TMI Blog2001 (9) TMI 1141X X X X Extracts X X X X X X X X Extracts X X X X ..... and Gas Fields Project - The only client of the assessee was a company resident in Australia. 2. Assessee did not file the return for the relevant year of assessment in the normal course. On 5-5-1997 a notice was issued on the assessee under section 148 of the Income-tax Act, 1961 (hereinafter called the Act) and this was sent to the assessee s address at London. In compliance to the said notice assessee filed return on 31-3-1998 declaring therein Nil income. It claimed refund of ₹ 88,64,695 being the amount of tax deducted at source by M/s Ispat Industries, Mumbai on the fees amounting to UK Pounds 3,96,893 equivalent to ₹ 2,46,10,513 remitted to the assessee. The assessee appended along with the return a statement of income attributable to its Indian operation and computation of income. Total turnover was shown at UK Pounds 4,04,848. The assessee deducted therefrom an amount, which it received towards reimbursement of expenses. In conformity with the provisions of section 44C of the Act, other expenses were limited to 5%. Thus assessee reflected total income in UK Pounds at 3,16,243 which is equivalent to ₹ 1,64,44,618. This income was towards the fees attri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce in relation to the Project. 5. The aforesaid services were rendered by the partners of the assessee- firm and the employees. The employees were also professionals. For the time spent working on the project assessee charged the following hourly rates:- PartnerPounds 245 Senior LawyerPounds 195 LawyerPounds 175 Junior LawyerPounds 140 TraineePounds 75 6. The general conspectus of the main plank of Shri Dastur s argument was that the income of assessee is not exigible to tax as it comes within the ken of Article 15 of the Double Taxation Avoidance Agreement between India and United Kingdom of 1993 (hereinafter called DTA). A revised agreement for Avoidance of Double Taxation was signed on 25-1-1993 between India and the United Kingdom. This revised agreement comprised the changes in tax laws relating to taxation of non-residents. The old agreement, which was notified on 23-11-1981, ceased to have effect soon after entering into force of this agreement. This agreement provided for reduced tax rates in specified areas. It was intended to help in the modernization and growth of Indian industry by encouraging the flow of investment and technology in e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e object and purpose of Article 15 of the DTA is to provide for avoidance of double taxation of income. Therefore, only income producing activities/days are to be counted for the purpose of Article 15 of the DTA. It was further stated that if multiple counting is avoided and such business promotional visits are considered, the total number of days of Indian presence of the partners of the assessee-firm would only be 68 days. 10. Next it was argued that only the presence of partners is to be considered and not that of the employees. Adverting our attention to the word member as used in Article 15, Shri Dastur submitted that the word member refers to a partner because only a partner can be a member of a partnership . Learned counsel made reference to sections 5, 17(3), 34, 36 and 42(1) of the English Partnership Act, 1890 and section of the Indian Partnership Act, 1932. Our attention was also invited on the provisions of section 64(1)(i) of the Act. The word member was also explained with reference to the definition as given in Black s Law Dictionary. 11. It was demonstrated with reference to the sections of English Partnership Act and Indian Partnership Act listed above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions and International Tax Law by Philip Baker. It is mentioned in the said commentary that the concept of fixed base differs from the permanent establishment in two respects (i) the degree of permanency of the activity exercised through the base is less stringent; and (ii) the place from which the profession is performed does not need to be especially equipped for the performance of the activity. We reproduce here the relevant portion from Page 296 of the Book by Philip Baker:- The difference between fixed base and permanent establishment is mentioned in a further Bundesfinanzhof decision 14-1-1982, IV.R., 168/78 (1982) BStBI, II, 345 - discussed in (1982) E.T. 364, which concerned the deduction of losses incurred by a German architect as a result of his participation in a joint venture in Switzerland. The lower tax court had held that the participation in the joint venture constituted a fixed base so that the profit earned (or the loss incurred) was only taxable (or deductible) in Switzerland. the Bundesfinanzhof held that the joint venture did not necessarily imply a fixed base, and remitted the case to the lower court to examine if a fixed base in fact existed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting this. Besides, this letter was written prior to the filing of the return in connection with its application for a No Objection Certificate for TDS. From the stage of the filing of the return, assessee consistently pointed out that the threshold of 90 days was never crossed. If multiple counting is avoided, the stay of the partners of the assessee-firm could not exceed 90 days. In any event, if the issue of multiple counting is held in assessee s favour, this issue loses all significance because even if the incorrect number of days are counted, the number of days will not exceed 90 days. A statement showing number of days under various scenarios was placed before us. This is reproduced here as under:- Taking into account 52 days of CJ Wyman Taking into account` 65 days of CJ Wyman (as per NOC Application) I.Number of days partners were present excluding 59 72 ( i )days spent by partners on business development and ( ii )common days ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he decision rendered in the case of IRC v. Hang Seng Bank Ltd. [1991] 1 AC 306. 19. Reference was also made to the decision of the Apex Court rendered in the case of CIT v. Toshoku Ltd. [1980] 125 ITR 525 (SC). In this case Hon ble Supreme Court has found that the non-resident did not carry on any business operation in the taxable territories. They acted as selling agents outside India. On this factual matrix it was held that the receipt in India of the sale proceeds of tobacco remitted or caused to be remitted by the purchasers from abroad did not amount to an operation carried out by the non-residents in India as contemplated by clause (a) of the Explanation to section 9(1)(i) of the Income-tax Act, 1961. The commission amounts, which were earned by the non-residents for services rendered outside India could not be, deemed to be income, which had either accrued or arisen in India. 20. On that basis it was argued that even if it is assumed that assessee s income is deemed to accrue or arise in India, only that portion thereof which is reasonably attributable to the operations carried out by the assessee in India can be taxed. Equally on this basis, the assessee can be taxed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se to Article 7 of the DTA does not arise. Even under the Income-tax Act it is incumbent on the Assessing Officer to first classify a particular income under the appropriate head and then deter- mine its chargeability. Reference was made to the decision of the jurisdictional High Court rendered in the case of CIT v. Smt. T.P. Sidhwa [1982] 133 ITR 840 (Bom.)1 In this case Hon ble High Court has held that the correct approach on the setting of the relevant provisions would be first to classify the item under consideration under the appropriate head of income as mentioned in section 6. For this purpose, the character or the nature of the income has to be determined. Further, the nature of the income must be decided according to common notions of practical men because the Act does not provide the guidelines. In deciding this issue Hon ble High Court followed the decision of the Apex Court rendered in the case of Nalinikant Ambalal Mody v. CIT [1966] 61 ITR 428 . In this case assessee was an Advocate. His accounting year was calendar year. He kept account on cash basis. He was elevated to the Bench of High Court, as such he ceased to carry on the profession on 1-3-1957. In the years 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f it is so chargeable under the computing section corresponding to that head. 25. Shri Dastur further submitted that even under the Act, a distinction is made between profession and business . Reference was made to sections 44AB, 176(3A) and 176(4) of the Act. It was stated that the fact that lawyer employees have been retained by the assessee does not mean that the assessee s fees are not professional income. Shri Dastur submitted that it is not a, sine qua non, that to be professional fees, services should be rendered only by the partners of a firm or by a professional practising as a sole proprietor. In any event and without prejudice, Shri Dastur submitted that even if Article 7 of the DTA were assumed to apply, the assessee would have been chargeable only in respect of that portion of its income, which was attributable to the services performed by it in India. This is because under Article 7(1) of the DTA, only that portion of the assessee s income, which was directly or indirectly attributable to its activities in India, would be chargeable to tax in India. Articles 7(2) and 7(3) of the DTA respectively define what profits can be directly and indirectly attributable to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in regard to the decision of the Authority for Advance Ruling in XYZ, In re [1999] 238 ITR 991 (AAR) learned counsel submitted that it is not binding precedent and it is concerned with taxability of a royalty for the use of a trade mark. As such, it cannot be applied. It is nobody s case that the assessee s fees constitute royalty income. 28. Coming now to the next issue that reimbursement to be excluded from the assessee s income learned counsel submitted that it is now well- settled that reimbursement of expenses cannot constitute income. Reference was made to the decision of the Hon ble Delhi High Court rendered in the case of CIT v. Industrial Engg. Projects P. Ltd. [1993] 202 ITR 1014 wherein the Hon ble High Court declined to grant reference to the department. It was stated that it was a case of pure reimbursement of actual expenses incurred by the assessee. This issue was raised without prejudice to the other grounds taken in the appeal. 29. Next issue relates to the allowability of expenditure claimed against the assessed income. Learned counsel submitted that assessee rendered expenditure for earning this income. It was prayed that specific direction be given to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services. These were not the independent services. Assessee took the help of employees also. It was stated that assessee was rendering services on a large scale. To exemplify, it was stated that Doctor is a professional. But when his work expends and he opens Nursing Home and renders the medical services with the team of professional and other staff, the work of a Doctor partakes the character of business. Similarly, in the case of the assessee services were rendered with the help of a team of staff, as such it partakes the character of business. Ex consequenti, the case of the assessee is to be governed by the provisions of Article 7 of the DTA and not Article 15 as alleged by the assessee. Our attention was invited on the scope of services as appeared in agreement with M/s Bhadravati Power Station Project. We have reproduced this clause at Para 4 of the order. The structure of remuneration as is discussed in Para 5 was also highlighted. We have reproduced this clause at Para 5 of this order. 33. Learned DR emphasized that the employees were also professionals. They were well qualified. They were getting almost the same remuneration what the partner were getting. Our attention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... those who are belonging to the firm. As such it includes employees also. Resultantly, lawyers representing the firm as employee also come within the ambit of the term member . Member of partnership firm means persons belonging to the partnership firm. 36. Coming to the other activities of the partners, learned DR submitted that there is absolutely no evidence to indicate that for what purpose the partners visited. Whether their visit had any nexus with the profession or not was not established. No document or paper was filed to buttress the claim that the visit of partner was for purposes other than the professional work. As such, it should be deemed that the visit were for professional purposes only. Our attention was also invited on the auditors report, wherein auditor in Annexure of Form 3CE has stated number of days spent in India as 181. 37. Learned DR further explained the meaning of fixed base. It was stated that fixed base is centre of activity of a fixed or permanent character. It was referred to a site where the professional is regularly available to the clients. It was stated that the base is different from place. Learned DR submitted that since the fixed base i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cated in India. As such, the ratio of the aforesaid decision cannot be applied in the facts of the present case. Reliance was placed on, (i) Steffen, Robertson and Kirsten Consulting Engineers Scientists case ( supra) and (ii) XYZ s case (supra). 39. In regard to the reimbursement of expenditure, it was stated that CIT(A) only asked the Assessing Officer to make necessary verification. There is nothing wrong in the order. 40. Similarly in respect of salary expenses CIT(A) issued directions for making necessary verification before allowance. There is no infirmity in the order. 41. We have heard the rival submissions in the light of material placed before us and precedents relied upon. At the outset it would be appropriate to examine the scope and ambit of Article 15 of the DTA. It reads as under:- 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 of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y or other body . In the Black s Law Dictionary the word member is defined as one of the persons constituting a family, a partnership, association, corporation, guild, etc. According to Concise Law Dictionary by P. Ramanatha Aiyar, member means a person considered in relation to any aggregate of individuals to which he belongs; particularly one who has united with or has been formally chosen as a corporate part of an association or public body of any kind. In anatomy, a limb . 45. The word belonging may and very often thus mean ownership , but it may also mean that which is connected with a principal. As per the Black's Law Dictionary belonging is that which is connected with a principle or greater thing; an appendage, an appurtenance. 46. The rights and duties of partners in relation to each other and to third parties, raise many legal problems. There is a legal maxim: SOCII MEI SOCIUS MEUS SOCIUS NON EST. It means the partner of my partner is not my partner. Partnership is relation between persons who have agreed to share the profits of a business to be carried on by all or any of them acting for all. The law of agency is closely linked with the law of partn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... artners were getting. Our attention was invited at page 158 of the Paper Book. We find that the Senior lawyer got the same amount what the partner got for rendering the professional services; albeit this example relates to the subsequent year of assessment. The basis of remuneration of partners and lawyers is listed at Para 5. 49. Law consists not in a particular instance, but in the reason. It is said: UBI EADEM RATIO IBI IDIM JUDICIUM (like reason doth make like law). It is not within human powers to foresee the manifold sets of facts, which may arise, therefore it is not possible under lex scripta (written law), to provide for them in clear and unequivocal terms. The trouble lies with our method of drafting. The principal object of the draftsman is to achieve certainty - a laudable object in itself. But in pursuit of it, he loses sight of the equally important object - clarity. Resultantly it brings to obscurity and absurdity. It is therefore important to find out the intention of the lawmakers. If we accept the interpretation as suggested by the assessee, it would lead to absurdity. A partnership firm can very well execute the contractual duty by sending solicitors who ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to our finding given above. The treaty does not provide the definition of business. Classification as business profits under the treaty depends upon the Domestic Law of the Contracting States. Both the countries are entitled to use their definition of the term which are not defined in the treaty. In India the definition of the term business profits is of wide import. It is something, which occupies the attention and labour of a person for the purpose of profit. It has a more extensive meaning. An activity carried on continuously in an organised manner with a view to earn profit is business. Organised business activity combining professionals and non-professionals together can be imagined in a commercially developing society when the profit or any other benefit is available. Such an attempt is sufficiently evident in running a hospital by several partners of whom one alone is a Doctor and the others lay men . The reasoning that the association of non-qualified persons for the establishment of a firm to run a private hospital would only be a gain profits. The activities, which constitute carrying on business, need not necessarily consist of activities by way of trade, commerce or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Apex Court in the case of S. Mohan Lal v. R Kondiah AIR 1979 SC 1132. In the case of Dr. J.S. Raphel v. Mrs. K.L. Regina Joseph [1995] Supplement (3) SC 190, 191 running of a nursing home by a tenant Doctor and seven Members of the staff was held to be a business. 57. Under All National Tax Systems as well as under Tax Treaty Law, business profits is the most important category of income. By far the largest portion of income derived from international economic activities falls under that category. Compared with Domestic Tax law, the benefit of application of the treaty concept may somewhat restricted, but this is only due to the fact that special distributive rules apply to specific kinds of business profits. 58. Assessee did not produce before us sufficient documents to elaborate on the nature of the work done in India. But from the details available on record it is clear that assessee s activity did not restrict into merely giving legal advice sitting at the desk of solicitor s office. The scope of the activity was much larger. Despite being asked, details were not produced. From the details available, it appears that it was possible on the part of revenue to proce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. In the case of IRC v. Hang Seng Bank Ltd. (supra), assessee carried on business in Hong Kong where it had many branches. It acquired substantial amounts of foreign currencies in the course of business. It invested surplus holdings in foreign currencies on fixed deposits with overseas financial institutions. It was never assessed to profits tax on the interest earned by such deposits. The Bank subsequently changed its practice in investing its holding on foreign currencies. It invested in certificates of deposit. At the relevant time there were markets for certificates of deposits in Singapore and London. It was not in Hong Kong. The Bank monitored its foreign currency holdings. Instructions for purchase and sale were given through Bank in Singapore and London. The question arose whether the Bank was liable to profits tax on the profits arising from these transactions. Privy Council held that three conditions have to be satisfied before a charge to tax could arise, viz. the taxpayer must carry on a trade, profession or business in Hong Kong; the profits to be charged must be from such trade, profession or business and the profit must be profits arising in or derived from Hong Kon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies in foreign country. Payment was made in connection with the services to be utilized in India. On this factual matrix, Authority for Advance Ruling held that such amount would deem to accrue or arise in India. In the case of XYZ (supra) American Company was owning 51% of shares of Indian Company. Indian Company acquired right to use trademark owned in India by a Swedish company. Subsequently there was agreement to terminate use of the trade mark. It was agreed that trade mark users to continue for a phase out period of 24 months. Royalty for right to use trade mark in India during phase out period was paid by American company to Swedish company outside India. There is no reference in section 9(1)(vi) of the Income-tax Act, 1961 to person who is liable to pay royalty or business carried on by him in India. Only condition precedent for application of this section is that royalty should arise from property used for earning income from source in India. On this factual backdrop Authority for Advance Ruling has held that royalty paid by the American company must be deemed to accrue or arise in India. It was assessable in India under Article 12 of DTAA between India and USA. This case ..... X X X X Extracts X X X X X X X X Extracts X X X X
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