TMI Blog2008 (12) TMI 30X X X X Extracts X X X X X X X X Extracts X X X X ..... ich were dismissed, were admitted for final hearing on the following substantial question of law. (A) Whether the ITAT'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 CIT(A)? (ii) that ITAT's ignoring the material and the evidence which was admittedly on record and which had been accepted, after enquiry, by the respondent and the CIT(A)? (iii) the ITAT ignoring 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 ITAT 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? 2. The factual scenario common to both appeals arising out of the orders relating to the Assessment Years 1996-97 and 1996-9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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: 11. During the previous year relevant to the assessment year 1997-98, the number of days the Appellant's partners were p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts 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 CIT (A), 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. 17. Being aggrieved by the above order of the CIT(A), the Appellant preferred an appeal to the ITAT. 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 United Kingdom (UK) ("DTA" 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. 18. The ITAT, by its order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia, 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. 23. 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. 24. 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 applyin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 Ishkawajima Harima Heavy Industries Vs. Director of Income Tax, Mumbai (2007) 288 ITR, 408. 30. 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 5(2) "Subject to the provisions of this Court, 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. 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 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 reside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ber 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: 34. 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. 35. 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 Assessee/Appellant outside India required to be excluded while computing the tax in India? 36. The resolution of the above question would depend upon the interpretation of Clause 15 of DTA read with of Section 9 of the Income Tax Act which cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India would be taxable in India. 42. 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. 43. 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. 44. The Apex Court had occasioned to consider the above question in the case of (cited supra), wherein while interpreting the provisions of Section 9(1)(vii)(c) of the Act, the Supreme Court held as under: Section 9(1)(vii)(c) of the Act states that "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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n-resident 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 DTA. A distinction may also be made between rendition of services and utilization thereof. 47. 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 purpose 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. 48. 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. 49. In the above view of the mat ..... 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