| SooperKanoon Citation | sooperkanoon.com/72747 |
| Court | Income Tax Appellate Tribunal ITAT Mumbai |
| Decided On | Aug-29-2003 |
| Judge | I Bansal, P Kumar |
| Reported in | (2004)90ITD793(Mum.) |
| Appellant | Maharashtra State Electricity |
| Respondent | Deputy Commissioner of Income Tax |
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 to be provided by the legal advisor (i.e. Freshfields) will be to act as legal advisor to the client (i.e. Maharashtra State Electricity Board) in relation to the project (i.e. Enron Project) and in particular, but without limitation to undertake the following assignments: review the State of discussions/correspondence between the client and Enron as at 1st March, 1993; assist the client in negotiations for the finalisation of the power purchase agreement relating to the Project and related documentation; and generally review the commercial and financial arrangements proposed for the project and advise on their legal implications.
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: "Please note that Article 15 will not come to your rescue as M/s Freshfields sent number of people and stayed more than the number of man-days permitted. Your calculation of man-days does not fit into normal prudent calculation of man-days. However, you are free to calculate the man-days as per advise given to you and take the matter further in appeal. However, in our view, man-days mentioned in the DTA agreement means if a person spends a man-day in India, it will be counted as a man-day and if five people spend a man-day in India, it will be counted as five man-days and not as one man-day as argued by you".
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.
6. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success.
7. Learned CIT(A) observed that the contract between MSEB and Freshfields clearly shows that 'Freshfields had rendered legal services of advisory nature' and that 'the advice to be given by Freshfields was consultancy not only involving legal issues and questions but also involving technical issues connected with commercial and financial arrangements'. After elaborately surveying dictionary meanings of terms 'technical', 'legal' and 'consultancy', the CIT(A) came to the conclusion that "having regard to the meaning of 'technical', as commonly understood (i.e., going by dictionary meaning) care has to be taken not to confuse it with the words 'technological' or 'scientific'" and that "the meaning of the word 'technical' would take in its sweep intricacies of 'art' and 'law' as well". It was then observed that the fact that Freshfields acted as a consultant could not be overemphasised. It was then concluded that the services rendered by the Freshfields were technical services as well as consultancy services in nature. It was also observed that there was no water tight partitioning between the services of 'managerial, technical or consultancy services' under Article 13 and 'independent personal services' under Article 15 of the India UK DTAA. However, CIT(A) ruled out application of article by observing as follows: "16. Of course, it cannot be denied that the services rendered by Freshfields were such as are normally rendered by lawyers in their consulting chambers. So, the services rendered by Freshfields, by their very nature, may also be viewed as 'independent personal services'. But the payments made to Freshfields would be covered by Article 15 only if it can be treated as individual." 8. The CIT(A) thus concluded that the payments to Freshfields are covered by the scope of Article 15 and, accordingly, the action of the AO in directing the MSEB to deduct the tax at source @ 30 per cent was justified.
9. The assessee tax deductor is aggrieved and in second appeal before us.
10. We have heard Shri Chappgar, learned counsel of the assessee, and Shri Udhayakumaran, learned CIT (Departmental Representative), at considerable length. We have also carefully perused the material before us and duly deliberated upon factual matrix of the case as also the applicable legal position.
11. Before we deal with the core issue in the appeal, we deem it desirable to reproduce the relevant provisions of the applicable India UK Double Taxation Avoidance Agreement as follows: (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 law of that State; provided that where the royalties or fees for technical services are paid to a resident of the other Contracting State who is the beneficial owner thereof and they are paid in respect of a right or property which is first granted, or under a contract which is signed, after the date of entry into force of this Convention, the tax so charged shall not exceed 30 per cent of the gross amount of the royalties or fees for technical services.
(3) The term "royalties" as used in this article means payments of any kind including rentals received as a consideration for the use of, or the right to use-- (a) any patent, trade mark, design or model, plan, secret formula or process; (b) industrial, commercial or scientific equipment, or information concerning industrial, commercial or scientific experience; (c) any copyright of literary, artistic or scientific work, cinematographic films, and films or tapes for radio or television broadcasting; but does not include royalties or other amounts paid in respect of the operation of mines or quarries or of the extraction or removal of natural resources.
(4) The term "fees for technical services" as used in this article means payments of any kind to any person, other than payments to an employee of the person making the payments and to any individual for independent personal services mentioned in Article 15 (independent personal services), in consideration for services of a managerial, technical or consultancy nature, including the provision of services of technical or other personnel.
(5) The provisions of paragraphs (1) and (2) of this article 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 a case, the provisions of Article 7 (business profits) or Article 15 (independent personal services), as the case may be, shall apply.
(6) Royalties and fees for technical services shall be deemed to arise in a Contracting State where the payer is that State itself, a political sub-division, a local authority 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 obligation to make the payments was incurred and the payments are borne by that permanent establishment or fixed base, then the royalties or fees for technical services shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated.
(7) Where, owing to a special relationship between the payer and some other person, the amount of the royalties or fees for technical services paid exceeds for whatever reason 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 that case, the excess part of the payments shall remain taxable according to the law of each Contracting State, due regard being had to the other provisions of this convention.
(1) Income derived by a resident of a Contracting State in respect of professional services or other independent activities of a similar character may be taxed in that State. Such income may also be taxed in the other Contracting State if such services are performed in that other State and if-- (a) he is present in that other State for a period or periods aggregating 90 days in the relevant fiscal year; or (b) he has a fixed base regularly available to him in that other State for the purpose of performing his activities; but in each case only so much of the income as is attributable to those services.
(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." 12. Article 15 uses the expression 'resident of a Contracting State' which in turn is defined in Article 4 of the DTAA as follows: (1) For the purposes of this convention the term "resident of a Contracting State" means any person who, under the law of that State, is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature.
(2) Where by reason of the provisions of paragraph (1) of this article an individual is a resident of both Contracting States, then his status shall be determined in accordance with the following rules: (a) he shall be deemed to be a resident of the Contracting State in which he has a permanent home available to him. If he has a permanent home available to him in both the Contracting States, he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closer (centre of vital interests); (b) if the Contracting State in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available to him in either Contracting State, he shall be deemed to be a resident of the Contracting State in which he has an habitual abode; (c) if he has an habitual abode in both the Contracting States or in neither of them, he shall be deemed to be a resident of the Contracting State of which he is a national; (d) if he is a national of both Contracting States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.
(3) Where by reason of the provisions of paragraph (1) of this article a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident of the Contracting State in which, its place of effective management is situated." 13. A careful perusal of the above provision, particularly of Article 4(3) which specifically refers to 'a person other than an individual', leaves no doubt about the fact that the expression 'resident of a Contracting State' is not confined to individual residents but also extends its scope to non-individuals such as firms, companies and other entities since the question of 'place of effective management' can only arise in respect of such entities. It would thus follow that the provisions of Article 15 will even apply to such entities as well, in addition to 'individuals', as the aforesaid article refers to income derived by a 'resident of Contracting State in respect of professional services' which has clearly much broader connotations than the 'individual resident of Contracting State in respect of professional services'. There is nothing to support the interpretation that the aforesaid article uses the expression 'income derived by an individual resident of Contracting State in respect of professional services' as the Revenue seems to have inferred. In this view of the matter, we see no support for the interpretation that in view of the wordings of exclusion clause in Article 12(4), the payments for professional services (termed as 'independent personal services' in the Double Taxation Conventions) covered under Article 15, to entities other than individuals, is to be treated as 'payment for fees for technical services'. Justice Rowlatt's oft repeated observation in Cape Brady Syndicate v. IRC 1 KB 64 that "in a taxing statute, one has to look merely at what is clearly said; there is no room for any intendment....", in our considered view, is equally relevant in the context of interpretation of provisions of a Double Taxation Avoidance Agreement. An exclusion cannot be inferred or assumed, it must be supported by a specific provision. In this view of the matter, once Article 15 clearly provides that income derived by resident of a Contracting State, in respect of. 'professional services', is only to be taxed in such Contracting State except in specified circumstances, it cannot be inferred, in the absence of specific exclusion provisions, that this provision is applicable for 'resident individuals' and will not extend to 'entities other than individuals'.
14. It is also interesting to note that the new Double Taxation Avoidance Agreement [which has replaced the old India--UK DTAA, applicable at the relevant point of time, vide Notification No. GSR 91(E) dt. 11th Feb., 1994; (1994) 206 ITR (St) 235] has a modified form of Article 15 which is reproduced below for ready reference: (1). Income derived by an individual, whether in his own capacity or as a member of a partnership, who is a resident of a Contracting State in respect of professional services or other independent activities of a similar character may be taxed in that State. Such income may also be taxed in the other Contracting State if such services are performed in that other State and if: (a) he is present in that other State for a period or periods aggregating to 90 days in the relevant fiscal year; or (b) he, or the partnership, has a fixed base regularly available to him, or it, in that other State for the purpose of performing his activities; but in each case only so much of the income as is attributable to those services.
(2). For the purposes of paragraph 1 of this article, an individual who is a member of a partnership shall be regarded as being present in the other State during days on which, although he is not present, another individual member of the partnership is so present and performs professional services or other independent activities of a similar character in that State.
(3). 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." 15. The material difference between this article vis-a-vis the relevant article in applicable DTAA is that the words 'an individual, whether in his own capacity or as a member of a partnership, who is' have been inserted in Article 15(1)(a) before the words 'resident of a Contracting State' and the related consequential modifications have also been made. In the present case, it is not in dispute that by the virtue of Article 30(1)(b) of the new DTAA and by the virtue of the fact that notification of both the countries of the completion of procedures required under their respective tax laws was completed on 26th Oct., 1993, the provisions of this treaty were to come in force in respect of "income arising in any fiscal year beginning on or after the first day of April, next, following the calendar year in which the later of notification is given", i.e., previous year beginning 1st April, 1994. The fees for legal advisory services impugned in this appeal having admittedly arisen between the period 30th April, 1993 to 26th Jan., 1994, the amended provisions of the new DTAA are clearly not applicable on the facts of this case. The provisions of Article 15 of the applicable DTAA, as we have mentioned earlier in this order, will even apply to other entities as well, in addition to 'individuals', as the aforesaid article refers to income derived by a 'resident of Contracting State in respect of professional services' which has clearly much broader connotations than the 'individual who is resident of Contracting State in respect of professional services' i.e., the expression used in the new India-UK DTAA.16. The expression 'professional services' is not defined anywhere in the DTAA or in commentaries of various Model Conventions. However, in the case of Graphite India Ltd. v. Dy. CIT (2003) 78 TTJ (Cal) 418 : (2003) 86 ITD 384 (Cal), a co-ordinate Bench of this Tribunal, to which one of us was a party, has interpreted the scope of expression 'professional services' as follows: "The definition of 'professional services', which are termed as 'independent personal services' in the phraseology employed in tax treaties, is, however, not defined in tax treaties or even official commentaries on UN and OECD Model Conventions. The meaning of this term is illustrated by some examples of typical liberal professions, and this enumeration of professions has only an explanatory character. 'The Law Lexicon' edited by Justice Y.V. Chandrachud (1997 Edn.) defines 'profession', inter alia, as involving' the idea of an occupation requiring either purely intellectual skill or if any manual skill, as in painting and sculpture or surgery, skill controlled by the intellectual skill of the operator, as distinguished from an occupation which is substantially the production or sale of arrangements for the production or sale of commodities'. This definition, barring the words "as distinguished from an occupation which is substantially the production or sale or arrangements for the production or sale or arrangements for the production or sale of commodities" is incidentally the same as assigned by Scrutton LJ in IRC v. Maxse (1919) 1 KB 647 referred to in LB Curzon's Law directory. Referring to Hon'ble Bombay High Court's judgment in the case of Sakharam Narayan Kherdekar v. City of Nagpur Corporation AIT 1964 Bom. 200, at p. 210, the Law Lexicon further states that 'an activity to be profession must be one carried on by an individual by his personal skill, intelligence and dependent on individual characteristics'. Black's Law Dictionary (5th Edn.) defines profession as 'a vocation or occupation requiring special, usually advanced, education and skill e.g., in law and medicine' and observes that 'the labour and skill involved in a profession is predominantly mental or intellectual, rather than physical or manual'. The school of thought thus emerging from these deliberations is that, broadly speaking, a profession will imply any vocation carried on by an individual, or group of individuals, requiring predominantly intellectual skills, dependent on individual characteristics of the person(s) pursuing that vocation, requiring specialised and advanced education or expertise.
...............We find that the thrust of consultancy arrangement is that Mr. Rusinko is to keep the assessee abreast of matters concerning technology upgradation and development of new products in the field of carbon and graphite, besides sharing with the assessee fruits of his labour in the area of his related research and development. This work essentially involves predominantly intellectual skills, dependent on individual characteristics of Mr.
Rusinko, and presupposes Mr. Rusinko's specialised and advanced education or expertise in related fields".
17. We see no reasons to take any other view of the matter than the view so taken by co-ordinate Bench. We are, therefore, of the considered view that the expression professional services will imply any services rendered in the course of a vocation carried on by an individual, or group of individuals, requiring predominantly intellectual skills, dependent on individual characteristics of the person(s) pursuing that vocation, requiring specialised and advanced education or expertise.
18. 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 Freshfields 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(s) rendering these services or if any manual skill, as in painting or sculpture or surgery, skill controlled by the intellectual skill of the person(s). 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. Sasidharan v. Peter & Karunakar 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 Freshfields are distinctly in the nature of professional services.
19. 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'.
20. 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'. We may, in this regard, refer to the following observations by the Tribunal in the case of RPG Industries Ltd. v. Asstt. CIT (2003) 79 TTJ (Cal)(TM) 819 : (2003) 85 ITD 105 (Cal) (TM), relevant portion at pp. 115 and 116 wherein one of us observed as follows and those observations were specifically concurred with by the Third Member: "I find that the above provisions (of Section 72) are for 'carry forward and set off of business losses' in general, whereas Section 73, reproduced earlier in this order, deals specifically with 'losses in speculation business'. As to the question that which of these legal provisions will govern the principles regarding carry forward and set off of speculation losses, I find guidance from the principle 'generalia specialibus non derogant' which lays down that the general provisions will not override the specific provisions. In other words, provisions of Section 73, which specifically deal with speculation business, cannot be derogated by the provisions of Section 72 of the Act which deals with business losses in general.
As observed by Hon'ble Supreme Court in the case of Union of India and Anr. v. India Fisheries (P) Ltd. (1965) 57 ITR 331 (SC). "If there is an apparent conflict between two independent provisions of law, the special provision must prevail". This principle is described in Sampat Iyengar's Commentary on Law of Income-tax (9th Edn., Vol. 1 p. 48) as follows: 'The general maxim is generalia specialibus non derogant, that is general things will not derogate from special things. The maxim is also otherwise expressed as generalibus specialia derogant. A special provision normally excludes the operation of the general provision.... It can be resorted to for deciding the competing claims of two provisions in the same enactment, one specific and other general with some overlapping between the two. The requisite conditions to attract this principle are: Firstly, both the general enactment and the particular enactment must be simultaneously operative, the general enactment covering larger filed and particular enactment covering a limited field out of the larger field covered by the general enactment and, secondly, there must be nothing contained in the general provisions indicating the legislative intent to overrule or set aside the particular provision.' This principle has also been dealt with by Kolkata SMC Bench, in the case of Asstt. CIT v. Executors of the Estate of Bhagwan Devi Sarogi (2002) 75 TTJ (Cal) 563 : (2001) 79 ITD 539 (Cal), wherein Hon'ble Vice President Shri Garg has inter alia observed that "To solve such a conflict (of competing claims of sections), one has to resort to interpretations of law and the famous dictum is where there is a general provision which, if applied in its entirety, would neutralise a special provision dealing with the same subject-matter, the special provision must be read as a proviso to the general provision and the general provision, insofar as it is inconsistent with the special provisions, must be deemed not to apply". I am in respectful agreement with the views expressed by the Hon'ble Vice President Garg. Similar views were also expressed in the case of ITO v. Titagarh Steels Ltd. (2001) 73 TTJ (Cal) 297 : (2001) 79 ITD 532 (Cal), wherein while articulating the view of Kolkata C Bench, I had observed as follows: 'It is fairly well settled in law that general provisions do not override specific provisions, as aptly described by the maxim 'generalia specialibus non derogant'. A special provision normally excludes the operation of a general provision and we are of the view that such a principle governs the instant case also. In the case of South India Corporation (P) Ltd. v. Secretary, Board of Revenue (AIR 1964 SC 207), at p. 215), Hon'ble Supreme Court had an occasion to consider whether Article 277 or Article 372 of the Constitution of India should govern the particular situation involved therein. Their Lordships pointed out that "a special provision should be given effect to the extent of its scope, leaving the general provision to control cases where specific provisions do not apply'." 21. In this view of the matter, we are of the considered view that the provisions of Article 13 have to give way to more specific provisions of Article 15 which will hold field in the present case. In this view of the matter, we are unable to uphold the stand of the authorities below that Article 15 will (not) govern the fact situation in this case. It is also not in dispute that in case Article 15 does not apply to this case, the payments to Freshfields will not be exigible to tax in India as, in view of the uncontroverted and unchallenged findings of the CIT(A), the condition of Article 15 regarding stay in India are not satisfied. We are, therefore, of the considered view that the payment of fees for legal consultancy services to the UK based firm of solicitors is taxable only in United Kingdom and is not exigible to tax in India.
22. Let us also briefly touch upon the issue, i.e., whether for the purpose of computing number of days, under Article 15(1)(a) of the India United Kingdom DTAA, whether multiple counting of common days where more than one person from the solicitor firm was present is permissible, i.e., whether solar days are required to be taken into account or man-days are to be taken into account. We may, in this regard, refer to following observations of a co-ordinate Bench of this Tribunal, in the case of Clifford Chance UK v. Dy. CIT (2002) 76 TTJ (Bom) 725 : (2002) 82 ITD 106 (Bom): "In our opinion multiple counting of the common days is to be avoided so that the days when two or more partners were present in India, together, are to be counted only once. Multiple counting would lead to absurd results. For example, if 20 partners were present in India together for 20 days in one fiscal year, multiple counting would result in 400 days. There cannot be more than 365 days in a year. Therefore, this system of multiple counting leads to absurdity. Therefore, it should be avoided." Suffice it to say that we are in considered agreement with the above views and that we see no reasons to take any other view of the matter than the view so taken by our esteemed colleagues. In our considered view, multiple counting of days would indeed go against the object of Article 15(1)(a) of the India UK DTAA which is to provide criterion for substantial and permanent presence in a Contracting State, as opposed to a transient and fleeting one." 23. We may now deal with the ratio of Hon'ble Supreme Court's judgment in the case of Transmission Corporation of AP and Anr. v. CIT (1999) 239 ITR 587 (SC), wherein their Lordships have inter alia observed as follows: "8. The scheme of Sub-sections (1), (2), (3) of Section 195 and Section 197 leaves no doubt that the expression "any other sum chargeable under the provisions of this Act" would mean 'sum' on which income-tax is leviable. In other words, the said sum is chargeable to tax and could be assessed to tax under the Act.
Consideration would be-whether payment of sum to non-resident is chargeable to tax under the provisions of the Act or not? That sum may be income or income hidden or otherwise embedded therein. If so, tax is required to be deducted on the said sum-what would be the income is to be computed on the basis of various provisions of the Act including provisions for computation of the business income, if the payment is trade receipt. However, what is to be deducted is income-tax payable thereon at the rates in force.......
Further, the rights of payee or recipient are fully safeguarded under Sections 195(2), 195(3) and 197. Only thing which is required to be done by them is to file an application for determination by the AO that such sum would not be chargeable to tax in the case of recipient, or for determination of appropriate proportion of such sum so chargeable, or for grant of certificate authorising recipient to receive the amount without deduction of tax, or deduction of income-tax at any lower rates or no deduction. On such determination, tax at appropriate rate would be deducted at the source. If no such application is filed income-tax on such sum is to be deducted and it is the statutory obligation of the person responsible for paying such 'sum' to deduct tax thereon before making payment. He has to discharge the obligation of tax deduction at source." 24. These observations do give a prima facie impression that, in the esteemed views of the Hon'ble Supreme Court, whenever an application under Section 195(2), is not filed, the assessee tax deductor is under a statutory obligation to deduct tax at source computed on the entire payment to non-resident treating the same as income. However, in our considered view and for the reasons, we shall now state, such an interpretation will be fallacious.
25. While elaborating upon the ratio of the aforesaid judgment, a co-ordinate Bench of this Tribunal in the case of Raymonds Ltd. v. Dy.
CIT (2003) 80 TTJ (Mumbai) 120 relevant portion at p. 168) has observed as follows: "A first reading of the judgment of the Supreme Court in the case of Transmission Corporation (supra) no doubt gives the impression that if no application is filed by the assessee under Section 195(2) seeking a determination of the appropriate portion of the sum remitted, income-tax on the gross sum has to be deducted and paid.
However, penultimate paragraph of the judgment (p. 596 of the report) the Supreme Court has upheld as correct the answer given by the Andhra Pradesh High Court that the obligation of the assessee to deduct tax at source under Section 195 is limited only to the appropriate portion of income chargeable under the Act. In our humble understanding of the section in the light of the judgment, the position appears to be like this. The sum paid to the non-resident may be either fully or partly chargeable to income tax.
If it is fully chargeable (pure income) undoubtedly the tax is to be charged at the appropriate rate on the whole sum and deducted and paid, If the sum is only partly chargeable (embedded or hidden income), the assessee has to apply under Section 195(2) to the AO for determination of the appropriate portion." 26. We are in considered agreement with the views so expressed by our distinguished colleagues and would only add the observations of their Lordships or the ratio of the judgment do not affect that position that in a case where no portion of payment is exigible to tax, the question of application of Section 195(2) does not arise, because, as the section itself categorically provides that it comes to play "where the person responsible for paying any sum chargeable under this Act (other than salary) to a non-resident considers that whole of such sum would not be chargeable in the case of the recipient. It would thus follow that for invoking Section 195(2), it is a sine qua non that sum being paid to the non-resident is 'chargeable under the provisions of this Act', i.e., IT Act, 1961 whether fully or partly, i.e., the entire sum or the income hidden or embedded therein.
27. As to the connotations of expression 'chargeable under the provisions of this Act', as observed by the Hon'ble Calcutta High Court, in the case of P.C. Ray & Co. (India) (P) Ltd v. A.C. Mukherjee (1959) 36 ITR 365 (Cal), and referred to with approval in this very judgment of Hon'ble Supreme Court in the case of Transmission Corporation of AP (supra), "it is not merely amounts, the whole of which are taxable without deduction, that is to say, amounts which Lord Greene called 'pure income profit'.... but amounts of a mixed composition, a part of which only may turn out to be taxable income, are also contemplated". Their Lordships made the observations in the context of, as noted in the text of the judgment itself, "distinction between 'pure income' that is to say, receipts which.... had the 'character of income chargeable itself as such to tax' and receipts against which expenses had to be set off in order to determine whether there was any taxable income". Hon'ble High Court was more specific in subsequent observations to the effect that "... if the amount payable to a non-resident appeared to be, say, income from property or profits and gains of business, profession or vocation or income from other sources, it would come within the purview of the section, but if it was an amount of a kind exempt (under the Indian IT Act) from tax, such as agricultural income, it would be outside its preview". It is thus a settled position that when an income is outside the scope of income taxable under the Indian IT Act, the question of application of Section 195, which is in material respects pari materia with Section 18(3B) of the 1922 Act that the High Court was in seisin of, does not arise. A fortiorari, when an income is not exigible to tax in India, by the virtue of the provisions of the applicable DTAA, the deduction of tax under Section 195 of the Act does not come to play at all. It leads us to the conclusion that the expression 'chargeable under the provisions of this Act' cannot include an income, which in terms of the specific provisions of the applicable Double Taxation Avoidance Agreement, is not exigible to tax in India.
28. While deliberating upon the impact of Hon'ble Supreme Court's certain observations in Transmission Corporation of AP & Anr.'s case (supra) we are also reminded of the observations of Justice Bhat, in the case of SRF Finance Ltd. v. CBDT (1995) 211 ITR 861 (Del) that "it is well settled rule of construction that judgments must be read as a whole and observations from the judgments should be considered in the light of the questions which were before the Court". Referring to the judgment of Hon'ble Supreme Court in the case of CIT v. Sun Engineering Works (P) Ltd. (1992) 198 ITR 297 (SC), their Lordships observed that: "As observed by the Supreme Court in CIT v. Sun Engineering Works (P) Ltd. (1992) 198 ITR 297 (SC), it is neither desirable nor permissible to pick out a word or a sentence from the judgment of the Supreme Court, divorced from the context of question under consideration and treat it to be the complete law declared by the Supreme Court. A decision of Supreme Court takes its colours from the question involved in the case in which it is rendered and, while applying it to a later case, the Courts must carefully try to ascertain the true principles laid down by the decision. It is not proper to regard a word, a clause or a sentence occurring in a judgment of the Supreme Court, divorced from its context, as containing full exposition of law on a question when the question did not even fall to be answered in that judgment".
29. It was not even the case of the Revenue, in the matter of Transmission Corpn. (supra), that tax at source was also required to be deducted from the payments made to non-residents were not exigible to tax in India. Their Lordships' concern was confined to two categories of payments : first, which are in the nature of payment of income simplicter and, second, in the nature of 'amounts of a mixed composition, a part of which only may turn out to be taxable income' on account of income embedded or hidden therein. The observations made in this context, in our considered view, cannot be applied in the case of sums no part of which are exigible to tax in India.
30. We may, in this regard, also refer to the observations of Hon'ble Supreme Court itself, in Mumbai Kamgar Sabha v. Abdulbhai Faizullbhai AIR "It is trite, going by Anglophonic principles, that a ruling of superior Court is binding in law. It is not of spiritual sanctity but is of ratio-wise luminosity within the edifice of facts where the judicial lamp plays the legal flame. Beyond those walls and de hors the milieu we cannot impart the eternal vernal value to the decision, exalting the doctrine of precedents into prison house of bigotry, regardless of varying circumstances and myriad developments; realism dictates that a judgment has to be read, subject to the facts directly presented for consideration and not affecting those matters which may lurk in the dark".
31. When examined in this perspective also, it is clear that the facts directly presented for consideration of Hon'ble Supreme Court in the case of Transmission Corpn. of AP & Anr. (supra) were not in pari materia with the facts of this case inasmuch as it was not the case of the assessee before Hon'ble Supreme Court that the payments in question were not at all exigible to tax in India but the only case of the assessee was that the payments to non resident did not constitute 'pure income or 'income simpliciter'. The observations made by the Hon'ble Supreme Court, therefore, cannot have any application in a case where the income is claimed to be not included in total income exigible to tax in India which admittedly was not the case before the Hon'ble Supreme Court. In any event, in our considered view, Hon'ble Supreme Court's observations should not be used as a blind man's walking stick, as it would amount to if we are to be guided by those observations alone without examining the facts of the situation where the observations are to be applied. For these reasons also, Hon'ble Supreme Court's observations in the case of Transmission Corpn. (supra) have no application in the matter.
32. As regards Revenue's suggestion that assessee's interests are not adversely affected by deducting the tax at source by way of abundant caution, since the recipient can always file an income-tax return and get the refund in case the income embedded in payments to non-resident is held to be not exigible to tax in India, we are unable to see any substance in this plea for the simple reason that to suggest that the rights of the assessee are not adversely affected, by being called upon to deduct more tax than what he is under a statutory obligation to deduct, is contrary to the scheme of the Act which, by the virtue of Section 248, gives specific right of appeal to the assessee for denying his liability to make such deductions under Section 195.
33. It is a fairly well settled principle of interpretation that no word or expression used in any statute can be said to be redundant or superfluous. As observed by the Hon'ble Supreme Court, in the case of CIT v. Distributors (Baroda) (P) Ltd. (1972) 83 ITR 377 (SC), "....no part of the provision of statute can be just ignored by saying that the legislature enacted it not knowing what it is doing", It is one of the basic principles of the interpretation of statutes that a legal provision should not be interpretated in such a manner so as to make the provision infructuous or redundant. Hon'ble Calcutta High Court in the case of CIT v. Jayashree Chanty Trust (1986) 159 280. (Cal) has observed that, "To resolve.., (the) controversy, regard must be had to the language that has been employed and also to the object of the statute. It is well settled that, if possible, the words of a statute must be construed so as to give a sensible meaning to them. The words ought to be construed ut res magis valeat quam pereat". This latin maxim, i.e., ut res magis valeat quam pereat, means that the words of the statute should be given a sensible meaning so as to make them effective, rather than a meaning which will make the provision redundant. As observed by Hon'ble Supreme Court, in the case of Addl.
CIT v. Teja Singh (1959) 35 ITR 408 (SC), at p. 414, "A statute is designed", observed Lord Dunedin in Whitney v. Commissioners of Inland Revenue, "to be workable, the interpretation thereof by a Court should be to secure that object, unless crucial omission or clear direction makes that end unattainable." 34. We are thus unable to uphold the Revenue's contention that no prejudice is caused to the assessee tax deductor by deducting the tax at source by way of abundant caution, and even when the income embedded therein may not be exigible to tax in India, for that such an interpretation will render the assessee's right of appeal under Section 248 obliterated from the statute.
35. We have given a categorical finding that impugned payments made to M/s Freshfields are not exigible to tax in India, we are of the considered view that the assessee tax deductor was not under any obligation to deduct tax at source from such payments. In support of this proposition, we may also place our reliance on following observations by a co-ordinate Bench in the case of Dy. CIT v. ITC Ltd. (2002) 76 TTJ (Cal) 323 : (2002) 82 ITD 239 (Cal), wherein the coordinate Bench has inter alia observed as follows : "20. Under Section 195(1} of the Act, any person making payment in the form of income to a non-resident is required to deduct tax at source, from the said income, at the 'rate in force' which, in turn, has been explained under Section 2(37A)(iii) as follows: 'for the purposes of deduction of tax under Section 195, the rate or rates of income-tax specified in this behalf in the Finance Act of the relevant year or the rate or rates of income-tax specified in an agreement entered into by the Central Government under Section 90, whichever is applicable by virtue of the provisions of Section 90'.
As we have earlier observed, provisions of the DTAA clearly override the provisions of the Act to the extent the provisions in such agreements are more favourable to the assessee. Therefore, in case a DTAA provides for lower rate, which includes 'nil' rate, of taxes, such a rate will prevail over the rate given in the Act. As a natural corollary to this proposition, when, in terms of the provisions of a DTAA, an income is not exigible to income tax in India, no tax is required to be deducted under Section 195 from the payment of such income to a non-resident." 36. We are, therefore, of the considered view that the assessee tax deductor did not have any liability to deduct tax at source from the payments made to M/s Freshfields, the UK based firm of solicitors, on account of legal consultancy charges. For the detailed reasons set out above, we deem it fit and proper to vacate the orders of the authorities below and direct the AO to refund the taxes already deposited by the assessee tax deductor. As we do so, we may mention that the assessee has, vide letter dt. 17th June, 2003, clarified that no TDS certificates, in respect of the aforesaid taxes, have been issued by the assessee to Freshfields.