Clifford Chance, Apartnership Firm v. Respodent

IN THE HIGH COURT OF JUDICATURE AT BOMBAYORIGINAL SIDE INCOME TAX APPEAL NO.181 OF 2002WITH INCOME TAX APPEAL No. 182 OF 2002 Clifford Chance, apartnership firm having its )office at 200 Aldersgate )Street, London ECIA 4JJ, The)United Kingdom. .. .. Versus .. The Deputy Commissioner of )Income Tax, Circle 2(6), )Mumbai, having his office at)Aayakar Bhavan, Maharshi )Karve Road, Mumbai 400 020 ) (Orig. Respondent) ) Appellant(Org.Appellant) Respodent Mr. Harish Salve, Senior Advocate with Mr. F.V. Irani with Mr. N. Sahu i/b S. K. Srivastav& Co. for the appellant. Mr. Parag Vyas a/w P. S. Sahadevan, for therespondent. CORAM :DR. S. RADHAKRISHNAN ANDV.C. DAGA, JJ. DATED : 19TH DECEMBER, 2008 JUDGMENT : [ Per : V.C. DAGA, J.] assessee against the orders of the C.I.T.(A) bothdated 19.12.2000 which were dismissed, were admittedfor final hearing on the following substantialquestions of law. (B)On the facts and circumstances of the rendered in India as measured by the billed hours of work done in India ? FACTUAL SCENRAIO:---------------- United Kingdom (UK). It has no office or fixed base in India. advisers for three projects in India, namely : 1.Bhdravati Power Project2.Vizag Power Project; and2.Vizag Power Project; and 3.Ravva Oil and Gas FieldsProject.Project. 4.The Bhadravati Power Project was a three-way 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 jointventure project for the construction of a powerplant between two non-resident participants, namely, National Power PLC and Machen DevelopmentCorporation. 6.The Ravva Oil and Gas Fields Project, was theonly client of the assessee, who was a non-residentAustralian company called Chase Manhattan (Australia) Limited. 7. The Appellant, during the previous year ended advisers additionally for the Vemagiri PowerProject. 8.In the case of the Vemagiri Power Project, 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 : Industries Ltd., was a resident in India. 5.The Vizag Power Project was a two-way jointventure project for the construction of a powerplant between two non-resident participants, namely, National Power PLC and Machen DevelopmentCorporation. 6.The Ravva Oil and Gas Fields Project, was theonly client of the assessee, who was a non-residentAustralian company called Chase Manhattan (Australia) Limited. 7. The Appellant, during the previous year ended advisers additionally for the Vemagiri PowerProject. 8.In the case of the Vemagiri Power Project, 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 : Whether :: : Client : Resident :: : : in India. ::-----------:---------------------:----------------:: (1) : (2) : (3) :: ::-----------:---------------------:----------------:: : : :: Bhadravati: Electric De : Non-resident. :: Power : France : :: Project : : :: : GEC Alsthom : Non-resident. :: : Group : :: : : :: : Ispat Industries : Resident. :: : Limited. : ::-----------:---------------------:----------------:: : : ::Vizag Power: Machen Development : Non-resident. :: Project : Corporation : :: : : :: : National Power plc : Non-resident. :: : : :------------:---------------------:----------------:: : : :Ravva Oil and Chase Manhattan : Non-resident. :: Gas : Bank : :: Fields : : :: Project : (Australia) Limited : ::_________________________________________________ :: :: Vemagiri : Avondale Ltd. : Non-resident. :: Power : : :: project : : :----------------------------------:----------------- 10.The Appellant’s method of billing the Clientsfor the services rendered by the Appellant to themwas, briefly, as follows : (ii) (iii) (iv) ASSESSMENT OF INCOME:-------------------- the said time sheetsseparately showed thetime spent on doing suchwork in India and outsideIndia;the time so spent wasmultiplied by the hourlybilling rates applicableto each respectivepartner / employee asspecified in the terms ofappointment between theAppellant and theClients;in the case of theBhadravati Power Projectand Vizag Power Project,the amounts arrived atunder (ii) above wereappointed among thedifferent participants ofthe joint venture inproportion to theirrespective shares thereinand bills were accordingly raised by theAppellant upon suchparticipants; andthe bills so raised werepaid to the Appellant bythe Clients outsideIndia. 11.During the previous year relevant to the assessment year 1997-98, the number of days theAppellant’s partners were present in India duringthe previous year, relevant to the Assessment Year1997-98, exceeded 90 days. The appellant filed a its operations in India in respect of the above Four Projects. 12.The Assessing Officer, took up the Appellant’s according to the respondent, Assessing Officer was liable to Indian Taxation. The relevant portion of the assessment order is extracted hereinbelow- contention of the assessee cannot be accepted. . Forthe earlier which was attributable to the services performed by 11.During the previous year relevant to the assessment year 1997-98, the number of days theAppellant’s partners were present in India duringthe previous year, relevant to the Assessment Year1997-98, exceeded 90 days. The appellant filed a its operations in India in respect of the above Four Projects. 12.The Assessing Officer, took up the Appellant’s according to the respondent, Assessing Officer was liable to Indian Taxation. The relevant portion of the assessment order is extracted hereinbelow- contention of the assessee cannot be accepted. . Forthe earlier which was attributable to the services performed by it in India. 16.The CIT (A) vide its order dated 20-12-2000 held that the entire fees received by the Appellant time-sheets which showed the services rendered by partners and employees, in India and outside India. 18.The ITAT, by its order dated 27th September, from the clients engaged in the Four Projects was taxable in India. 19.Being aggrieved by the aforesaid order of the ITAT dated 27th September, 2001 the Appellant has invoked the appellate jurisdiction of this court. Rival Submissions : ----------------- ----------------- ----------------- create chaos and uncertainty. 22. Mr. Salve submits that the tax on advice were to have any kind of interest in the project. 24. In the submission of Mr. Salve, the Tribunalhas accepted (and is not contested for this year bythe Department) that income has to be ascertained byapplying Article 15 of the Treaty. which providesthat "income derived by an individual .... inrespect of professional services ... may also betaxed in the other contracting state if suchservices are performed in that other State and.....". He submits that the income of an individualfrom professional services, therefore, is in thefirst instance taxable in the State of residence.It is additionally taxable in the other contractingState if the services are performed in that otherState.25.Mr. Salve urged that professional such as asolicitor performs services which are advisory incharacter by being present in that other State atthe time when the client needs his services. Anyservices performed by a professional from his homeState for a client who is overseas cannot be taxedin a state other than the state of residence.26.In the submission of Mr. Salve, it issignificant to note that the test of residence is a cannot-levy tax where no tax would be leviable under the domestic law-i.e. the Income Tax Act 1961. only such income from "services performed in that other State" which is taxable. Harima Heavy Industries Vs. Director of Income Tax,Mumbai (2007) 288 ITR, 408. cannot be applied in their favour in this case for two reasons namely viz. (a)the decision is in respect of Technicalservices. The nature of the appellant’sservices 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 1961reading as under: . relevant to decide the issues raised in this appeal: .Section 5(2), section 9(1)(vii) of the Act, which are relevant for our purpose, read as under : 9(1)(i), section "Section 5(2) Subject to the provisions of this Court, the total income of any previous year of a person who is anon-resident includes all incomefrom whatever source derived which - (a) is received or is deemed to be received in India in such year by oron behalf of such person; oron behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in Indiaduring such year. Section 9(1) The following incomes shall be deemed to accrue or arise in India- (i) all income accruing or arising, . relevant to decide the issues raised in this appeal: .Section 5(2), section 9(1)(vii) of the Act, which are relevant for our purpose, read as under : 9(1)(i), section "Section 5(2) Subject to the provisions of this Court, the total income of any previous year of a person who is anon-resident includes all incomefrom whatever source derived which - (a) is received or is deemed to be received in India in such year by oron behalf of such person; oron behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in Indiaduring such year. Section 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 businessconnection in India, or through orfrom any property in India, orthrough or from any asset or sourceof income in India, or through thetransfer of a capital asset situatein India [Explanation 1] -For the purposesof this clause- (a) in the case of a business of which all the operations are not carriedout in India, the income of thebusiness deemed under this clause toaccrue or arise in India shall be only such part of the income as isreasonably attributable to theoperations 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 inrespect of services utilized in abusiness or profession carried on bysuch person outside India or for thepurposes of making or earning anyincome from any source outsideIndia; orrespect of services utilized in abusiness or profession carried on bysuch person outside India or for thepurposes of making or earning anyincome from any source outsideIndia; or (c) a person who is a non-resident, where the fees are payable inrespect of services utilized in abusiness or profession carried on bysuch person in India or for thepurposes of making or earning anyrespect of services utilized in abusiness or profession carried on bysuch person in India or for thepurposes of making or earning any income from any source in India : agreement made before the 1st day of April, 1976, and approved by the Central Government. recipient or consideration which would be income of the recipient chargeable under the head "Salaries". Treaty : Double Taxation Avoidance Agreement (DTAA) : Article 15 : Independent personalservices : a resident of a Contracting State in respect ofprofessional services or other independentactivities of a similar character may be taxed inthat 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 aperiods aggregating to 90 days in the relevantfiscal year; or(b) he, or the partnership, has a fixed baseregularly available to him, or it, in thatother State for the purpose of performing hisactivities;but in each case only so much of the income asis attributable to those services.2. For the purposes of paragraph 1 of this Articlean individual, who is a member of a partnershipshall be regarded as being present in the otherState during days on which although he is notpresent, another individual member of thepartnership is so prsent and performs services or other independent activities of a similar character in that State. presence of all such members is aggregated to ascertain their presence for 90 days. 38.If the test of 90 days is satisfied, the other independent activities of a similar character in that State. presence of all such members is aggregated to ascertain their presence for 90 days. 38.If the test of 90 days is satisfied, the effect is to virtuallly take the assessee out of thetreaty, the taxability of the income beingdetermined under section 9(1)(i) of the Act.39.The interpretation of this section 9(1)(i), isno longer res-integra. It has been construed by the Hon’ble Supreme Court in the following three cases,viz : (i) Carborandum and Co. v/s Commissioner of IncomeTax, 108 ITR 335. (ii) Commissioner of Income Tax v/s Toshuku Ltd, 125 ITR 525. (iii) Ishikawajima-Harima Heavy Industries Ltd v/s Director of Income Tax, 288 ITR 408. other provisions thereof, as held by the Apex Court in the case of Maruti Udyog Ltd. Vs. Ram Lal [2005] 2 SCC 638. 41.The provisions of section 42 of the Indian Income-tax Act, 1922 provided that only such part income as was attributable to the operations carried out in India would be taxable in India. of entire income "accrues or arises" in each of the jurisdictions. 44. The Apex Court had occasioned to consider the part of a business or profession carried on by such person in India. 45.In the above judgment, Apex Court observed or earning any income from any source in India"Itis thus, evident that section 9(1)(vii)(c), read inits plain, envisages the fulfilment of twoconditions : services, which are source of incomesought to be taxed in India must be (i) utilized inIndia and (ii) rendered in India. In the presentcase, both these conditions have not been satisfiedsimultaneously.48.The provisions of section 9(1)(vii)(c) of theAct are plain and capable of being given a meaning,is no reason not to give full effect thereto.49.In the above view of the matter, contentionsraised by the assessee/appellants need to beaccepted. Thus, the income of the assessee ischarged on hourly basis in India and utilised inIndia shall only be chargeable to Income-Tax Act asdisclosed in the return of Income. The substantialquestions of law framed are, thus, answered infavour of the assessee and against the Revenue. Inthe result, appeals are allowed with no order as tocosts. Sd/- [ V. C. DAGA, J.] Sd/- [ Dr. S. RADHAKRISHNAN, J.]