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2008 (12) TMI 30 - HC - Income TaxForeign law firms even though working as solicitors for multinational corporations with operations in India will pay tax only in those countries where they give legal advice and not in India - Services which are to be taxed must be both rendered in India and utilized in India for them to fall under the income tax bracket.
Issues Involved:
1. Whether the ITAT's conclusion that the Appellant had not proved that it had rendered services outside India is vitiated in law. 2. Whether the ITAT erred in law in not ascertaining the income of the Appellant in India based on the services rendered in India as measured by the billed hours of work done in India. Issue-wise Detailed Analysis: 1. Whether the ITAT's conclusion that the Appellant had not proved that it had rendered services outside India is vitiated in law: The appellant, an international firm of solicitors resident in the UK, was involved in multiple projects in India. The ITAT concluded that the appellant did not provide sufficient evidence to prove that services were rendered outside India. The appellant argued that detailed time sheets showing the time spent by partners and employees on work done in India and outside India were maintained and submitted. The ITAT, however, held that the appellant failed to provide full details of three out of four projects and thus could not limit the income to billed hours in India. The ITAT's decision was based on the nature of the work and the lack of detailed project information. 2. Whether the ITAT erred in law in not ascertaining the income of the Appellant in India based on the services rendered in India as measured by the billed hours of work done in India: The appellant contended that the income attributable to services rendered outside India should not be taxed in India. The Assessing Officer and CIT (A) held that the entire fees received from the clients for the projects in India were taxable in India, irrespective of where the services were performed. The appellant argued that under Article 15 of the Double Taxation Avoidance Agreement (DTAA) between India and the UK, only the income attributable to services performed in India should be taxed. The appellant's method of billing was based on hourly rates for services rendered, and the income was shown based on operations in India. The High Court examined the statutory provisions, including Section 5(2), Section 9(1)(i), and Section 9(1)(vii) of the Income Tax Act, and Article 15 of the DTAA. It was determined that income derived by an individual in respect of professional services may be taxed in the state of residence and also in the other contracting state if the services are performed in that state. The Court emphasized that both conditions of services being rendered and utilized in India must be satisfied for the income to be taxable in India. The Court referred to the Supreme Court judgments in Carborandum and Co. v. CIT, CIT v. Toshuku Ltd., and Ishikawajima-Harima Heavy Industries Ltd. v. Director of Income Tax, which established that only the income attributable to operations carried out in India is taxable in India. The Court held that the ITAT erred in not considering the detailed time sheets and the method of billing based on services rendered in India. Conclusion: The High Court concluded that the income of the appellant, charged on an hourly basis and utilized in India, should only be chargeable to tax as disclosed in the return of income. The substantial questions of law were answered in favor of the appellant and against the Revenue. The appeals were allowed with no order as to costs.
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