ITAT, MUMBAI BENCHES ‘L’ Deductibility of tax at source from payment made to legal advisors at Hongkong for GDR issue

Deductibility of tax at source from payment made to legal advisors at Hongkong for GDR issue



When the legal charges paid in UK are accepted to be covered under section 9(1)(vii) of the Income-tax Act, then how it can be argued that similar charges paid in Hongkong be given a different treatment, more so when the relation of the services with the subject continues to remain the same.



ITAT, MUMBAI BENCHES ‘L’, MUMBAI

DDIT (Int’l Taxation)

v.

Tata Iron & Steel Co. Ltd.

ITA No. 536/Mum/2004

August 13, 2009

RELEVANT EXTRACTS:

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12. We have heard the rival submissions and perused the relevant material on record. Admittedly there was no DTAA with Hongkong for the relevant year. As such we will restrict ourselves in examining the provisions of section 9(l)(vii) in order to ascertain the deductibility or otherwise of tax at source from the payment so made to the firm of legal advisors at Hongkong. At this stage it will be relevant to consider the material part of section 9(l)(vii), as under:-

"(vii) income by way of fees for technical services payable by -

(a) the Government; or

(b) a person who is a resident, except where the fees are payable in respect of services utilized in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or

(c) a person who is a non-resident, where the fees are payable in respect of services utilized in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India.

Explanation [2J. - For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries".

13. Explanation 2 gives the meaning of "fees for technical services" as consideration for rendering of any managerial, technical or consultancy services including the provision of services of technical personnel. The exception clause within the Explanation 2 is not applicable as it relates to 'consideration for any construction, assembling, mining or like projects undertaken by the recipient or consideration which is chargeable under the head salaries'. From here it can be seen that the scope of technical services within this clause is not confined only to the technical services but also brings within its fold the managerial or consultancy services. If the services for which the fees is paid is for rendering of either managerial or technical or consultancy services, that will come within the sweep of Explanation 2 and resultantly clause (vii) of section 9(1) will be applicable.

14. The Special bench in Mahindra & Mahindra Ltd. (supra) has considered the meaning of the word "technical" in the expression "fees for technical services" in para 19.12 asunder:-

"19.12. The word "technical" in the expression fees for technical services' has not been defined u/s. 9(1)(vii) and hence its meaning needs to be ascertained. As per the New Shorter Oxford Dictionary (Thumb Index Edition) the word "technical' has been defined as 1. Of a person : having knowledge of or expertise in a particular art, science, or other subject. 2. pertaining to, involving, or characteristic of a particular art, science, profession, or occupation, or the applied arts and sciences generally. The word "technical" came up for consideration before the Hon'ble Supreme Court, though in the context of section 80-O. It was held that the Agreement entered into between the assessee and a foreign enterprise whereby the assessee agreed to manage and run the hotel belonging to the latter involved the rendering of technical or professional services. The Hon 'ble Andhra Pradesh High Court in the case ofG. V.K. Industries Limited & Anr. Vs. ITO & Anr. [(1997) 228 ITR 564 (AP)] had also the occasion to consider the meaning of the term "technical services". In that case also section 9(l)(vii)(b) read with Explanation 2 was involved and it was held that the fees received by the non-resident for offering its services as financial advice to the project fell in "technical services" within the ambit of section 9(l)(vii)(b). In our considered opinion the Assessing Officer was right in terming the services rendered by the lead managers as falling within the purview of managerial technical or consultancy services so as to be considered as "fees for technical services" under Explanation 2 to section 9(l)(vii)."

15. In the case before Special Bench also some payment was made to legal advisors in connection with the GDR issue, which was held to be falling within the expression 'fees for technical services'. The learned A.R. has tried to make out a case that the relevant provisions were not considered by the Special Bench in concluding that such legal charges were also covered with in the expression 'fees for technical services' as per Explanation. He relied on section 44AA and section 194J of the Act for contending that legal services were to be considered as distinct from technical services for section 9(l)(vii) also in the light of the rule ejusdem generis. We are not inclined to accept this proposition for the reason that the expression "fees for technical services" has been specifically defined in section 9(l)(vii) by way of Explanation-2. When a specific meaning is assigned to a particular expression, its general meaning is ousted. Whatever may have been said about that expression generally in other parts of the Act, will not be relevant when interpreting a provision which gives a specific meaning to a particular word, phrase or expression. The rule of ejusdem generis is invoked to find the meaning of a word. In that process the entire context is seen with a view to ascertain the meaning of such word. If however a specific meaning is given to a particular expression which is relevant for that very section, then the general or specific meaning given to such term or expression in any other part of the Act becomes irrelevant. Here is a converse case. We are unable to find any logic in summoning this rule for the reason that a specific meaning has been given to the expression "fees for technical services' in Explanation-2, which is part and parcel of section 9(l)(vii). In such a situation there is hardly any need to wander here and there in search of unearthing the meaning of this expression from other parts of the statute.

16. Coming to the judgment in the case of Skycell Communications Ltd. and Another (supra) heavily relied on by the learned A.R., we find that the question involved in that case was about the deductibility or otherwise of tax at source u/s.l94J read with section 9(l)(vii) on the provision of cellular mobile telephone services to the subscribers. In that case it was held that the provision of cellular mobile telephone to the subscribers did not come within the definition of' "technical services" and hence there was no need for deducting the tax at source u/s.l94J. The Hon'ble High court has held that "the fees for technical services" could only be meant to cover such things technical as are capable of being provided by way of service for a fee. The popular meaning associated with 'technical" is "involving or concerning applied and industrial science". "Technical service" referred to in section 9(1) contemplates rendering of a "service" to the payer of the fee. Mere collection of a fee for use of a standard facility provided to all those willing to pay for it does not amount to the fee having been received for technical services. When a person decides to subscribe to a cellular telephone service in order to have the facility of being able to communicate with others, he does not contract to receive a technical service. From the above observations of the Hon'ble High Court it can be easily seen that the matter for consideration before the Hon'ble High Court was to consider whether the cellular mobile telephone service provided to the subscriber would come within the meaning "technical services" or not. This judgement has been rendered in an altogether different context. We are dealing with a case in which GDR issue was brought out by the assessee and several payments were made to the Lead Managers in order to facilitate the proper subscription to the GDR issue. The management and selling commission allowed to the non-resident in respect of GDR issue have also been held to be falling within the expression "fees for technical services" u/s.9(l)(vii), to which the Id. AR has not raised any objection. These legal services, the payment in respect of which has been disputed before us, are not de hors GDR issue but very much part and parcel of it. These legal services are not independent of the GDR issue so that these may be sliced from the payments made for other services in respect of GDR issue which have been held to be falling u/s. 9(l)(vii) read with Explanation. It is manifest that the legal charges for bringing out the GDR issue were incurred by the assessee in UK also apart from Hongkong. When the legal charges paid in UK are accepted to be covered u/s 9(l)(vii), then how it can be argued that similar charges paid in Hongkong be given a different treatment, more so when the relation of the services with the subject continues to remain the same. Respectfully following the Special bench order in Mahindra & Mahindra (supra), which has discussed this issue threadbare, we hold that the disputed amount paid in Hongkong is covered by the definition of "fees for technical services' as given in Explanation 2 and is in the nature of to income deemed to accrue or arise in India as per section 9(l)(vii). However we want to make it clear that on going through the two bills raised by the said firm, it is noticed that the second bill dated 9.11.1994 has two components. One part is of 40,000 Dollars representing "out of pocket expenses and disbursement". This part of the total amount of 200,000 Dollars paid to C.S.First Boston & Others shall be considered as reimbursement of expenses on which tax is not deductible as per the Special Bench order in the case of Mahindra & Mahindra (supra). We, therefore, hold that equivalent of 160,000 Dollars in Indian rupees is covered under the Explanation-2 as 'fees for technical services'.

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