V.C Daga, J.:— These appeals are filed by the assessee under section 260A of the Income-tax Act, 1961 (hereinafter referred to as “the Act” for short) against the orders of the Income-tax Appellate Tribunal (“the ITAT” for short) both dated September 27, 2001 in I.T.A Nos. 1327 and 1328.Mum/2001, whereby the appeals filed by the assessee against the orders of the Commissioner of Income-tax (Appeals) both dated December 19, 2000, which were dismissed and were admitted for final hearing on the following substantial questions of law:
(A) Whether the Income-tax Appellate Tribunal's conclusion that the appellant had not proved that it had rendered services outside India is vitiated in law on account of—
(i) it being contrary to the evidence and the material which was admittedly on record and which had been accepted, after enquiry, by the respondent and the Commissioner of Income-tax (Appeals)?
(ii) that the Income-tax Appellate Tribunal ignoring the material and the evidence which was admittedly on record and which had been accepted, after enquiry, by the respondent and the Commissioner of Income-tax (Appeals)?
(iii) the Income-tax Appellate Tribunal ignoring the relevant facts, particularly (but not limited to) the fact that 6 out of 7 of the appellant's clients Were non-residents?
(B) On the facts and circumstances of the case, the appellant being a law firm providing legal advice and being remunerated on an hourly rate basis, whether the Income-tax Appellate Tribunal erred in law in not ascertaining the income of the appellant in India on the basis of the services rendered in India as measured by the billed hours of work done in India?
Factual scenario:
2. The factual scenario common to both appeals arising out of the orders relating to the assessment years 1996-97 and 1997-98, lies in a narrow compass. The facts are drawn from Appeal No. 1327.Mum/2001 relating to the assessment year 1996-97 for the sake of clarity. Both the appeals are being disposed of by this common order. The appellant is an international firm of solicitors resident in the United Kingdom (UK). It has no office or fixed base in India. The appellant, during the previous year ended on March 31, 1996 (relevant to the assessment year 1996-97), was appointed as English law legal advisers for three projects in India, namely:—
1. Bhadravati Power Project
2. Vizag Power Project; and
3. Ravva Oil and Gas Fields Project.
4. The Bhadravati Power Project was a three-way joint venture for the construction of a power plant between three participants: Ispat Industries Ltd., GEC Alsthom group and Electricite de France, GEC Alsthom group and Electricite de France were not resident in India. Only one of them, Ispat Industries Ltd., was a resident in India.
5. The Vizag Power Project was a two-way joint venture project for the construction of a power plant between two non-resident participants, namely, National Power PLC and Machen Development Corporation.
6. The Rawa Oil and Gas Fields Project, was the only client of the assessee, who was a non-resident Australian company called Chase Manhattan (Australia) Limited.
7. The appellant, during the previous year ended on March 31, 1997 (relevant to the assessment year 1997-98), was appointed as English law legal advisers additionally for the Vemagiri Power Project.
8. In the case of the Vemagiri Power Project, the assessee's client, Avondale Ltd. was also not resident in India.
9. The position in regard to the four projects has been summarized in tabular form given below:
Project
Appellant's client
Whether resident in India
(1)
(2)
(3)
Bhadravati Power Project:
Electric De France GEC Alsthom group
Non-resident Non-resident.
Ispat Industries Limited
Resident
Vizag Power Project:
Machen Development Corporation
Non-resident
National Power Plc.
Non-resident
Rawa Oil and Gas Fields Project:
Chase Manhattan Bank (Australia Limited.)
Non-resident
Vemagiri Power Project:
Avondale Ltd.
Non-resident.
10. The appellant's method of billing the clients for the services rendered by the appellant to them was, briefly, as follows:
(i) each partner and employee of the appellant who was involved in doing work for the clients was required to maintain detailed time sheets recording the time spent by them on such work; the said time sheets separately showed the time spent on doing such work in India and outside India;
(ii) the time so spent was multiplied by the hourly billing rates applicable to each respective partner/employee as specified in the terms of appointment between the appellant and the clients;
(iii) in the case of the Bhadravati Power Project and Vizag Power Project, the amounts arrived at under (ii) above were appointed among the different participants of the joint venture in proportion to their respective shares therein and bills were accordingly raised by the appellant upon such participants; and
(iv) the bills so raised were paid to the appellant by the clients outside India.
Assessment of income:
3. During the previous year relevant to the assessment year 1997-98, the number of days the appellant's partners were present in India during the previous year, relevant to the assessment year 1997-98, exceeded 90 days. The appellant filed a return of income showing an income, liable to Indian taxation, of Rs. 5,08,87,950. The said figure of Rs. 5,08,87,950 was arrived at on the basis of the income of the appellant, which was attributable to its operations in India in respect of the above four projects.
4. The Assessing Officer, took up the appellant's above return of income for scrutiny and proceeded to assess the quantum of the appellant's income, which, according to the respondent, the Assessing Officer was liable to Indian taxation.
5. The Assessing Officer, however, by his order dated March 29, 2000, held that the entire fees received by the appellant from the clients engaged in the above four projects was taxable in India. The relevant portion of the assessment order is extracted hereinbelow:
“As against the $ 31,11,727 the assessee has returned a sum of $ 8,71,369 which is considered as taxable and is attributable to services performed in India. It is also stated that income attributable to services performed outside India is not taxable in India. This contention of the assessee cannot be accepted.
For the earlier assessment year 1996-97, the total fees received, whether the work was done in India or outside India but for the Indian project as a whole was taken together and total fees received were taxed, for detailed reasons mentioned in that year. Since there is no change in this year also, the total fees received for these projects taken together are taxed.”
6. On this basis of the total fees received by the appellant from all clients engaged in the above four projects was assessed on the appellant on an income of Rs. 17,26,38,634 as against the figure of Rs. 5,08,87,950 shown by the appellant on the basis of the income as attributable to the services rendered by it in India.
7. Being aggrieved by the above order dated March 29, 2000, passed by the Assessing Officer, the appellant preferred an appeal to the Commissioner of Income-tax (Appeals) and reiterated its contentions to the effect that the quantum of its income which could be subjected to Indian taxation was only that portion of its income which was attributable to the services performed by it in India.
8. The Commissioner of Income-tax (Appeals) vide his order dated December 20, 2000, held that the entire fees received by the appellant from the clients in respect of the four projects were taxable in India, irrespective of the fact that such fees were received for services rendered by the appellant outside India, as, according to the Commissioner of Income-tax (Appeals), the determining factor was the place where the appellant's services were utilised by the clients and not the place where the appellant's services were performed for, or rendered to the clients.
9. Being aggrieved by the above order of the Commissioner of Income-tax (Appeals), the appellant preferred an appeal to the Income-tax Appellate Tribunal. The Appellant reiterated its stand to the effect that both under the provisions of the Act as well as under the provisions of the Double Taxation avoidance agreement executed between India and the United Kingdom (UK) (“the DTAA” for short) only that portion of its income from the clients which was attributable to the services performed by the appellant in India could be subjected to Indian taxation. In support of this contention, the appellant explained, in detail, the method followed by it for billing of clients and, in this connection, drew a pointed reference to the time-sheets which showed the services rendered by partners and employees, in India and outside India.
10. The Income-tax Appellate Tribunal, by its order dated September 27, 2001, accepted that article 15 of the DTAA was applicable to the appellant's case and the appellant's income which was attributable to the services rendered by the appellant outside India has to be excluded while computing the appellant's income chargeable to tax in India. The Income-tax Appellate Tribunal then went on to hold that “the work of the assessee related to (a) the general advice in relation to the entire projects, (b) the projects were to be executed in India, (c) the assessee had not provided full details of three out of four projects, and (d) in the absence of details as to the projects and the nature of the work done, it was not possible to find fault with the findings of the Assessing Officer that income could not be limited to the billed hours in India. In principle, the Tribunal accepted the view that it is the nature of the work that will decide the tax liability in India would have to be ascertained.” In view of this finding, the Income-tax Appellate Tribunal held that the entire income received by the appellant from the clients engaged in the four projects was taxable in India.
11. Being aggrieved by the aforesaid order of the Income-tax Appellate Tribunal dated September 27, 2001, the appellant has invoked the appellate jurisdiction of this court.
Rival submissions:
12. Mr. Harish Salve learned senior counsel appearing for the appellant, urged that the finding of the Tribunal that the assessee did not place material it has to be understood in the context in which it was rendered. It is submitted that complete details of the presence of each of the “members” of Clifford Chance (partners and associates) and their billing hours on the basis of which clients were invoiced have been placed in full before the assessing authorities all along. It is further submitted that if (as contended by the assessee) the fees generated in India is the correct basis, then the requisite material to ascertain income was and is very much on record.
13. It is further urged that in the case of a legal professional rendering advisory services, the services are only rendered at a place where the professional is personally present. In the submission of Mr. Salve, any other rule would create chaos and uncertainty.
14. Mr. Salve submits that the tax on professionals who has crossed the 90 day rule would be chargeable to tax under section 9(1)(i) of the Income-tax Act. In his submission in order to be taxed in India, the income must accrue or arise in India. According to him, Explanation 1 makes it clear that only such income as is “reasonably attributable to the operations carried out in India” is taxable in India. Applying this to a legal professional rendering advisory services, and where such advice is billed on the basis of billing hours, his presence at the time of rendering advice would be the basis for determining where income is taxable. He submits that the billing hours are an accurate reflection of the service rendered by a legal professional to a client.
15. Mr. Salve submitted that applying the project rule for ascertaining whether the advisory services are taxable in India, undermines the very foundation on which the nature of the legal profession rests. A legal professional has no stake or interest in the project he is available at any time to the client for advice on all legal issues. It would be a conflict of interest if the professionals giving the advice were to have any kind of interest in the project.
16. In the submission of Mr. Salve, the Tribunal has accepted (and is not contested for this year by the Department) that income has to be ascertained by applying article 15 of the Treaty which provides that “income derived by an individual…in respect of professional services may also be taxed in the other contracting state if such services are performed in that other State and…”. He submits that the income of an individual from professional services, therefore, is in the first instance taxable in the State of residence. It is additionally taxable in the other Contracting State if the services are performed in that other State.
17. Mr. Salve urged that professional such as a solicitor performs services which are advisory in character by being present in that other State at the time when the client needs his services. Any services performed by a professional from his home State for a client who is overseas cannot be taxed in a State other than the State of residence.
18. In the submission of Mr. Salve, it is significant to note that the test of residence is a test that excludes, as it were, the application of the Treaty and makes the income then taxable under section 9(1)(i). The treaty does-not—as it cannot—levy tax where no tax would be leviable under the domestic law, i.e, the Income-tax Act, 1961.
19. According to Mr. Salve, two independent conditions need to be satisfied to bring income to tax in the “other” State, viz., (a) the services have to be performed in that other State, and (b) the individual has to be present in that other State. According to him, these conditions are cumulative for the reasons that the presence in the other State for 90 days does not make the income of such person taxable in that other State in its entirety. It is only such income from “services performed in that other State” which is taxable.
20. Mr. Salve submits that the test of residence obviously is not directly correlated to the rendition of service. In other words, it is not necessary that where the services are rendered by a person to a client then for rendering service to that client, the residence should exceed 90 days. A professional who is generally present for professional work in the other State for 90 days becomes taxable in respect of the income earned by him in the other State. He, thus, submits that the key question is as to when are such services performed in that State.
21. It is submitted that it is clear from the language of the Treaty that the place of utilization of service is not relevant but the place of performance of service is what would be determinative of the matter. Reliance is placed on the apex court judgment in the case of Ishikawajma-Harima Heavy Industries Ltd. v. Director Of Income Tax, Mumbai., [2007] 288 ITR 408.
22. According to Mr. Salve, the legal system on which advice given is equally irrelevant. An advice given on Indian law, in England by a professional resident in England, is not taxable in India. Conversely, advice given in English law by a professional in India and present in India would be taxable in India (subject to the test of number of days residence were applicable). It is, therefore, submitted that the presence in India is the criteria in ascertaining the situs and the performance of the service by the legal professional. It is further submitted that in fact it has been clearly stated by the assessee that being English lawyers there was no question of their rendering advice on Indian law looking to the engagement letters with the clients produced on record. He submits that the assessees being the members of the legal profession, they would identify Indian issues that may arise in particular transaction but wherever necessary advice on Indian legal issues would be obtained from a professional who is entitled to prac-. rice Indian law and vice versa. Mr. Salve, thus, submits that the impugned order is unsustainable and the appeal is liable to be allowed.
23. Per contra, the learned counsel appearing for the Revenue, urged that the term “attributable to” is wider in meaning than the term “derived from” and, therefore, on the facts of the present case the whole of the consideration received on account of services rendered relating to projects in India is taxable in India. Reliance is placed on the apex court judgment in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT, [1978] 113 ITR 84. He further submits that the apex court judgment in the case of Ishikawajima Harima Heavy Industries Ltd., [2007] 288 ITR 408 cannot be applied in their favour in this case for two reasons, namely:—
(a) the decision is in respect of technical services. The nature of the appellant's services as admitted by the assessee is not in the nature of technical services;
(b) There has been a retrospective amendment in section 9 of the Income-tax Act, 1961, reading as under:
“Explanation.—For the removal of doubts, it is hereby declared that for the purposes of this section, where income is deemed to accrue or arise in India under clause (v), (vi) and (vii) of sub-section (1), such income shall be included in the total income of the nonresident, whether or not the non-resident has a residence or place of business or business connection in India.”
24. Lastly, he submits that the Income-tax Appellate Tribunal has recorded a clear finding of fact that there is no indication in the agreement or any documentary proof that services has been rendered outside India. This being a finding of fact the appellant cannot at this stage be permitted to produce any additional evidence. He submits that the Tribunal has considered the submissions made on behalf of the appellant on the “attribution” with which no fault can be found. He, thus, prayed for dismissal of the appeal and confirmation of the order of the Income-tax Appellate Tribunal.
Statutory provision:
25. Before embarking upon the rival submissions, it is necessary to turn to the statutory provisions relevant to decide the issues raised in this appeal:
Section 5(2), section 9(1)(i), section 9(1)(vii) of the Act, which are relevant for our purpose, read as under:
“5.(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which—
(a) is received or is deemed to be received in India in such year by or on behalf of such person; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year.
9.(1) The following incomes shall be deemed to accrue or arise in India—
(i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India:
Explanation 1.—For the purposes of this clause—
(a) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India;…
(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:
Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day of April, 1976, and approved by the Central Government.
Explanation 1.— For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date.
Explanation 2.—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’.”
Treaty: Double Taxation Avoidance Agreement (DTAA) ([1994] 206 ITR (St.) 235, 252):
Article 15: Independent personal services:
(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 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.”
Consideration:
26. For the purpose of taxation the authorities under the Act have proceeded on the basis that the fees received by the appellant was for the entire Indian project as such chargeable to tax.
27. Two basic questions which, thus, arise for our consideration are:
(A) Whether fees charged for composite activity is chargeable to tax? and
(B) Whether the income attributable to the services rendered by the asses see/appellant outside India required to be excluded while computing the tax in India?
28. The resolution of the above question would depend upon the interpretation of clause 15 of the DTAA read with of section 9 of the Income-tax Act which clearly lays down that income derived by an individual whether in his own capacity or as a member of partnership, who is resident of contracting State in respect of professional services or independent activities of 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 State, and if he is present in that State for a period aggregating to 90 days in the relevant fiscal year. Now, the question is how much income is taxable. The answer is: only so much of the income as is attributable to those services.
29. Article 15 provides for the residence rule in relation to taxation of income of an individual, including members of a partnership, the exception being where such individual is present in the “other” State for a period aggregating 90 days or more in the relevant previous year. In the case of a partnership, where “an individual is a member of a partnership even if he is not present” but “another individual member of the partnership is so present and performs professional services”, then the presence of all such members is aggregated to ascertain their presence for 90 days.
30. If the test of 90 days is satisfied, the effect is to virtually take the assessee out of the Treaty, the taxability of the income being determined under section 9(1)(i) of the Act.
31. The interpretation of this section 9(1)(i) is no longer res integra. It has been construed by the hon'ble Supreme Court in the following three cases, viz.:
(i) Carborandum Co. v. CIT, [1977] 108 ITR 335 (SC);
(ii) CIT v. Toshoku Ltd., [1980] 125 ITR 525 (SC); and
(iii) Ishikawajma-Harima Heavy Industries Ltd. v. Director Of Income Tax, Mumbai., [2007] 288 ITR 408 (SC).
32. Section 9 raises a legal fiction, but having regard to the contextual interpretation and furthermore in view of the fact that we are dealing with a taxation statute the legal fiction must be construed having regard to the object it seeks to achieve. The legal fiction created under section 9 of the Act must also be read having regard to the other provisions thereof, as held by the apex court in the case of Maruti Udyog Ltd. v. Ram Lal, (2005) 2 SCC 638.
33. The provisions of section 42 of the Indian Income-tax Act, 1922 provided that only such part of the income as was attributable to the operations carried out in India would be taxable in India.
34. The territorial nexus doctrine, thus, plays an important part in assessment of tax. Tax is levied on one transaction where the operations which may give rise to income may take place partly in one territory and partly in another. The question which falls for our consideration is: whether the income that arises out of the said transaction would be required to be apportioned to each of the territories or not.
35. Income arising out of operations in more than one jurisdiction would have territorial nexus with each of the jurisdictions on actual basis. If that be so, it may not be correct to contend that the entire income “accrues or arises” in each of the jurisdictions.
36. The apex court had occasion to consider the above question in the case of Ishikawajima Harima, [2007] 288 ITR 408 (SC), wherein, while interpreting the provisions of section 9(1)(vii)(c) of the Act, the Supreme Court held as under (page 444):
“section 9(1)(vii)(c) of the Act states that ‘a person who is a nonresident, 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 of India’.”
37. Reading the provision in its plain sense, as per the apex court it requires two conditions to be met—the services which are the source of the income that is sought to be taxed, has to be rendered in India, as well as utilized in India, to be taxable in India. Both the above conditions have to be satisfied simultaneously. Thus, for a non-resident to be taxed on income for services, such a service needs to be rendered within India, and has to be part of a business or profession carried on by such person in India.
38. In the above judgment, the apex court observed that (page 444): “section 9(1)(vii) of the Act must be read with section 5 thereof, which takes within its purview the territorial nexus on the basis whereof tax is required to be levied, namely, (a) resident; and (b) receipt of accrual of income”. According to the apex court, the global income of a resident although is subjected to tax, the global income of a non-resident may not be. The answer to the question would depend upon the nature of the contract and the provisions of the DTA. What is relevant is receipt or accrual of income, as would be evident from a plain reading of section 5(2) of the Act subject to the compliance with 90 days rule.
39. As per the above judgment of the apex court, the interpretation with reference to the nexus to tax territories also assumes significance. Territorial nexus for the purpose of determining the tax liability is an internationally accepted principle. An endeavour should, thus, be made to construe the taxability of a non-resident in respect of income derived by it. Having regard to the internationally accepted principle and the DTAA, no extended meaning can be given to the words “income deemed to accrue or arise in India” as expressed in section 9 of the Act. Section 9 incorporates various heads of income on which tax is sought to be levied by the Republic of India. Whatever is payable by a resident to a non-resident by way of fees for services, thus, would not always come within the purview of section 9(1)(vii) of the Act. It must have sufficient territorial nexus with India so as to furnish a basis for imposition of tax. Whereas a resident would come within the purview of section 9(1)(vii) of the Act, a non-resident would not, as services of a non-resident to a resident utilized in India may not have much relevance in determining whether the income of the nonresident accrues or arises in India. It must have a direct link between the services rendered in India. When such a link is established, the same may again be subjected to any relief under the DTAA. A distinction may also be made between rendition of services and utilization thereof.
40. With the above understanding of law laid down by the apex court, if one turns to the facts of the case in hand and examines them on the touchstone, section 9(1)(vii)(c) which clearly states… 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”. It is thus, evident that section 9(1)(vii)(c), read in its plain, envisages the fulfilment of two conditions: services, which are source of income sought to be taxed in India must be (i) utilized in India, and (ii) rendered in India. In the present case, both these conditions have not been satisfied simultaneously. The provisions of section 9(1)(vii)(c) of the Act are plain and capable of being given a meaning, is no reason not to give full effect thereto.
41. In the above view of the matter, the contentions raised by the assessee/appellants need to be accepted. Thus, the income of the assessee is charged on hourly basis in India and utilised in India shall only be chargeable to the Income-tax Act as disclosed in the return of income. The substantial questions of law framed are, thus, answered in favour of the assessee and against the Revenue. In the result, the appeals are allowed with no order as to costs.