of fees for technical services received by a foreign company from an Indian concern in pursuance of an approved agreement made on or after the 1st April, 1976, will be charged to tax at the rate of 40 per cent on the gross amount of such fees."
The periodic changes in Section 44D have been accompanied by the corresponding changes in Section 115A. It is thus, clear that non-deduction of expenses under Section 44D, which means that the taxability is on gross basis, is coupled with a special rate of tax for such income on gross basis under Section 115A. A somewhat similar scheme of taxability of royalties and fees for technical service on gross basis, but a lower rate, also finds place in most of the tax treaties including India-Singapore tax Treaty. Article 12 provides for taxation of fees for technical services in the source country on gross basis, but at a lower tax rate of 15 per cent, barring the cases of fees for technical services which are ancillary and subsidiary to the enjoyment of property for which royalties under para 12(3)(b), which are taxed at an even lower rate of 10 per cent. Section 44D r/w Section 115A of the Indian IT Act, and Article 12 of the India-Singapore tax Treaty are, therefore, similar in nature. These alternate paradigms, contained in Section 44D r/w Section 115A and in Article 12 of the India-Singapore tax Treaty, offer alternative but similar models of taxation of income from royalties and fees from technical services. While these two sets of provisions dealing with taxability on gross basis may belong to the same genus of taxation models, but, at the same time, these are two independent, mutually exclusive, and, therefore, competing sets of provisions. Once it is clear that these are competing models of taxation of royalties and fees for technical services on gross basis, in the IT Act and in the India-Singapore tax Treaty, it has to follow that the provisions of the IT Act cannot come into play unless these are more beneficial to the assessee. That certainly is not the case here. The law is trite that the provisions of taxability under the IT Act, in preference over the provisions of the applicable tax Treaty, cannot be thrust upon an unwilling assessee. Therefore, the provisions of Section 44D cannot be applied in a situation in which the Revenue's case for taxing the royalties and fees for technical services on gross basis under the tax Treaty on the sole ground that receipts in question are not in the nature of 'royalties and fees for technical services' for the purposes of the said Treaty. This situation is quite distinct and different from the situation that the receipts are in the nature of 'royalties and fees for technical services' for the purposes of Treaty but are being taxed on the net basis because of the application of Article 12(6), i.e., on account of being attributable to the PE in the other Contracting State. In other words, in case a receipt is held to be not taxable as 'royalties and fees for technical services' under the provisions of the India-Singapore tax Treaty, the same cannot also be subjected to tax under Section 44D r/w Section 115A either.
20. In view of the admitted position that the provisions of the India-Singapore tax Treaty are applicable on the facts of this case, let us examine, on the touchstone of underlying scheme of things in the said tax Treaty, as to what is the nature of receipts in the hands of the assessee and in respect of which profits attributable to Indian PE are to be computed. In the assessment order, there is no finding by the AO that the receipts by the assessee could be covered by any of the Sub-clauses in Article 12(4). To the AO, this aspect of the matter did not really seem important because he was of the view, in view of the mandate of Article 12(6), that when 'royalty and fees for technical services' arise, in the course of business carried on through a permanent establishment in India, the provisions of Article 7 are to be applied for the purpose of computation of profits liable to tax. While there is, and there cannot be, quarrel with this proposition that in a case where royalties and fees for technical services arise in the course of business carried on through the permanent establishment, the taxable profits in respect of the same are to be computed with reference to the principles laid down under Article 7(3), we are also of the considered view that a finding about the nature of receipt being taxed in the hands of the assessee is a sine qua non for proper application of the Treaty provisions. The importance of this finding is from the point of view as to what are the limitations for deduction of expenses which are applicable on the facts of this case. In the present case, there is no dispute that the receipts are not in the nature of 'royalties', and, therefore, these receipts are required to be examined from the point of view of scope of 'fees for technical services' only. In case the receipts are held to be outside the scope of 'fees for technical services', which is defined under Article 12(4), and for the reasons we shall now set out, the limitations set out in Section 44D will not be applicable.
21. The heading of Section 44D, as we have reproduced earlier in this order, is "Special provisions for computing income by way of royalties, etc., in the case of the foreign companies". It is a well known Latin legal maxim that "A rubro ad nigrum" which means, literally, from red to the black. In olden times, the title of a statute as well as headings of a provision, were written in red while its body text was written in black. Viewed in this background, this Latin maxim implies that in the process of interpreting a statute, one must start from the title and interpret the text of the provision with reference to its title. Somewhat identical were the views of the Hon'ble Supreme Court in the case of Shree Sajjan Mills Ltd. v. CIT and Anr. (1985) 156 ITR 585 (SC), wherein Their Lordships took note of the title of the section and interpreted the scope of the section in the light of title thereof. Their Lordships observed that:
"..........Section 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...."
(Emphasis, italicized in print, supplied by us now) Therefore, the heading of a section, in the words of Hon'ble Supreme Court, "certainly is a relevant factor to be taken into consideration in construing the ambit of the section". The heading of Section 44D being "special provisions for computing income by way of royalties, etc., in the case of the foreign companies," this section can come to play only when the income is by way of royalties, etc., i.e., by way of royalties and fees for technical services ('fees for technical services' is perhaps the only other nature of income belonging to the genus of 'royalties') in the hands of a foreign company. Unless the income is of such a nature so as to fit the description of title of Section 44D, there cannot be any occasion to invoke that section. But then, one more important and fundamental aspect is required to be dealt with. This aspect pertains to the conflicting scope of definition of 'fees for technical services'. Explanation (a) to the Section 44D States that (a) "fees for technical services" shall have the same meaning as in Expln. 2 to Clause (vii) of Sub-section (1) of Section 9. The question then is whether the limitation under Section 44D is to be invoked in a case where receipts in question answer the description of technical services in Expln. 2 to Section 9 (vii) or is it confined to the cases where receipts are covered by the scope of fees for technical services under the applicable tax Treaty. Explanation (a) to Section 44D is essentially a part of Section 44D itself. In a situation where there is no occasion to enter Section 44D, as the receipts do not meet the description of fees for technical services in terms of tax Treaty which is admittedly applicable, it is quite illogical to apply the definition of 'fees for technical services' envisaged in Expln. (a) to Section 44D itself. When the main door of the house is locked how does one open the main door with the help of the keys lying inside the living room. There is no occasion to invoke Section 44D, because one cannot take recourse to the definition inside the section which one has no occasion to invoke. In terms of the provisions of the tax Treaty, if receipts in question cannot be treated as 'fees for technical services', could it be the scheme of the Treaty to apply the limitations for deduction of expenses which are applicable only in the cases of receipts in the nature of 'fees for technical services' ? To our understanding the answer has to be an emphatic 'No'. In coming to this conclusion, we are particularly guided by the observations of Hon'ble Madras High Court in the case of CIT v. VR. S.R. M. Firm and Ors. (supra), that "tax treaties are..... considered to be mini legislation containing in themselves all the relevant aspects or features which are at variance with the general taxation laws of the respective countries". If we are to view a tax Treaty as a coherent piece of mini legislation, it essentially implies that a tax Treaty is to be construed in its entirety and not as a bunch of provisions unconnected with each other. It is thus, necessary to appreciate that while viewing one provision of a tax Treaty, due regard is to be given to the scheme of that tax Treaty. It cannot be open to take out a provision from the Treaty and interpret it as a kind of a standalone provision. Therefore, when we are to apply the limitation on deduction of expenses so far as 'royalties and fees for technical services' are concerned, we have to see whether or not the payments in question do in fact constitute 'royalties and fees for technical services' in the light of the principles underlying the scheme of the applicable tax Treaty. The deduction under Section 44D comes to play only when the income is in the nature of income as royalties and fees for technical services. It would indeed be somewhat inconsistent and certainly unreasonable to, on one hand, hold that the receipts of the assessee are not in the nature of fees for technical services, and then, on the other hand, apply the limitation for deduction of expenses which are applicable only in the case of receipts in the nature of fees for technical services.
22. Hon'ble Supreme Court has, in the case of Union of India v. Azadi Bachao Andolan (supra), observed that "the principles adopted in interpretation of treaties are not the same as those in interpretation of statutory legislation". While saying so, Their Lordships quoted, with approval, a passage from the judgment of the Federal Court of Canada in the case of N. Gladden v. Hex Majesty, the Queen (supra), wherein the emphasis is on the 'true intentions' rather than 'literal meaning of the words employed'. In the light of the views so expressed by the Hon'ble Supreme Court, if one is to consider the scope of limitations on deduction of expenses in computation of business profits "in accordance with the provisions of and subject to the limitations of the taxation laws of that State", it is difficult to find the meeting ground between the finding that a particular receipt is not in the nature of 'fees for technical services' for the purposes of the tax Treaty, and yet, while computing the profits in respect of the same, limitation on deduction of expenses which are applicable only on receipts from 'fees for technical services' is applicable while computing taxable profits from such receipts. What must prevail is the inherent scheme of the tax Treaty. In case, under the scheme of a tax Treaty, a particular receipt is not to be treated as a fees for technical services for the purposes of its taxability, it cannot be treated as a fees for technical services for the purposes of application of limitation on deduction of expenses under Article 7(3) either. In our considered view, the limitation on deduction of expenses under Article 7(3) cannot be viewed in isolation of other provisions under the tax Treaty.
23. On the touchstone of broad principles of general expectation also, referred to in the case of Ensco Maritime Ltd. (supra), it is futile to expect that once the Treaty provides that a certain income is not to be treated as fees for technical services, the limitations on deduction of expenses, which are applicable only on the fees for technical services, can be applied in computation of income from such receipts. In our considered view, therefore, the limitations on deduction of expenses under Article 7(3) can only be such as are applicable for business profits other than profits from royalties and fees for technical services, which are dealt with separately under the tax Treaty. This is, in our humble understanding, contextual connotation of the limitation on deduction of expenses under Article 7(3) so far as business profits other than those in the nature of royalties and fees for technical services are concerned.
24. Article 12(4), which is already reproduced above, lays down that the term 'fees for technical services' means payments of any kind to any person in consideration for services of a managerial, technical or consultancy nature (including the provision of such services through technical or other personnel) if such services are (a) ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in para 3 is received; or (b) make available technical knowledge, experience, skill, know-how or processes, which enables the person acquiring the services to apply the technology contained therein; or (c) consist of, development and transfer of a technical plan or technical design, but excludes any service that does not enable the person acquiring the service to apply the technology contained therein. The nature of assessee's activities being in the nature of 'strategy consulting1, application of (a) and (c) is clearly ruled out. Such services can neither be ancillary and subsidiary to the application or enjoyment of the right, property or information, nor can these services consist of development and transfer of a technical plan or technical design. That leaves us only with Sub-Clause (b) of Article 12(4).
25. The nature of assessee's activities, as noted in the statement of facts is being engaged in business of 'strategy consulting'. There is no dispute that these consultancy services are non-technical in nature inasmuch as these services are, as noted in the assessment order itself, "in the nature of strategy and business consulting which are intended to improve the performance of its clients by focusing on fundamentals of business". It has not been, at any stage of proceedings, the case of the Revenue that the consultancy services are technical in nature. The question then arises whether non-technical consultancy services can also be covered by the scope of fees for technical services under the India-Singapore tax Treaty.
26. The provisions of Article 12(4)(b) of India-Singapore, tax Treaty are to a limited extent, in pari materia with the provisions of the definition of 'fees for included services' under Article 12(4)(b) of Indo-USA DTAA which is as follows :
"(4) For the purposes of this article, 'fees for included services' means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services :
(b) make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design."
The scope of India-Singapore tax Treaty is narrower in the sense it specifically provides the services should be such "which enables the person acquiring the services to apply the technology contained therein", even though as observed by a co-ordinate Bench of this Tribunal in the case of Raymonds Ltd. v. Dy. CIT (2003) 80 TTJ (Mumbai) 120 : (2003) 86 ITD 791 (Mumbai), ".........the addition of these words in the Singapore DTAA merely make it explicit what is embedded in the words 'make available' appearing in DTAA with UK and USA". The words "or consist of the development and transfer of a technical plan or technical design" appearing in the India-US tax Treaty also do not find mention in the India-Singapore tax Treaty. The scope of Article 12(4)(b) in India-US Treaty, therefore, are no wider than the scope of Article 12(4)(b) of the India-Singapore tax Treaty. Therefore, in case non technical services cannot be covered by the scope of Article 12(4)(b) of the India-US tax Treaty, these services cannot be covered by the scope of Article 12(4)(b) of the India-Singapore tax Treaty either. As a matter of fact, the aforesaid India-USA tax Treaty was the first Indian tax Treaty in which this paradigm shift in the scope of fees for technical services was made. The provisions of Article 12(4)(b), clearly depart from the normal definition of 'fees for technical services' in DTAAs that India had entered into with most foreign countries which is somewhat on the lines of definition given in Expln. 2 to Section 9 (vii) of the IT Act. In the protocol note attached to and forming part of the aforesaid DTAA, Government of India has confirmed that memorandum of understanding between India and USA with regard to interpretation of Article 12 (royalties and fees for included services) also represents the views of the Indian Government. This memorandum, inter alia, provides as follows :
Under para 4, technical and consultancy services are considered included services only to the following extent : (1) as described in para 4(a), if they are ancillary and subsidiary to the application or enjoyment of a right, property or information for which a royalty payment is made; or (2) as described in para 4(b), if they make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design. Thus, under para 4(b), consultancy services which are not of a technical nature cannot be included services.
(emphasis, italicized in print, supplied by us now) It is thus, clear that so far as the India-US tax Treaty is concerned, consultancy services, which are not technical in nature, cannot be treated as 'fees for included services' which is the same thing as, but for the peculiar expression used in this tax Treaty, 'fees for technical services'. This position becomes more clear from the following example given in the same MoU :
Example (7) Facts-The Indian vegetable oil manufacturing firm has mastered the science of producing cholesterol-free oil and wishes to market the product worldwide. It hires an American marketing consulting firm to do a computer simulation of the world market for such oil and to advise it on marketing strategies. Are the fees paid to the US company for included services ?
Analysis-The fees would not be for included services. The American company is providing a consultancy which involves the use of substantial technical skill and expertise. It is not, however, making available to the Indian company any technical experience, knowledge or skill, etc., nor is it transferring a technical plan or design. What is transferred to the Indian company through the service contract is commercial information. The fact that technical skills were required by the performer of the service in order to perform the commercial information service does not make the service a technical service within the meaning of para 4(b).
In the above example, advising on "marketing strategies" is held to be outside the scope of technical services. We have already noted that the assessee-company was engaged in the business of rendering strategy consulting services, such as business strategy, marketing and sales strategy, portfolio strategy, etc. to its clients in India and abroad. The nature of these services is materially similar. The scope of the corresponding provisions in the India-Singapore tax Treaty are not any wider in scope. In India-Singapore tax Treaty, it is all the more clear that only such services as are technical in nature are covered by the scope of Article 12(4)(b) as is evident from the reference to such services "which enables the person acquiring the services to apply the technology contained therein". Unless the services are technical in nature, there cannot be any question of 'technology' being contained therein which the person acquiring the services can be enabled to apply. Therefore, so far as provisions of India-Singapore tax Treaty, as also the provisions of India-US tax Treaty, are concerned, payments for services which are non-technical in nature, or, in other words, payments for services not containing any technology, are required to be treated as outside the scope of 'fees for technical services'.
27. It is noteworthy that the Government of India has confirmed that memorandum of understanding between India and USA with regard to interpretation of Article 12 (royalties and fees for included services), and extracts from which have been reproduced by us hereinabove, also represents the views of the Indian Government. Therefore, even apart from our categorical findings on merits, these views must prevail. We also have no reasons to believe that Government of India had any other views for materially identical provisions in India-Singapore tax Treaty. To the extent provisions are in pari materia, there cannot be different meanings assigned to the provisions, unless there is anything repugnant in the context. We find nothing to support any deviation from the interpretation canvassed in the memorandum of understanding, attached to and forming part of India-USA tax Treaty, extracts from which have been reproduced above. As stated by Lord Mansfield, "where there are different statutes in pari materia though made at different times, or even expired, and not referring to each other, they shall be taken together, as one system and as explanatory of each other. (R. v. Loxdale 97 ER 394 at p. 395). In our considered view, this principle of interpretation of statutes should also govern the interpretation of tax treaties, particularly when those tax treaties deal with the same thing and are identical in material respects. We may also refer to the observations of Griffith, C.J. in the case of Webb v. Outrim AC 81 PC, at p. 89 that, "When a particular form of legislative enactment, which has received authoritative interpretation whether by judicial decision or by a long course of practice, is adopted in framing a later statute, it is a sound rule of construction to hold that the words so adopted by the legislature to bear that meaning which has been so put on them." A fortiorari, when a particular tax Treaty clause has received an authoritative interpretation, from an authority no less than the Government of India itself, and identical clause is adopted in framing a later tax Treaty, it is to be held that the clause so adopted in the later tax Treaty will also normally have the same meaning as assigned to that clause.
28. In this view of the matter, in our considered view, the scope of 'fees for technical services' under Article 12(4)(b) does not cover 'consultancy services' unless these services are technical in nature. That admittedly is not the case here. Accordingly, we are of the considered view that the nature of services rendered by the assessee do not fit into the description of 'fees for technical services' under the provisions of the India-Singapore tax Treaty. As we have already held, in case the receipts, in respect of which profits are computed under Article 7(3), do not fit the description of 'royalties and fees for technical services', the limitation on deduction of expenses under Section 44D does not come into play. In the case before us, the receipts in question are such in nature that the provisions of Article 12 are not attracted. Accordingly, in our considered view, the limitation under Section 44D is not to be applied for the purpose of deduction of expenses, in computing taxable profits, under Article 7(3) of the India-Singapore tax Treaty. We have already taken note of the position that Section 44D r/w Section 115A of the Indian IT Act, and Article 12 of the India-Singapore tax Treaty are, similar in nature and offer alternative but similar models of taxation of income from royalties and fees from technical services, that these are two independent, mutually exclusive, and competing sets of provisions, and that once it is clear that these are competing models of taxation of royalties and fees for technical services on gross basis, in the IT Act and in the India-Singapore tax Treaty, it has to follow that the provisions of the IT Act cannot come into play unless these are more beneficial to the assessee which certainly is not the case here. We have held that in case a receipt is held to be outside the very scope of 'royalties and fees for technical services' under the provisions of Article 12, the same cannot be taxed under Section 44D r/w Section 115A either. For this reason also, Section 44D and Section 115A cannot have any application in the case before us.
29. For the detailed reasons set out above, we are of the considered view that the limitation on deduction of expenses, for the purpose of computing profits attributable to the permanent establishment in India, and in terms of the provisions of Section 44D of the Act, is not applicable on the facts of this case. Our reasoning for arriving at this conclusion is different than that of the CIT(A) but then we agree with his conclusions. Accordingly, we approve the conclusions arrived at by the CIT(A) and decline to interfere in the matter.
30. We may also mention that there are at least two important rulings by the Hon'ble Authority for Advance Rulings, namely, Ericsson Telephone Corporation India AB, in Re (1997) 224 ITR 203 (AAR) and ABC, In re (1997) 228 ITR 487 (AAR), which are in favour of the Revenue on somewhat similar issues, but none of the parties before us considered it necessary to invite our attention to these rulings. Be that as it may, we have carefully gone through these rulings and, having gone through these rulings also, we still see no reasons to take any other view than the view so arrived at above for several reasons set out below.
31. First, howsoever strong be the persuasive value of the ruling given by the Hon'ble Authority, these rulings are certainly not binding precedents on us. That gives us the liberty to, in deserving cases and for the cogent reasons to be placed on record, take an independent view of the matter, when so considered appropriate. In our considered view, the case before us is a fit case to exercise this option. For the detailed reasons set out earlier in this order and in the light of our findings on certain aspects of the matter, which Hon'ble Authority had no occasion to consider, we are of the view that the limitation on deduction of expenses under Section 44D will not apply in a case where the receipts in question do not answer the description of 'royalties and fees for technical services' under the applicable tax Treaty.
32. Secondly, in none of the above cases before the Hon'ble Authority, the receipts in question were found to be beyond the scope of 'royalties and fees for technical services' in the applicable tax treaties. On the contrary, there was a categorical finding in these cases that the receipts clearly fit in the description of 'royalties and fees for technical services' under the applicable tax treaties. In the case before us, however, not only that it is unchallenged finding of the CIT(A) that the receipts in question do not answer the description of 'royalties and fees for technical services', we have, on merits of the case and for the elaborate reasons set out earlier in this order, come to the conclusion that these receipts do not fit the description of the expression 'royalties and fees for technical services' under the applicable India-Singapore tax Treaty.
33. Thirdly, Hon'ble Authority for Advance Rulings considered only a purely legal interpretation to the provisions of the tax Treaty, but then Hon'ble Supreme Court has subsequently held that this approach is impermissible. Hon'ble Supreme Court, in the case of Union of India v. Azadi Bachao Andolan (supra), has observed that "the principles adopted in interpretation of treaties are not the same as those in interpretation of statutory legislation". While saying so, Their Lordships also quoted, with approval, extracts from the judgment of the Federal Court of Canada in the case of N. Gladden v. Her Majesty, the Queen (supra) wherein the emphasis is on the 'true intentions' rather than 'literal meaning of the words employed'. The views so expressed by Their Lordships are binding on us. When we have to choose between the views of the Hon'ble Supreme Court vis-a-vis the views of Hon'ble Authority for Advance Rulings, making the choice does not present any difficulty at all.
34. The fourth reason is as follows. In the case of ABC, In re (supra), Hon'ble Authority for Advance Rulings did notice the fact that the interpretation regarding application of Section 44D in computation of income attributable to PE will result in incongruities, but the Authority expressed its helplessness to do anything about it. We may, in this regard, refer to the following observations of the Authority in para 27 of the said ruling :
"Pausing here, it will be noticed that the above conclusion results in a somewhat anomalous situation. If the applicant's receipts had been assessed as royalties and fees for technical services simpliciter under Article 13 of the DTAA, the applicant could have insisted that they cannot be charged at a rate exceeding 20 per cent. However, the applicant will not be able to avail itself of this privilege or concession because the royalties and technical fees, having been derived in the course of business carried on through a permanent establishment, have specifically been taken out of the purview of Articles 13(1) and 13(2). The anomaly is one which arises from the terms of the DTAA cannot be helped."
Lord Denning, in the case of Seaford Court Estates Ltd. v. Asher (1949) 2 All ER 155 at p. 164, had observed that "when a defect appears, a Judge simply cannot fold his hands and blame the draftsmanship" and that "A Judge should ask himself the question as to how, if the makers of the Act had themselves come across this ruck in the texture of it, they would have straightened it out ? He must do as they would have done. A themselves Judge must not alter the material of which the Act is woven but he can, and he should, iron out the creases...". These observations, which were quoted with approval by Hon'ble Supreme Court in the case of M. Pentiah v. Mudulla Veeramallapa AIR 1961 SC 1107 (at p. 1115), may or may not be any longer relevant in the context of the interpretation of taxing statutes, but, in the light of principles approved in Azadi Bachao Andolan's case (supra) by the Hon'ble Supreme Court, these observations are certainly applicable in the context of interpretation of tax treaties. In our humble understanding, post Azadi Bachao Andolan it is no longer permissible in law to apply the rigid principles of interpretation of statutes on the treaties as well, and in case of such interpretations resulting in absurd results also, not to extend a liberal and extended construction. In Azadi Bachao Andolan's case (supra), Hon'ble Supreme Court has referred to, with approval, Federal Court of Canada's judgment in the case of John N. Gladden v. Her Majesty the Queen (supra) and observed as follows :
"......The Federal Court emphasised that in interpreting and applying the treaties, the Courts should be prepared to extend 'a liberal and extended interpretation' to avoid an anomaly which a contrary construction would lead to. The Court recognised that 'we cannot expect to find the same nicety or strict definition as in the modern documents, such as deeds, or Acts of Parliament, it has never been the habit of those engaged in diplomacy to use legal accuracy..........."
The approach of the Hon'ble Authority in continuing with strict legal interpretation, despite such an interpretation resulting in patent anomalies, is no longer good law. Accordingly, a conclusion so arrived at is also not legally sustainable.
35. Finally, a co-ordinate Bench, in the case of Ensco Maritime Ltd. v. Dy. CIT (supra), has, inter aha, observed that".....it would be necessary to bear in mind that the tax treaties should be interpreted unconstrained by the technical rules of law or precedents, on the broad principles of general expectation" and that "the process of interpretation should take into account the fact that the language of the Treaty has not been chosen by Parliamentary draftsman". It is not open for us to disregard these views and proceed to interpret the provisions of a tax Treaty only on the basis of technical rules of law and precedents, and, thereby, ignore the broad principles of general expectations.
36. In any event, it is certainly not the case that there is a binding precedent in favour of the Revenue. Therefore, even if there is a reasonably possible view in favour of the Revenue, this possibility per se does not clinch the issue. The view that we have accepted and elaborated earlier in this order is an equally, if not more, reasonable and possible view of the matter. It is well settled in law that when two views are possible, and one of these views is in favour of the assessee, the ambiguity is to be resolved in favour of the assessee. The authority for this proposition is contained in the Hon'ble Supreme Court's judgment in the case of CIT v. Vegetable Products Ltd. (1973) 88 ITR 192 (SC) wherein Their Lordships have observed that "if two reasonable constructions of a taxing provision are possible, that construction which favours the assessee must be adopted".
37. In the light of these reasons, as also for the detailed reasons set out above, we see no reasons to deviate from conclusions arrived at to the effect that the limitation on deduction of expenses, for the purpose of computing profits attributable to the permanent establishment in India, and in terms of the provisions of Section 44D of the Act, is not applicable on the facts of this case. We also hold that in case the receipts, in respect of which profits are computed under Article 7(3), do not fit the description of 'royalties and fees for technical services' under the applicable tax Treaty, the limitation on deduction of expenses under Section 44D does not come into play.
38. In the result, the Revenue's appeal is dismissed.