DCIT, CIRCLE 16(2), MUMBAI vs. M/S CYRIL AMARCHAND MANGALDAS, MUMBAI

The present appeals have been filed by the Revenue challenging the separate impugned orders of even date 09/02/2023, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [“learned CIT(A)”], for the assessment years 2017-18 and 2018-19.

2. Since these appeals pertain to the same assessee and involve similar issue, therefore, as a matter of convenience, these appeals were heard

M/s. Cyril Amarchand Mangaldas ITA no.1046/Mum./2023 ITA no.1047/Mum./2023 together and are being disposed off by way of this consolidated order. With the consent of the parties, the Revenue‟s appeal for the assessment year 2017-18 is taken up as a lead case.

./2023 Revenue’s appeal – A.Y. 2017-18

“1. On the facts and the circumstances of the case and in law, allowing tax relief in regard to income earned in Japan. The Ld. CIT(A) has not considered the provisions of Article 14A of India-Japan DTAA dealing with Independent Personal Services. As per the provision of Article 14A the income itself is not taxable, the tax credit in respect thereof is not allowable.

2. The appellant prays that the order of CIT(A) on the above ground be set- aside and that of the Assessing officer be restored.

3. The appellant craves leave to amend of alter any ground or add a new ground which may be necessary".

M/s. Cyril Amarchand Mangaldas ITA no.1046/Mum./2023 ITA no.1047/Mum./2023 the income received for services rendered in Japan. Accordingly, the assessee was asked to show cause as to why the credit of such withholding tax be not disallowed as the receipt is not taxable in Japan and thus, the tax was not required to be withheld as it was in the nature of independent professional services. In response thereto, the assessee submitted that the legal services provided by the assessee would squarely fall within the ambit of „consultancy services‟ in view of the decision of the Hon‟ble Supreme Court in GVK Industries v/s ITO (2015) 371 ITR 453 and thus, in accordance with Article 12 of the India Japan Double Taxation Avoidance Agreement (“DTAA”) the legal services rendered by the assessee to the Japanese residents would be taxable in Japan at the rate of 10%. The assessee further submitted that since the taxes have already been paid in Japan, the same should be allowed as admissible tax credits. It was also submitted that the assessee has been informed by its Japanese clients that Japanese tax authorities have interpreted Article 14 of the India-Japan DTAA differently and have held that the provisions of Article 14 shall be applicable only in case of professionals working in the individual capacity, i.e. independent lawyers, and not to entities engaged in rendering professional services like corporate law firms, such as the assessee. Therefore, it was submitted that its clients in Japan were directed by Japanese tax authorities to deduct tax under Article 12 of the India-Japan DTAA and deposit the taxes to its credit while making the payments to the assessee.

6. The Assessing Officer (“AO”) vide order dated 23/12/2019 passed under section 143(3) of the Act did not agree with the submissions of the assessee

M/s. Cyril Amarchand Mangaldas ITA no.1046/Mum./2023 ITA no.1047/Mum./2023 and held that the credit of such withholding tax is not allowable to the assessee in India as the receipt is not taxable in Japan and thus, the tax was not required to be withheld, as it was in the nature of independent personal services. Accordingly, the AO denied the foreign tax credit of Rs.77,29,804 claimed by the assessee under section 90 of the Act. Further, the AO rejected the alternative claim of the assessee of reducing the turnover to the extent of the foreign tax credit, as the assessee has received the net amount in India, following the approach adopted in the case of the principal firm, i.e. Amarchand and Mangaldas and Suresh A Shroff & Co., for the assessment year 2014-15.

7. The learned CIT(A), vide impugned order, following the decision of the coordinate bench of the Tribunal rendered in the case of the principal firm for the assessment year 2014-15 allowed the claim of foreign tax credit under section 90 of the Act to the assessee, after finding the facts to be identical. Being aggrieved, the Revenue is in appeal before us.

M/s. Cyril Amarchand Mangaldas ITA no.1046/Mum./2023 ITA no.1047/Mum./2023 18/12/2020 decided the similar issue in favour of the taxpayer, by observing as under:-

“4. We have heard Dr. Lala, learned counsel for the assessee, and Shri Iyengar, learned Departmental Representative, at length. We have also perused the material on record and duly considered the facts of the case in the light of the applicable legal position.

5. There is no dispute about the fundamental legal position that, in terms of Article 23(2)(a) of Indo Japanese tax treaty, "where a resident of India derives income which, in accordance with the provisions of this Convention, may be taxed in Japan, India shall allow as a deduction from the tax on the income of that resident an amount equal to the Japanese tax paid in Japan, whether directly or by deduction" [Emphasis, by underlining. supplied by us]. What essentially follows is that when in accordance with the provisions of Indo Japanese tax treaty, any income of Indian resident is taxed in Japan, the Indian resident will get the deduction, in the computation of his tax liability, taxes paid by the assessee in Japan- whether paid directly by the assessee or whether taxes were withheld in Japan. There are many other conditions attached to this basic provision, but, for our present purposes, those conditions are not really relevant. That brings us to the question as to what are the connotations of "in accordance with the provisions" of the tax treaty. In the case of Nav Bharat Vanijya Vs CIT [(1980) 123 ITR 865 (Cal)], Hon'ble Calcutta High Court has observed that "(t)he words 'in accordance with', mean being in agreement or harmony with; in conformity to: vide the Compact Edition of the Oxford English Dictionary, Vol. I, page 62". In paragraph 32.5 of the OECD Model Convention Commentary, 2017, as indeed in its earlier versions, it is, inter alia, stated that "Article 23 A and Article 23 B, however, do not require that the State of residence eliminate double taxation in "all" cases where the State of source has imposed its tax by applying to an item of income a provision of the Convention that is different from that which the State of residence considers to be applicable". Essentially, therefore, it is open to the Assessing Officer to take a call on whether the taxes withheld in the treaty partner jurisdiction could be reasonably said to be in harmony with or in conformity with the provisions of the related tax treaty, and in a case in which he comes to the conclusion that the taxes so withheld in the treaty partner jurisdiction could indeed be reasonably said to be not in harmony with the scheme of taxation in that tax treaty, he can decline the foreign tax credit under article 23(2)(a). The question, therefore, that we really need to adjudicate upon is whether the assessee could reasonably be said to be taxable in Japan under article 12, in respect of the professional income earned in Japan, of the Indo Japanese tax treaty. It is when the answer to this question is in the affirmative that the granting of the tax credit in respect of taxes so paid abroad could be considered, of course on merits, in the hands of the assessee.

M/s. Cyril Amarchand Mangaldas ITA no.1046/Mum./2023 ITA no.1047/Mum./2023

2. The term 'professional services' includes especially independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, surgeons, lawyers, engineers, architects, dentists and accountants.

M/s. Cyril Amarchand Mangaldas ITA no.1046/Mum./2023 ITA no.1047/Mum./2023 statutes, essentially the tax treaties, which are to be subject to less rigid rules of interpretation, cannot be subjected to literal interpretation isolation with the context in which the provisions of the treaty are set out. When we are interpreting a treaty provision, we cannot be guided by any one rule of interpretation alone even when the results achieved on that basis come in conflict with the results reached at by way of applying the other applicable principles. If we are to apply, for example, the principle of general provisions making way to the specific provisions in this case, and thus hold that only article 14 will come into play for the taxation of professional services, the results arrived at will be in conflict with the well-established principle that the treaty is to be read as a whole and the provisions of the treaty are to be construed in harmony with each other, inasmuch as while article 12(4) exclusion clause proceeds on the basis that article 14 applies to individuals alone, the article 14 will then be applicable to all the entities- including the partnership firms and corporate entities. That will be clearly incongruous. In any case, we have not been able to find even any conceptual justification for excluding one class of eligible taxpayers, i.e.individuals, from the application of provisions of article 12. Whatever holds good for the exclusion of individuals earning income taxable under article 14 must hold good for the other taxpayers earning income taxable under article 14 as well- unless, of course, article 14 is treated as applicable to the individuals alone. Therefore, unless the provisions of article 14 are held to be applicable only for individuals, the exclusion clause under article 12(4) being confined to the individuals earning income taxable under article 14 does not make sense. The principles of interpretation of treaties, as indeed any statutory provision or legal document, are to be applied in a holistic manner, and no one principle of interpretation, howsoever well established, can have priority over another principle of interpretation which is legally binding. The principle of generalia specialibus non derogant, i.e., general provisions do not override the specific provisions, is, therefore, required to be read for the purposes of individuals alone, so far as the provisions of article 14 are concerned, as is implicit in the scheme of the Indo- Japanese tax treaty as discussed above. Let us, in this background, take a look at the provision of article 12(4) once again. This article makes it clear that so far as the exclusion clause of an income from professional activities is concerned, i.e. income taxable under article 14 as independent personal services, only when the income is so earned by an individual. The exclusion clause, under article 12(4), covers only payments to "to any individual for independent personal services referred to in article 14". It is also important to bear in mind the fact that the normally an exclusion clause for independent personal services, as embedded in the article dealing with the fees for technical services, would cover only what is taxable under the head' independent personal services. It does indicate that under the scheme of this treaty, what is taxable under article 14 is only the professional income of an individual and not of entities other than individuals. While on this aspect of the matter, it is important to take note of the fact that there is a school of thought to the effect that article 14 comes into play only for individuals while article 7 is for entities other than individuals, and it is for this reason that article 14 was finally removed from the OECD Model Convention. Taking note of this position, a coordinate bench of this Tribunal, in the case of Linklaters LLP VS ITO [(2011) 9 ITR (T) 217 (Mum)], has observed as follows: 105. Learned counsel has also contended that the professional services can only be taxed under the head article 15 and in case chargeability under article 15 fails, that is end of the road. It cannot be open to Page | 8 M/s. Cyril Amarchand Mangaldas ITA no.1046/Mum./2023 ITA no.1047/Mum./2023 revenue authorities to tax income from professional services under article 7. It is contended that article 15 applies only to individuals. As to the situations in which article 5 will apply in respect of the professional services and the situations in which article 15 of the India-UK tax treaty, which is in pari materia article 14 of the U.N. Model Convention, will apply, we find guidance from the following observations made in the U.N. Model Convention Commentary:- "The Group discussed the relationship between article 14 and sub- paragraph 3(b) of article 5. It was generally agreed that remuneration paid directly to an individual for his performance of activity in an independent capacity was subject to the provisions of article 14. Payments to an enterprise in respect of the furnishing by that enterprise of the activities of employees or other personnel are subject to articles 5 and 7. The remuneration paid by the enterprise to the individual who performed the activities is subject either to article 14 (if he is an independent contractor engaged by the enterprise to perform the activities) or article 15 (if he is an employee of the enterprise). If the parties believe that further clarification of the relationship between article 14 and articles 5 and 7 is needed, they may make such clarification in the course of negotiations."

10. As we part with the matter, we may add that, in our humble understanding, so far as determination of question as to whether or not the taxation has been done in the source country "in accordance with the provisions of this Convention, may be taxed in ... (the source jurisdiction)", one has to take a judicious call as to whether the view so adopted by the source jurisdiction is a reasonable and bonafide view, which may or may not be the same (the as the legal position in the residence jurisdiction. While it is indeed desirable that there should be uniformity in tax treaty interpretation in the treaty partner jurisdictions, it may not always be possible to do so in view of a large variety of variations, such as the sovereignty of judicial systems, domestic law overrides on the treaty provisions, the legal framework in which the treaties are to be interpreted, and the judge-made law in the respective jurisdictions etc. In a situation in which a transaction by resident of one of the contracting states is to be examined in both the treaty partner jurisdictions, from the point of view of taxability of income arising therefrom, different treatments being given by the treaty partner jurisdictions will result in incongruity and undue hardship to the assessee. On the subject uniformity of interpretation in the treaty partner jurisdictions, Lord Denning, in the case of Corocraft, said: "If such be the view of the American Courts, we surely should take the same view. This convention should be given the same meaning throughout all the countries who were parties to it" (1 Q.B. 616). The importance of uniformity of interpretation of expressions which are used in global treaty networks can thus hardly be overemphasized. As was said in the Federal Court in Canadian Pacific Ltd. v. Queen 76 DTC 6120 at p. 6135) in interpreting the 1942 Canada-US Treaty, "While it is true that this Court has the right to interpret the Canada-US Tax Convention and Protocol itself and is no way bound by the interpretation given to it by the United States Treasury, the result would be unfortunate if it were interpreted differently in the two countries when this would lead to double taxation. Unless, therefore, it can be concluded that the interpretation given in the United States is manifestly erroneous it is not desirable to reach a different conclusion, and I find no compelling reason for doing so." That situation is to be best avoided, and it can only be so avoided when unless the view of the treaty partner jurisdiction is wholly unreasonable or, to borrow the words of Canadian Federal Court, "manifestly erroneous," it should be adopted, at least in respect of that transaction, by the other treaty partner as well. Here is a case in which not only the source country jurisdiction has taken the view Page | 10

M/s. Cyril Amarchand Mangaldas ITA no.1046/Mum./2023 ITA no.1047/Mum./2023 that the legal fees received by the assessee are taxable under article 12 of the Indo Japan tax treaty, but, as discernable from the facts as recorded by the authorities below, the Japanese tax authorities have consciously taken a call rejecting the plea of the assessee for non-taxation, and even proceeded against the assessee's Japanese clients for interest and penalties for non- deduction of tax at source from the payments in question. This view, in the light of the detailed reasons set out above, is a reasonable view in the context of Indo Japan tax treaty and, at the minimum, not a 'manifestly erroneous.' It is noteworthy that in the OECD Model Conventions Commentaries, which are judicially held to be in the nature of contemporanea expositio in India and which our Hon'ble Courts above have referred to, with a great degree to respect and approval, from to time in taking calls on the provisions relating to the tax treaties, also it is stated, as we have noted earlier as well, that "Article 23 A and Article 23 B, however, do not require that the State of residence eliminate double taxation in "all cases" where the State of source has imposed its tax by applying to an item of income a provision of the Convention that is different from that which the State of residence considers to be applicable" [Emphasis, by underlining, supplied by us]. Therefore, it was a position well visualized by the multilateral bodies, developing the treaty provision in question, that in all the cases in which the interpretation of the residence country about the applicability of a treaty provision is not the same as that of the source jurisdiction about that provision, and yet the source country has levied taxes- whether directly or by way of tax withholding, the tax credit cannot be declined. To put a question to ourselves, what could possibly be the situations in which views of the source and residence jurisdictions may differ about the applicability of a treaty taxation provision, and yet the residence country could still provide the related tax credits. In our humble understanding, for the detailed reasons set out above, these are the cases in which the treaty partner source jurisdiction has taken a reasonable bonafide view which is not manifestly erroneous- even though it is not the same as is the view taken by the residence jurisdiction. That aspect alone, however, is not the sole determinative factor in the present context since we have already held that, on the peculiarities of Indo Japanese tax treaty provisions, the legal fees paid to a partnership firm of lawyers can indeed be subjected to levy of tax under article 12 as the exclusion clause under article 12(4) does not get triggered for payments to persons other than individuals, and the provisions of article 14 are required to be read in harmony with the provisions of article 12(4).”

M/s. Cyril Amarchand Mangaldas ITA no.1046/Mum./2023 ITA no.1047/Mum./2023

“1. On the facts and the circumstances of the case and in law, allowing tax relief in regard to income earned in Japan. The Ld. CIT(A) has not considered the provisions of Article 14A of India-Japan DTAA dealing with Independent Personal Services. As per the provision of Article 14A the income itself is not taxable, the tax credit in respect thereof is not allowable.

2. The appellant prays that the order of CIT(A) on the above ground be set- aside and that of the Assessing officer be restored.

3. The appellant craves leave to amend of alter any ground or add a new ground which may be necessary.”

M/s. Cyril Amarchand Mangaldas ITA no.1046/Mum./2023 ITA no.1047/Mum./2023 16. In the result, the appeal by the Revenue for the assessment year 2018- 19 is dismissed.