The Hindu Business Line : Treaty constructions can be damaging

THERE can be more than one view on the question whether the Income-tax Appellate Tribunal (ITAT) should be the forum for a ruling on disputes about the interpretation of articles in the bilateral tax treaties that go by the name of double taxation avoidance agreements (DTAAs).

An assessee cannot challenge the computation of any income with reference to a tax treaty. He can only plead that he is liable to tax on the income in question in the treaty-country, that is, the country which has entered into an agreement with India, on the allocation of the income on which both have jurisdiction, between the two countries for purposes of tax levy by them. Will not the authorities designated for this purpose by the concerned countries be in a better position to make the apportionment of the taxable income better, since this is more an executive than a legal function?

PE construed to India's detriment

In the Maharashtra State Electricity Board vs Dy. CIT (2004 270 ITR 36 ITAT) case, the Mumbai Bench of the ITAT held that the payment of fees for legal consultancy service to a UK-based firm of solicitors was taxable only in the UK and not in India. On the face of it, this appears to be a simple ruling but, as in some similar tribunal rulings supposed to be based on facts, the damage to the Revenue has been so enormous that it has become a matter of public concern.

The following two points seem to have escaped consideration by the Tribunal:

Appeals that go to the Commissioner (Appeals) and the Tribunal and references/appeals to the High Courts or the Supreme Court, involving interpretation of DTAAs are distinguishable from other appeals/references. The basis of all tax treaties is the recognition that every taxpayer who has any income liable to tax in more than one treaty country will have to pay tax on that income at least in one of the two countries. He may be called upon to pay tax on the income in both the countries but in all such cases special flat rates of tax have been evolved by every treaty country.

All treaties, as their preamble makes it clear, are agreements for avoidance of tax on the same income in both the countries to the extent possible.

What is adjudicated in an appeal is not, in effect, a tax deduction or a tax claim of an assessee but apportionment of the tax payable in both the countries on the same income in the manner that is set out in the agreement between the two countries.

There is no scope for invoking principles of construction like generalia specialibus non derogant (that is, general things will not derogate from special things) or delving into law lexicons to arrive at the meaning of the expression `professional services', when the very `lay out' of the articles of the agreement should have served to settle which country was entitled to how much revenue on income in regard to which both exercise tax jurisdiction.

Article 13 provided for allocation of tax on `royalties and fees for technical services'; no matter what the period was within which the income in question had been earned while article 15 dealt with professional services or other independent personal activities of individuals who had spent 90 days or more in the country in which they were not resident.

The Tribunal leaves the layman with the impression that it has gone out of the way to impute refinements and subtleties to the issue which were neither realistic nor called for. How the Tribunal concluded that `technical services' was too wide a label and `professional services' were a special variety of technical services passes comprehension. One would have thought that the distinction sought to be made by the Tribunal was one without any difference. The Tribunal might have had the vestige of a justification if clause 15 singled out any of the professional or technical services, for example, law. Was it reasonable to sacrifice the revenue in India at the altar of a dubious legal principle for invoking which there was no scope?

The Supreme Court, in CBDT vs Oberoi Hotels (India) (P.) Ltd (1998 231 ITR 148), held that technical services always included within it `professional service' as well. Apart from the fact that professional services, including legal consultancy, should be taken to be included in `technical services' as laid down by the Supreme Court, an important fact which was not evidently brought to the notice of the Tribunal is that, in substance/reality the loan taken from IBRD by the Central Government/State of Gujarat (or the State Electricity Board (`SEB') which was a limb of the State Government for all practical purposes and which was the beneficiary of the loan) had paid the fees to Freshfield and, therefore, from the income-tax point of view the case is one that falls squarely within the ambit of clause (vii) of sub-section (1) of Section 9 of the Act.

There was little scope for paring down the extent of its liability to income-tax in India in view of the provision in clause (vii) of sub-section (1) of Section 9. Such scope was even less under article 13 of the India-UK DTAA which has made the matter mandatory by prescribing the rate of tax on the fees as 30 per cent of `the gross amount' of the fees. The elaborate discussions in the Tribunal's order on `the ratio' of the Supreme Court's ruling in Transmission Corporation of Andhra Pradesh Ltd (supra) are rendered redundant by the provisions in clause (vii) of sub-section (1) of Section 9 read with clause 13 of the India-UK DTAA and the Supreme Court's ruling in Oberoi Hotels (supra) to the effect that technical services have always included professional services.

It defies understanding how fees paid by the Government or its limb or agent, viz., SEB could be taken to have been derived in the UK when Fairfield's advice was based on an observation of the conditions of operation in India and it was utilised in India, as stipulated in clause (vii) of sub-section (1) of Section 9. There is nothing to stop the UK also taxing its resident beneficiaries but how can the firm claim exclusivity for the UK in taxing income pertaining to services rendered to an ongoing business in India and payment of the income out of a loan borrowed by the MSEB through the Government in India?

It is time that Section 90 of the Act is amended to require all disputes arising from interpretation of DTAAs to be referred to designated officers in the treaty countries for resolution. The clarifications issued by them may have to be given the necessary legal sanction or authority. Their job is not going to be an easy one, since they will have to conform, to the extent feasible, to the rulings of the Advance Rulings Authority (ARA) and initiate appropriate action through `protocols', and so on, for bringing about suitable, uniform, harmonised changes in all the agreements or `treaties'.

In the instant case, the UK Government is not directly in the picture. It is the beneficiary of the tax on the fees paid indirectly by the Indian Government or, in any case, by a resident in India, viz., the State electricity board. This is a matter which should be solved by the representatives of the governments concerned without troubling the tribunals or courts in India or the UK unless the two governments are unable to sort it out themselves.

(By arrangement with Corporate Law Adviser, New Delhi.)

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