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TMI Blog2013 (6) TMI 544X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. ( 2007 (1) TMI 91 - SUPREME COURT) which was in the context of section 9(1)(vii)(c) however their Lordships were conscious of the fact that the said decision was rendered in the context of section 9(1)(vii)(c) as is evident from para 44 of the order. It was also observed by that with the understanding of law laid down by the Hon'ble Apex Court in the case of Ishikawajima Harima Heavy Industries Ltd. (supra), if one turns to the facts of the case in hand and examines them on the touchstone of section 9(1)(vii)(c), services, which are source of income sought to be taxed in India, must be utilised in India and rendered in India. Therefore find it difficult to concur with the view expressed by the division bench of this Tribunal in the case of Linklaters LLP (2010 (7) TMI 535 - ITAT, MUMBAI ) that the judgment of Hon'ble Bombay High Court in assessee's case for A.Y. 1996-97 is based on the legal premise of interpretation of section 9(1)(vii) and the said premise no longer holds good in view of amendment made by the Finance Act, 2010 in section 9 with retrospective effect from 1st June, 1976. Thus the amendment made by the Finance Act 2010 in section 9 with retrospective effec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Clifford Chance:- "1. Whether insertion of Explanation to section 9 by way of amendment by Finance Act, 2010 with retrospective effect from 01-06-1976, changes the position of law, as far as the assessee is concerned? 2. Whether on a true and correct interpretation of the term "Directly or indirectly attributable to Permanent Establishment" in Article 7(1) of the India-UK DTAA, it is correct in law to hold that the consideration attributable to the services rendered in the State of residence is taxable in the source State". 2. The relevant facts of the case giving rise to the questions referred to this special bench are as follows. The assessee in the present case is a U.K. partnership firm of Solicitors. It is engaged in providing international legal services in certain areas and operates through its principal office in UK and branch offices in certain other countries. During the years under consideration, it rendered legal consultancy services in connection with different projects in India. Although it did not have an office in India, some part of the work relating to the projects in India was performed in India by its partners and employees during their visits to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed from services rendered in connection with the projects in India was taxable in India for the said years as per Article 15. The A.O. was also of the opinion that the case of the assessee even otherwise was covered by Article 7 of the India-UK DTAA read with Article 5 thereof. Reference in this regard was made by him to the terms of Article 5(2)(k) of the India-UK DTAA which provided that the term 'Permanent Establishment' (PE) shall include, inter alia, the furnishing of services including managerial services other than those taxable under Article 13 (Royalties and fees for technical services) within a Contracting State by an enterprise through employees or other personnel but only if the activities of that nature continued within that state for a period or periods aggregating to more than 90 days within any 12 months period. In this regard, he found that the test of 90 days stipulated under Article 5(2)(k) was satisfied in the case of the assessee and the assessee thus had a PE in India in terms of the "duration of stay" test provided in the treaty. He held that the assessee also was having fixed place PE in India in the years under consideration through which services were rend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxable in India even though such services were rendered outside India. Accordingly, the entire fees received by the assessee from its clients for the services utilised in relation to the projects in India was brought to tax by the A.O. in India in the hands of the assessee after allowing deduction u/s 44C of the Act. 5. Aggrieved by the orders of the A.O., the assessee preferred appeals before the ld. CIT(A) for all the six years under consideration raising the various issues. The ld. CIT(A) found that most of the issues raised by the assessee were squarely covered by the order of the Tribunal passed in assessee's own case for A.Y. 1996-97 dtd 27th September, 2001 in ITA No. 1327 (Mum) of 2001. As noted by the ld. CIT(A), it was held by the Tribunal in the said order that the case of the assessee was covered under Article 15 and not under Article 5 read with Article 7 of the DTAA. He therefore decided this issue, involved in all the years under consideration, in favour of the assessee following the order of the Tribunal for A.Y. 1996-97. Having held that Article 15 of the India-UK treaty was applicable in the case of the assessee, the ld. CIT(A) agreed with the stand of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nable. He therefore held that the assessee had been able to satisfactorily prove that the number of hours spent in India was correctly booked to the respective projects and the income attributable to work done in India was correctly calculated and offered to tax for A.Y. 1998-99. He held that the income declared by the assessee in the return of income for A.Y. 1998-99 thus was actually relatable to the services performed or rendered by the assessee in India and directed the A.O. to consider the same as fees attributable to the services rendered in India in order to compute the tax liability of the assessee for A.Y. 1998-99. 8. As regards the issue of inclusion of amount of reimbursement of expenses in the income of the assessee, the ld. CIT(A) found that this issue was also covered in favour of the assessee by the decision of the Tribunal in its own case for A.Y. 1996-97 wherein it was held that if the reimbursement of expenses was to be included in the income of the assessee, the corresponding expenses actually incurred by the assessee has to be allowed as deduction after necessary verification. Accordingly the A.O. was directed by the ld. CIT(A) to allow the corresponding expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sition that rendition of services in India is a sine qua non for its taxability in India. The submission made on behalf of the assessee on this aspect before the Division Bench in the case of the present assessee was that the amendment made by the Finance Act, 2010 with retrospective effect from 1-6-1976 was applicable to clause (v) or (vi) or clause (vii) of section 9(1) whereas the income of the assessee was covered by clause (i) of section 9(1). This submission made on behalf of the assessee was apparently found acceptable by the Division Bench of this Tribunal keeping in view that the amendment made by the Finance Act, 2010 w.e.f. Ist June, 1976 was not applicable in the case of the assessee as its income was chargeable in India u/s 9(1)(i). 10. The Division Bench in the case of Linklaters LLP (supra) had also decided another issue - which was also involved in the case of the present assessee - relating to determination of the quantum of income chargeable to tax in India in the hands of the non-resident who provided legal or consultancy services to certain projects in India. Reference in this regard was made by the Tribunal to Article 7(1) of the India-UK DTAA which used the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nate Bench in the case of Linklaters LLP (supra)], the Division Bench of the Tribunal referred the case to the Hon'ble President for constituting a Special Bench. Accordingly this Special Bench has been constituted by the Hon'ble President to consider and decide the two questions of law involved in the case of the assessee as already referred to at the beginning of this order. 12. Opening the arguments on the issue involved in question No. 1, the ld. Sr. Counsel for the assessee Shri M.S. Syali drew our attention to the decision of the Hon'ble Bombay High Court in assessee's own case for A.Y. 1996-97 which is reported in . He pointed out that the provisions of section 9(1)(i) were reproduced by their Lordships on page 468 of the report before recording its conclusion on page 470 of the report in para 38 that section 9(1)(i) is applicable in the case of the assessee and not section 9(1)(vii). He submitted that even the ld. CIT(A), in his impugned orders, held that the amount received by the assessee for the services rendered in relation to the projects in India was not in the nature of fees for technical services covered u/s 9(1)(vii). He submitted that this finding of the ld. CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i.e. Clifford Chance for A.Y. 1996-97 is no more a good law by ignoring that the said amendment was not even applicable to the case of an assessee whose income was held to be liable to tax in India u/s 9(1)(i) and not 9(1)(vii). In short, the case of the ld. Sr. Counsel was that the said amendment is not applicable to the case of the assessee and the decision of the Hon'ble Bombay High Court for A.Y. 1996-97, which is in favour of the assessee, is still a good law which is binding on this Special Bench. 14. The ld. Special Counsel for the Revenue Shri Girish Dave, on the other hand, submitted that a Special Leave Petition has been filed by the Revenue before the Hon'ble Supreme Court against the decision of Hon'ble Bombay High Court in assessee's own case for A.Y. 1996-97. He invited our attention to the copy of the said petition and submitted that the entire focus in the SLP filed by the Revenue is on the applicability of section 9(1)(vii) in the case of the assessee. He contended that it cannot therefore be said that the applicability of section 9(1)(i) in the case of the assessee has not been disputed by the Department. He then invited our attention to the common issue raised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n decided in favour of the assessee relying on the decision of Hon'ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd. v. DIT [2007] 288 ITR 408 which was in the context of provisions of section 9(1)(vii). He submitted that most of the operative portion of the order of the Hon'ble Bombay High Court is devoted to discuss the said decision of the Hon'ble Supreme Court with specific reference made to section 9(1)(vii) at several places without referring section 9(1)(i). He contended that it therefore cannot be said that section 9(1)(i) is specifically held to be applicable in the case of the assessee by the Hon'ble Bombay High Court. He contended that section 9(1)(vii) on the other hand is clearly applicable in the case of the assessee involving fees received for professional services. Reliance in this regard was placed by him on the decision of the co-ordinate Bench of this Tribunal in the case of DDI (International Taxation) v. Tata Iron Steel Co. Ltd. reported in [2009] 34 SOT 83 (Mum) wherein it was held that the fees for technical services covered u/s 9(1)(vii) also include professional services. He also relied on the decision of Mumbai Bench of ITAT in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said decision, it was held by the Division Bench of this Tribunal that Article 15 of the India-UK DTAA deals with "independent personal services" of professionals and such services could only be rendered by competent professionals. It was held that as per Article 15, the income must be derived from profession by an individual and the individual can get this income in his own capacity or as a member of partnership. It was also held that the term "member" as used in Article 15 of the India-UK DTAA is the term of most general meaning and even lawyers representing the firm as employees also come within its ambit. As regards the quantification of income to be taxed in India, the Tribunal held that if the assessee could prove that it rendered services outside India, its income to that extent should be excluded while computing its total income for determining tax payable in India. However in the absence of any document or other proof produced by the assessee to establish that the services were also rendered outside India, the Tribunal held that this issue could not be decided in favour of the assessee. It was held by the Tribunal in this context that it could be presumed that the mai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Special Bench as raised in question No. 1 however is whether the said decision of the Hon'ble Bombay High Court rendered in assessee's own case for A.Y. 1996-97 still holds good in view of the retrospective amendment made in section 9 by the Finance Act, 2010 with effect from 1st June, 1976 whereby Explanation to section 9(1) has been amended to provide that the income of the non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of section 9 and shall be included in its total income, whether or not (a) the non-resident has a residence or place of business or business connection in India or (b) non-resident has rendered services in India. The said Explanation as amended by the Finance Act, 2010 with retrospective effect from 1-6-1976 is reproduced below:- [Explanation]- For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (viii) of sub-section (1) and shall be included in the total income of the non-resident, whether or not, - (i) the non-resident has a residence or place of business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... termine the income of the assessee from said fees chargeable to tax in India as business profits, without making any reference to Article 13 of the India-UK Treaty which specifically deals with "Royalty and Fees for Technical Services" for computing the income of the assessee chargeable to tax in India. The A.O. also allowed deduction u/s 44-C which is allowable specifically in computing the income of a non-resident assessee chargeable under the head "profits and gains of business or profession" whereas the special provisions for computing the income by way of royalties or fees for technical services in case of non-resident are contained in section 44DA of the Act. In one of the assessment orders passed for A.Y. 1998-99 in assessee's case u/s 143(3) r.w.s. 147 of the Act on 27-3-2006, the A.O. himself has clearly mentioned that the assessee is liable to tax on the total income earned in India u/s 9(1)(i) of the Act and accordingly proceeded to compute such income after allowing deduction u/s 44C of the Act. Even in the impugned orders, the ld. CIT(A) held that the amount received by the assessee for the services rendered in relation to the projects in India is not in the nature of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o longer res integra as it has been construed by the Hon'ble Supreme Court in three cases viz. Carborandum Co. v. CIT [1977] 108 ITR 335, CIT v. Toshoku Ltd. [1980] 125 ITR 525 and Ishikawajima Harima Heavy Industries Ltd. (supra). 24. It may be noticed that the issue involved in the case of Carborandum Co. (supra) was whether the technical fee in excess of 5% received by the American Company from the Indian Company during the previous year relevant to A.Y. 1957-58 had accrued or arisen in India and the same was decided by the Hon'ble Supreme Court with reference to sub-section (1) and sub-section (3) of section 42 of the 1922 Act. Sub-section (1) of section 42 of the 1922 Act provided that all income, profits or gains accruing or arising, whether directly or indirectly, from any business connection in the taxable territories shall be deemed to be income accruing or arising within the taxable territories while sub-section (3) of section 42 provided that in the case of business of which all the operations are not carried out in the taxable territories, the profits and gains of the business deemed under this section to accrue or arise in the taxable territories shall be only such p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofits and gains of business deemed to accrue in India through and from business connection in India shall be only such profits and gains as are reasonably attributable to that part of the operations carried out in the taxable territories. It is pertinent to note here that a reference in this regard was made by the Hon'ble Supreme Court to its earlier decision rendered in the case of Carborandum Co. (supra) observing that the same was decided on the basis of section 42 of the Income Tax Act, 1922 that corresponds to section 9(1)(i) of the Income Tax Act, 1961. 26. Keeping in view the decision of Hon'ble Supreme Court in the case of Carborandum Co. (supra) which was in the context of section 42 of the Income Tax Act, 1922 which corresponds to section 9(1)(i) of the Income Tax Act, 1961 and in the case of Toshoku Ltd. (supra) which was in the context of section 9(1)(i) itself, the Hon'ble Bombay High Court, in assessee's case for A.Y. 1996-97, held that the provisions of section 9(1)(i) having been construed by the Hon'ble Supreme Court, the interpretation thereof was no longer res-integra and the issue was decided by applying such interpretation of section 9(1)(i) of the Act which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e projects in India is chargeable to tax in India only to the extent it is attributable to the services rendered/performed in India, we are of the view that the issue involved in question No. 2 referred to this Special Bench has become virtually infructuous and is rendered only academic. However, as the said question is also referred specifically for the consideration of this Special Bench, we now proceed to consider and decide the same for the sake of completeness. 28. While arguing the case of the assessee on the issue involved in question No. 2, Shri Syali invited our attention to Article 7(1) of the India-UK Treaty and submitted that as per the said Article, profit attributable directly or indirectly to the PE in India is taxable in India. He submitted that what is directly and indirectly attributable to the PE in India is defined in Article 7(2) and 7(3) of the Treaty and the Tribunal in the case of Linklaters LLP (supra) was not justified in referring to the UN Model Convention to come to the erroneous conclusion that the force of attraction rule is incorporated in Article 7(1) of the India-UK DTAA. He invited our attention to the relevant portion of the UN Model Convention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rectly attributable to that PE. What is directly and indirectly attributable to the PE for the purpose of Article 7(1) is explained in Article 7(2) and Article 7(3) of the India-UK treaty, the provisions of which read as under:- "2. Where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, the profits which that permanent establishment might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment shall be treated for the purposes of paragraph 1 of this Article as being the profits directly attributable to that permanent establishment. 3. Where a permanent establishment takes an active part in negotiating, concluding or fulfilling contracts entered into by the enterprise, then, notwithstanding that other parts of the enterprise have also participated in those transactions, that proportion of profits of the enterprise arising out of those contracts which the contribution of the permanent establishment to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat PE or not. In this regard, it is relevant to refer to the provisions of Article 7(1) of the UN Model Convention which is reproduced below:- "The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the Contracting State through a permanent establishment therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to (a) that permanent establishment; (b) sales in that other state of goods or merchandise of the same or similar kind as those sold through that permanent establishment; or (c) other business activities carried on in that other State of the same or similar kind as those effected through that permanent establishment." 33. A comparative study of Article 7(1) of the India-UK DTAA and Article 7(1) of UN Model Convention shows that there is material difference in the provisions of these two Articles. Article 7(1) of the UN Model Convention itself points out the scope of profits of an enterprise in contracting state which carries on business in other contracting state through PE situate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons of Article 7(1) of UN Model Convention which are materially different from the provisions of Article 7(1) of the India-UK DTAA read with Article 7(3) thereof. The reliance of the Division Bench of this Tribunal on the provisions of Article 7(1)(b) and 7(1)(c) of the UN Model Convention as well as on the UN Model Convention Commentary to come to a conclusion in the case of Linklaters LLP (supra) that the connotations of "profits indirectly attributable to permanent establishment" used in Article 7(1) of the Indo-UK treaty incorporates a force of attraction rule thereby bringing an enterprise having a PE in another country within the fiscal jurisdiction of that another country to such a degree that such another country can properly tax all profits that the enterprise derives from that country - whether the transactions are routed and performed through their PE or not - is clearly misplaced and we are unable to subscribe to this proposition. 36. As already noted, the connotations of "profits indirectly attributable to permanent establishment" used in Article 7(1) are explained and defined in Article 7(3) of the India-UK DTAA. The provisions of Article 7(3) explaining the scope o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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