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Pramod Kumar, A.M.

1. This is an appeal by the assessee and is directed against CIT(A)'s order dt. 26th March, 1996, for the asst. yr, 1994-95. Solitary issue requiring our adjudication is whether or not the assessee had any liability to withhold tax from the payments made by the assessee to M/s Freshfields, a UK-based firm of solicitors, in consideration of services rendered by the aforesaid firm of solicitors.

2. The issue in appeal lies in a narrow compass of material facts. The assessee tax deductor Maharastra State Electricity Board (MSEB, in short), on 21st June, 1993, entered into an agreement with one M/s Freshfields, a London based firm of solicitors, for availing certain 'legal advisory services'. These services were required by MSEB as it intended to enter into a power purchase agreement to purchase power from, what was popularly known as, Enron Project. MSEB was a beneficiary of the proceeds of a loan granted by the International Bank for Reconstruction & Development (IBRD, in short) to Government of India. It appears that under the terms of this loan arrangement, a part of this loan was to be used for payment of legal advisory fees to Freshfields. As to the nature of services rendered by Freshfields to MSEB, following extracts from 'Appendix A' to the aforesaid 'Contract for Legal Services' throw sufficient light on the same:

The services will be required until such time as the PPA (i.e., power purchase agreement with Enron Project) is executed, unless otherwise agreed between the client and the legal advisor, but not in any event for a period exceeding beyond 31st July, 1993 unless the parties agree to an extension thereto.

It is acknowledged by both the parties that the legal advisor is a firm of English solicitors and will not (either itself or through any sub-consultants) advise on matters of Indian Law (or of any State therein) on which MSEB will take its own separate advice.

The services shall be performed at such locations' as shall be agreed between the client and the legal advisors as appropriate for performance of services, it being acknowledged by both the parties that certain of the services will fall to be performed in Bombay and others in London."

3. The professional fees for these services was to be worked out at the hourly rate ranging between £ 105 per hour to £ 252 per hour, and the total legal fees was estimated at £ 5,31,569 and total reimbursement of expenses estimated at £ 84,980. The agreement further provided that the total payment of legal fees under the contract was not to exceed £ 6,00,000 and this ceiling was, by way of subsequent amendments, finally enhanced to £ 9,00,000. It was under these arrangements that the assessee paid equivalent of Rs. 3,11,63,082 to Freshfields. These payments were in settlement of eighteen separate bills raised by Freshfields between 30th April, 1993 to 26th Jan., 1994, details of which are on record in Annexure to the impugned order passed by the AO. While seeking AO's permission to make remittance in settlement of these bills for legal consultancy services, the assessee took the stand that the payments being covered by Article 15 of applicable India United Kingdom Double Taxation Avoidance Agreement and the recipient firm having spent less than 90 days in India, these payments of legal fees are not exigible to tax in India. The AO was, however, of the view that Article 15 has application only in the cases of individuals, and observed that 'when a lawyer as an individual gives personnel services and M/s MSEB remits the money in the name of individual, then only Article 15 will come into play otherwise Article 13 of DTA between UK and India alone would be applicable'. In an earlier communication, i.e., letter dt. 16th June, 1994, the AO had also observed that in any event the MSEB cannot derive any benefit from Article 15 of the DTAA because man-days spent by the Freshfields are more than '90', i.e., in excess of the time limit set out in Article 15. The AO's observations inter alia were:

4. This aspect of the matter is, strictly speaking, not really relevant for our deliberations, as the CIT(A) has, in the impugned order, observed that "it would be logical to assume presence going by solar days and not man-days' and the Revenue is not aggrieved of the same.

5. It was in this backdrop that the AO came to the conclusion that the payments on account of legal consultancy charges were in the nature of fees for technical services covered by Article 13 of India United Kingdom DTAA, and, accordingly, the assessee was required to deduct tax at source computed @ 30 per cent of the gross sum. The AO further directed the MSEB that in the event of MSEB bearing the tax of Freshfields, the payment was, for the purpose of determining tax liability, required to be grossed up under Section 195A of the Act. Since it was an admitted position that any tax liability of Freshfield, with respect to income-tax in India, was to be borne by MSEB, the assessee was also held liable for grossing up under Section 195A of the Act.