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77. The above is the summary of the arguments of Mr. Dastur for the assessee, on the applicability of the DTAA with UK.

78. Mr. Kapila for the Department countered the above arguments as under. His first point goes to the root of the matter, viz., the applicability of the DTAA with UK. According to him, the agreement dt. 23rd Oct., 1994 was between the assessee-company and Merrill Lynch (Asia Pacific region), Hongkong. There is no DTAA between India and Hongkong and, therefore, the arguments based on the DTAA with UK are wholly irrelevant. So is the position with regard to the agreement with Goldman Sachs which is based in Hongkong. As regards DSP Financial Consultants, it was an Indian company and there is no question of any DTAA being applicable. As regards Barclays, its origin is not known. Thus, the DTAA with UK is not applicable to any case. In the alternative, Mr. Kapila contended that (assuming there was a payment) the amounts were received by the lead managers on behalf of all the other managers and since the lead managers were based in Hongkong with whom India has no DTAA, there is no question of applying any DTAA. His other alternative argument was that at least 90 per cent of the fees, relates to services rendered by Merrill Lynch (Asia Pacific region, Hongkong, before 9th Nov., 1994, and that even on this basis the DTAA with UK has no application. He also pointed out that with regard to the expenses of US $ 250,000 incurred prior to 9th Nov., 1994, for which there was no break-up, it must be considered as a payment to the lead managers based in Hongkong with whom India has no treaty. The amount was, therefore, fully taxable.

84. In his reply to the above arguments, Mr. Dastur, learned counsel for the assessee, relying on paras 28 to 38 of the order under Section 195, submitted that the AO himself had applied the provisions of the DTAA with UK and, therefore, it is no longer open to the Department to raise the point that the said DTAA was not applicable. The AO has even adopted, it was pointed out, the rate of tax of 15 per cent as per Article 13 of the DTAA. Mr. Dastur also took this opportunity to point out that the charge of the Department before us that the assessee-company did not point out the UK moorings of Merrill Lynch (vis-a-vis the fact that the agreement dt. 23rd Oct., 1994, was in the letterhead of Merrill Lynch Asia Pacific Region, Hongkong) was baseless, as unless the assessee had informed the fact that Merrill Lynch was based in UK the AO would not have come to know of it. Thus, in the light of the fact that even in the proceedings before the AO there was no dispute that the UK treaty was applicable, no question about the applicability thereof can be permitted to be raised at this stage. Even on merits, it was submitted that the assessee always looked to Merrill Lynch for anything in connection with the GDR issue. To show the importance of Merrill Lynch, our attention was drawn to Clause (C) of the preamble to the subscription agreement which gave the option of subscribing to 6,28,140 GDRs only to Merrill Lynch. Our attention was also drawn to various other clauses in the agreement which gave certain rights to Merrill Lynch such as the right to determine whether there has been a mis-statement in the offering circular, disability of the assessee to issue any securities in the same class as the GDRs before a particular time-limit after the closing date without the written consent of Merrill Lynch, the right to terminate the agreement on behalf of the managers on the happening of certain events, etc. The payment of 3 per cent commission was made only to Merrill Lynch. The assessee has affirmed it in its letter dt. 26th Nov., 1998 to the AO. The lead manager, in turn, paid the co-managers out of the same. Thus, the other managers would receive the commission from Merrill Lynch and not from the assessee. This position was in conformity with Clause 5(d) of the managers' agreement dt, 9th Nov., 1994 (pp. 9 to 13 of the Department's paper book No. 1). Thus, the payment was unquestionably made to Merrill Lynch, UK with whom the assessee was concerned. It was, therefore, contended that the AO had rightly applied the UK treaty.

87. With regard to the payment made to Goldman Sachs and Barclays, Mr. Dastur fairly stated that since there was no DTAA with Hongkong (they are based in Hongkong) there was no question of applying any DTAA, but submitted that even then only the income portion of the underwriting commission received by them was taxable and not the entire commission, meaning thereby that the expenses to earn the income shall have to be deducted.

88. We have carefully considered the matter. At the outset it may be stated that there was no dispute that the DTAA, if one is applicable, would govern the case. Even Mr. Kapila's preliminary contention was only that the DTAA with UK was not applicable on the facts of the case. We, therefore, proceed to examine firstly whether he is right. In our opinion, having regard to the fact that the AO himself did not dispute the applicability of the DTAA with UK, Mr. Kapila, with respect, cannot now be heard to say that it did not apply to the case. Paras 28 to 38 of the order under Section 195 are quite elaborate on this. The AO, in these Paras, has examined the applicability of the DTAA with UK on merits without ever raising the objection that it does not apply in the first place. Mr. Dastur is, therefore, right, in our view, in saying that the Revenue cannot now raise the point. The CIT(A) is also not correct in saying that the question of applicability of the DTAA with UK is academic. Further, we cannot possibly infer that the assessee had impliedly admitted [as the CIT(A) says] that the fees paid were taxable in India, merely from the facts that the assessee did not make any application to the AO under Section 195(2) for determination of the appropriate proportion of the sum which is chargeable to tax.

89. Even on merits, the objection of the Revenue that the UK agreement does not apply cannot be upheld. The clauses in the managers' agreement dt. 9th Nov., 1994 to which our attention was drawn on behalf of the assessee show the importance of Merrill Lynch in the issue of GDRs. It was appointed the lead manager. Even the payment was to be made only to Merrill Lynch and the same was to be distributed by Merrill Lynch to the other managers. The assessee was thus concerned directly with Merrill Lynch and with the other managers, only through Merrill Lynch. The letter dt. 26th Sept., 1994, which on 23rd Oct., 1994 became a contract between the assessee and Merrill Lynch has no doubt been written by the Asia Pacific Regional office of Merrill Lynch but that, it is reasonable to assume, is only because it was the regional office of Merrill Lynch of UK. As it turned out later, the subscription agreement was entered into with Merrill Lynch of UK. We have already seen that there can be no water-light compartmentalisation between what happened before and after 9th Nov., 1994. Nothing has been brought to record to show that Merrill Lynch UK has disowned the contract of appointment or the terms and conditions thereof embodied in the letter dt. 26th Sept., 1994 which was signed by the assessee-company on 23rd Oct., 1994. This letter refers to "Merrill Lynch International Ltd." which is situated in UK. The appointment as lead manager is of Merrill Lynch international Ltd. as is clear from this letter itself. Further, the subscription agreement is, inter alia, with Merrill Lynch International Ltd. and not with Merrill Lynch Asia Pacific Region, Hongkong. The managers' agreement dt. 9th Nov., 1994 also refers to Merrill Lynch International Ltd. and the complete London address is given therein. Apparently Merrill Lynch International Ltd. of UK negotiated with the assessee-company through its Asia Pacific Regional office in Hongkong in the preliminary stages. But from that it cannot be said that the assessee utilised the services of the Asia Pacific Regional office of Merrill Lynch, which was located in Hongkong, and, therefore, the UK treaty does not apply. Mr. Kapila's preliminary objection cannot, therefore, stand even on merits. .