Judgment:
1. These two Departmental appeals arise from two separate orders both dt. 12th Dec., 2000, of CIT(A)-IV, Mumbai. As identical grounds of appeal have been raised, both the appeals are disposed of by this common order. The ground of appeal raised by the Department for the asst. yr. 1996-97 is as under : "On the facts and circumstances of the case and in law, the learned CIT(A) erred in holding that the payment of Rs. 1,72,92,500 made by M/s G.V.K. Industries Ltd., Hyderabad, an Indian company, is for professional service as defined in Article 15 of DTAA and, therefore, cannot be brought to tax as the 'fees for included services', whereas AO has taxed such fees as 'fees for included services' as per Article 12 of the DTAA with USA." For the asst. yr. 1997-98, similar ground has been raised except that the quantum of payment for this assessment year is Rs. 2,67,52,500.
2. The relevant facts, briefly stated, are that the assessee is a partnership firm of solicitors based in New York, USA. The assessee filed return of income on 27th March, 1998, declaring NIL income claiming refund of Rs. 34,58,500 being tax deducted at source @ 20 per cent on the payment of Rs. 1,72,92,500, received by it from M/s G.V.K.Industries Ltd., Hyderabad, which is an Indian company. The assessee claimed that having regard to the specific provisions of the Double Taxation Avoidance Agreement (DTAA), entered into by the Government of India with the USA, the aforesaid receipt was not exigible to tax in India and, therefore, the assessee was entitled to the refund of tax deducted at source. It was claimed before the AO that the case of the assessee is governed by Article 15 of the DTAA. The assessee did not have any fixed base regularly available in India. The assessee-company rendered professional services to M/s G.V.K. Industries Ltd. through US based lawyers outside India, who do not stay in India. All the attorneys and the staff as well as partners of the firm worked only outside India and no office was maintained in India. The AO rejected this argument as according to him Article 12 of the DTAA was applicable in the case of the assessee and, therefore, the receipt was chargeable to tax in India. The AO was of the view that assessee rendered technical consultancy services and not professional services. The AO, therefore, brought to the charge of tax the relevant receipt of Rs. 1,72,92,500 for the asst. yr. 1996-97 and Rs. 2,67,52,500 for the asst.
yr. 1997-98.
3. The learned CIT(A) has examined this issue in great detail with reference to relevant provisions of the DTAA and came to the conclusion that Article 15 of the DTAA is applicable to the case of the assessee.
The Department is aggrieved on account of this finding of the learned CIT(A).
4. In the backdrop of the abovementioned facts, the learned CIT--Departmental Representative forcefully contended before us that the services rendered by the assessee-firm are in the nature of technical consultancy services which come under the purview of Article 12 of the DTAA and not Article 15. He invited our attention to p. 2 of the assessment order wherein it has been stated by the AO that the assessee-firm has rendered various types of services to the Indian company in respect of telecommunication and power project set up at Jegurupadu in Andhra Pradesh. The assessee denied to have exchanged any formal letters before commencement of the service. There was no letter of appointment mentioning terms and conditions for rendering services.
The entire matter regarding the fee structure and the nature of services was discussed orally. As per the copies of invoices which were produced before the AO, it was found that the assessee rendered following services including legal services : (a) Drafting and negotiating construction and power project contract and related documents.
(d) Review on environmental impact study work on research regarding Enron guarantee.
(g) Review draft counter-guarantee proposals on amendments to PPA with the help of video conferencing.
(h) Analysis of project and work relating to Government clearances including financial and non-financial clearances for GVK project.
(i) Research issue on exemption status of securities treated by International Finance Corporation, The learned CIT--Departmental Representative contended that the services rendered by the assessee are in the nature of technical consultancy services, which come under the purview of Article 12 of the DTAA. In support of this contention, he relied on the following judgments : (ii) Steffen, Robertson &. Kirsten Consulting Engineers & Scientists, In re (1998) 230 ITR 206 (AAR).
It is submitted that the learned CIT(A) was not justified in holding that the payment received by the assessee was not chargeable to tax in India.
5. The learned Authorised Representative strongly supported the orders of the learned CIT(A). He led us through the relevant articles of the DTAA and contended that the assessee's case is clearly covered under Article 15 and not Article 12, The learned counsel relied on the following Tribunal's judgments : (i) Maharashtra State Electricity Board v. Dy. CIT (2004) 83 TTJ (Mumbai) 325 (ii) Graphite India Ltd. v. Dy. CIT (2003) 78 TTJ (Cal) 418 : (2003) 86 ITD 384 (Kol).
6. We have given a careful consideration to the rival submissions vis-a-vis the relevant facts of the case, have also considered the relevant articles of the DTAA, provisions of the law and the precedents cited before us. There is no dispute about the factual position.
Admittedly, the assessee is a partnership firm of solicitors operating in USA. There is also no dispute about the fact that the assessee-firm does not have any fixed base regularly available in India and further that the partners or employees of this firm have rendered services sitting in USA and have not travelled to India. The moot question is that as to whether the services rendered by the assessee-firm fall under Article 12 or Article 15 of the DTAA. Admittedly, if the services fall under Article 12, the same would be brought to the charge of tax in India and, on the contrary, if the services fall under Article 15, no income-tax could be levied in India having regard to the provisions of the DTAA. There is no dispute that by virtue of Sub-section (2) of Section 50 of the IT Act, the provisions of DTAA will have precedence over the provisions of the IT Act and the provisions of the IT Act shall apply only to the extent they are more beneficial to the assessee. Therefore, the crucial aspect of this matter is interpretation of the relevant articles of the DTAA. The relevant portions of the Article 12 and Article 15 may be reproduced below : 1. Royalties and fees for included services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.......
(a) payments of any kind received as consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, 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 or property which are contingent on the productivity, use or disposition thereof, and (b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment, other than payments derived by an enterprise described in para 1 of Article 8 (Shipping and Air Transport) from activities described in para 2(c) or 3 of Article 8.
4. For 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 : (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, or consist of the development and transfer of a technical plan or technical design.
5. Notwithstanding para 4, 'fees for included services' does not include amounts paid-- (e) to an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professional services defined in Article 15 (Independent Personal Services).
1. Income derived by a person who is an individual or firm of individuals (other than a company) who is a resident of a Contracting State from the performance in the other Contracting State of professional services or other independent activities of a similar character shall be taxable only in the first-mentioned State except in the following circumstances when such income may also be taxed in the other Contracting State : (a) if such person has a fixed base regularly available to him in the other Contracting State for the purpose of performing his activities, in that case, only so much of the income as is attributable to that fixed base may be taxed in that other State; or (b) if the person's stay in the other Contracting State is for a period or periods amounting to or exceeding in the aggregate 90 days in the relevant taxable year.
2. The term 'professional services' includes independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, surgeons, lawyers, engineers, architects, dentists and accountants." The learned CIT--Departmental Representative has emphasised on Clause (4) of Article 12, which defines 'fees for included services'. On the other hand, the learned counsel for the assessee has submitted that as per Clause (5) of Article 12, 'fees for included services' does not include any amount which is paid to any individual or firm of individuals for professional services as defined in Article 15. It has been contended by the learned counsel for the assessee that Article 15 of the DTAA is in respect of 'independent personal services' and Clause (2) of Article 15 clearly stipulates that the term 'professional services' includes independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, surgeons, lawyers, engineers, architects, dentists and accountants. It has been forcefully contended before us on behalf of the assessee that the assessee-firm is a firm of solicitors and is engaged in rendering legal and connected services which are apparently covered under Article 15.
7. At this stage, reference may be made to the cases cited before us.
The learned CIT--Departmental Representative has strongly relied on Andhra Pradesh High Court decision in the case of G.V.K. Industries Ltd. (supra). In that case, the Indian company was formed for generation and sale of electricity and it entered into an agreement with a non-resident company in Zurich for helping in raising finance.
The non-resident company rendered services in advising the Indian company regarding processing of loan. The Indian company paid success fees to the non-resident company. It was held by the High Court that the success fee constituted fee for technical services assessable under Section 9(1) of the IT Act. The learned CIT--Departmental Representative also relied on the judgment of the Authority for Advance Rulings (AAR), in the case of Steffen, Robertson & Kirsteen Consulting Engineers & Scientists. In re (supra). The facts and the ratio of this case can be gathered from the brief headnote, which is reproduced below: Advance ruling--Collaboration agreement between foreign company and Indian company--Agreement stipulating that foreign company would not be liable to pay any taxes in India and that Indian company was liable to pay tax which may have to be paid by foreign company--Foreign company bound to file returns and pay advance tax--Determination of question whether income accrued or arose to it in India would affect it--Foreign company entitled to file application for advance ruling--IT Act, 1961, Sections 245N, 245Q. .
Non-resident--Advance ruling--Income deemed to accrue or arise in India--Fees for technical services--Scope of Explanation to Section 9--Amounts paid for preparatory studies in foreign country--Services to be utilised in India--Such amounts would be deemed to accrue or arise in India--No difference between fees for engineering services and amounts paid as living allowance and travel allowance--IT Act, 1961, Section 9." We have carefully gone through the abovementioned two decisions. Both these cases arose in connection with the interpretation of Section 9 of the IT Act. In these cases, there was no question of interpretation of any DTAA. In the present case, the relevant issue is required to be considered and decided entirely on the basis of provisions of the DTAA between India and the USA. In our view, the two cases relied upon by the learned CIT--Departmental Representative are of no assistance to the Revenue. The admitted position is that if there is a conflict between the provisions of the IT Act and the provisions of the DTAA, the provisions of the IT Act will have application only insofar as they are more beneficial to the assessee. In the present case, the moot question, as already mentioned above, is as to whether the payment received by the assessee-firm falls under Article 12 or Article 15 of the DTAA. The chargeability to tax in India would entirely depend upon the answer to the above question.
8. A reference may now be made to the Tribunal's decision relied upon by the learned counsel for the assessee. The case of Maharashtra State Electricity Board (supra) came up before the Tribunal, Mumbai. In this case, the interpretation of relevant provisions of DTAA between India and UK was involved. Payment was made by Maharashtra State Electricity Board to the UK based firm of solicitors for legal services. The question arose as to whether the services were in the nature of technical consultancy services falling under Article 13 of the DTAA between India and UK or under Article 15 of the same DTAA. The aforesaid Articles 13 and 15 are, mutatis mutandis, analogous to the Articles 12 and 15 of the DTAA between India and USA. It was held by the Tribunal, Mumbai Bench, that the expression 'professional services' will imply any services rendered in the course of the vocation carried on by an individual or group of individuals, requiring predominantly intellectual skills, dependent on individual characteristics of the person pursuing the vocation, requiring specialised and advanced education or expertise. The learned counsel for the assessee has invited our attention to paras 18, 19 and 20 of this decision, relevant portions of which may be reproduced below : "Applying the above test as to what constitutes 'professional services', let us examine facts of this case. It can also not be in dispute that the services that Freshfield was required to deliver under the contract also involved, to use the phraseology of Lord Justice Scrutton, 'either purely intellectual skills or if any manual skill, as in painting or sculpture or surgery, skill controlled by the intellectual skill of the operator'. Any services in the nature of legal consultancy services inherently involve either purely intellectual skills of the person rendering these services or if any manual skill, as in painting or sculpture or surgery, skill controlled by the intellectual skill of the person.
There is also no dispute about the factum of services rendered being in the nature of legal consultancy services. We may also mention that Hon'ble Supreme Court has, in the case of V. Sasidhara v. Peter & Kamnakar AIR 1984 SC 1700, observed that '.......whatever may be the popular conception or misconception regarding the role of today's lawyers and the alleged narrowing of gap between a profession, on one hand, and a trade or business, on the other, it is trite that, traditionally, lawyers do not carry on trade or business nor do they render services to the 'customers'. Keeping all these factors in mind, as also the observations of Hon'ble Supreme Court, we are of the considered view that the services rendered by Freshfield are distinctly in the nature of professional services.
Once we come to a finding that the services in question constitute 'professional services', the natural corollary to this finding is that the provisions of Article 15 are to be applied in this case which specifically deal with 'professional services'.
As to Revenue's contention that the provisions of Article 13 will be applicable in this case because these services, whether or not in the nature of 'professional services', are also covered by the scope of Article 13 being in the nature of 'managerial, technical or consultancy services', suffice to say that the provisions of Article 15 being specific provisions for professional services, will override the relatively general provisions of Article 13 which apply to broader category of 'managerial, technical or consultancy services'." From the above case, it is clear that in identical circumstances, it was held by the Tribunal that the services rendered by a firm of solicitors would be in the nature of professional services covered under Article 15 of the DTAA. The learned counsel for the assessee has also strongly relied on Tribunal, Kolkata Bench, decision in the case of Graphite India Ltd. (supra). The relevant portion of the ratio of this case may be reproduced below : "In case a payment falls within the scope of expression 'independent personal services' within the meaning of Article 15, the same shall automatically be out of ambit of Article 12(4) since, in view of the specific provisions of Article 12(5), notwithstanding the provisions of Article 12(4), 'fees for included services' do not, inter alia, include amounts paid to any individual for independent personal services as defined in Article 15. In other words, when an amount paid to an individual, or for that purpose, a firm of individuals, resident in the USA, is found to be covered by the scope of expression 'independent personal services' within the meaning assigned in Article 15, it is immaterial whether or not the same is covered by the scope of expression 'fees for included services' which in common parlance is known as 'fees for technical services' under Article 12(4). In the eventuality, in view of the provisions of Article 12(5), if at all that amount is exigible to tax in India, it can only be taxable under Article 15. To that extent, the provisions of Article 12(4) and Article 15 are non-competing and mutually exclusive (para 7).
In the light of the discussions of various articles as provided in the Indo-US DTAA, the following conditions are required to be satisfied for a service rendered by the US resident being brought within the ambit of 'independent personal services' exigible to tax in India under Article 15 : (i) The service should be in the nature of a 'professional service', or other activity of an independent character, which includes independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, surgeons, lawyers, engineers, architects, dentists and accountants.
In addition, this service should be rendered by an individual or a firm of individuals (other than a company).
(ii) The service should not be in the nature of a commercial or industrial activity, or a professional service rendered in the course of employment.
(iii) In addition to satisfying both the above conditions, atleast one of the following conditions should also be satisfied : (a) The person rendering such service has a fixed base regularly available to him in India for the purpose of performing his activities, the connotations of 'fixed base', for this purpose, are somewhat akin to a professional's chamber which, in broad terms, implies a place from where the person can conduct his independent professional activities.
(b) The person rendering such service stays in India, in the relevant previous year, for period of 90 days or more (para 11)." From the above case, it may be seen that Articles 12 and 15 have been considered in detail by the Tribunal. The assessee's case may be considered in the light of the legal position as emerging from the above cases and having regard to the relevant provisions of the DTAA. As mentioned above, Clause (5)(e) of Article 12 of the DTAA lays down that 'fees for included services' does not include amount paid to any individual or firm of individuals (other than a company) for professional services as defined in Article 15. Article 15 is specifically meant for an individual or a firm of individuals (other than a company), who is rendering professional services as lawyers, etc. In the present case, the assessee is a firm of solicitors based in USA and has rendered predominantly legal services to the Indian company. Considering the entire facts and circumstances and the legal position, we have no hesitation in holding that the services rendered by the assessee fall under the provisions of Article 15 of the DTAA. The learned CIT(A) has elaborately considered the factual and legal position in a detailed order passed by him and at para 10 of his order, and has recorded the following finding : "In the present case, Article 15 of the DTAA with USA is clearly applicable. This article refers to the income derived by a firm of lawyers which is a resident of a 'Contracting State from the performance of professional services in the other Contracting State.
However, the appellant-firm has not rendered any services in India to M/s G.V.K. Industries Ltd., its client. M/s GVK Industries Ltd., had engaged the appellant-firm for the documentation and other legal consultancy services relating to a telecommunication and power project in Andhra Pradesh and the entire services were rendered by its personnel based abroad, Under the circumstances, Article 15 which is normally applicable in the case of 'independent personnel services' rendered by a firm of solicitors is not also applicable in the present case as it did not have a 'fixed base' in India. In other words, it did not have a permanent establishment within the meaning of Article 5 of the DTAA between India and USA. Therefore, no question arises of bringing to tax the fees received by it from M/s GVK Industries Ltd., as business income within the meaning of Article 7 of DTAA. However, the AO has sought to bring to tax the receipts as the fee as 'fees for included services' by invoking Article 12 of the DTAA. However, the legal consultancy services rendered by the appellant-firm to the Indian company cannot be considered as 'included services' as defined in Article 12(4) of the DTAA and, therefore, these cannot be brought to tax as the 'fees for included services' or 'technical services'. The AO has also placed his reliance on the decisions in GVK Industries Ltd. and Ors. v. ITO and Anr. (1997) 228 ITR 564 (AP) and SRK Consulting Engineers & Scientists, In re (1998) 230 ITR 206 (AAR). However, in both the cases, there is no mention of the DTAA between India and the country concerned. And, therefore, the ratio of these decisions does not help the AO in bringing to tax the said amount as 'fees for included services' as defined in Article 12 of the DTAA with USA. At any rate, it is well-settled that the provisions of DTAA override the provisions of the IT Act and, therefore, the present case is governed by the provisions of DTAA with USA and not by the provisions of the IT Act, 1961. On these facts, I hold that a sum of Rs. 1,72,92,500 is not liable to tax as income in the hands of the appellant-firm and the same is deleted." For the reasons already stated by us, we are in full agreement with the finding of the learned CIT(A). Accordingly, his orders for both the assessment years are confirmed.
9. In the result, the Departmental appeals stand dismissed.
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