CLIFFORD CHANCE vs. THE DEPIUTY COMMISSIONER OF INCOME TAX,CIRCLE-2(6) MUMBAI.

IN IN IN THE HIGH COURT OF JUDICATURE AT BOMBAY THE HIGH COURT OF JUDICATURE AT BOMBAY THE HIGH COURT OF JUDICATURE AT BOMBAY

ORIGINAL ORIGINAL ORIGINAL SIDE SIDE SIDE

INCOME INCOME INCOME TAX APPEAL NO.181 OF 2002 TAX APPEAL NO.181 OF 2002 TAX APPEAL NO.181 OF 2002

WITH WITH WITH

INCOME INCOME INCOME TAX APPEAL No. 182 OF 2002 TAX APPEAL No. 182 OF 2002 TAX APPEAL No. 182 OF 2002

Clifford Chance, a

partnership firm having its )

office at 200 Aldersgate )

Street, London ECIA 4JJ, The)

Appellant Appellant Appellant

United Kingdom. ..

(Org. (Org. (Org. Appellant) Appellant) Appellant)

...... Versus .. Versus .. Versus ..

The Deputy Commissioner of )

Income Tax, Circle 2(6), )

Mumbai, having his office at)

Aayakar Bhavan, Maharshi )

Respodent Respodent Respodent

Karve Road, Mumbai 400 020 ) (Orig. Respondent) (Orig. Respondent) (Orig. Respondent)

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 the

respondent.

CORAM CORAM CORAM : : :

DR. DR. DR. S. RADHAKRISHNAN AND S. RADHAKRISHNAN AND S. RADHAKRISHNAN AND

V.C. V.C. V.C. DAGA, JJ DAGA, JJ DAGA, JJ.

DATED DATED DATED : 19TH DECEMBER, 2008 : 19TH DECEMBER, 2008 : 19TH DECEMBER, 2008

JUDGMENT JUDGMENT JUDGMENT : [ Per : V.C. DAGA, J.] : [ Per : V.C. DAGA, J.] : [ Per : V.C. DAGA, J.]

These appeals are filed by the assessee under

Section

260A

the

Income-tax

Act,

1961

(hereinafter

referred

to as "the Act"

for

short)

against

the

orders

of the

Income

Tax

Appellate

Tribunal("ITAT"

for

short)

both

dated

27th

September,

2001

I.T.A.Nos.

1327

and

1328/Mum/2001,

whereby

the

appeals filed

the CNR No : HCBM020017302002 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:50:43

- 2 -

assessee

against

the orders of the C.I.T.(A)

both

dated 19.12.2000 which were dismissed, were admitted

for final hearing on the following substantial substantial substantial

questions questions questions of law. of law. of law.

(A)

Whether the ITAT’s conclusion that the

Appellant

had

not proved that

had

rendered services outside India is

vitiated in law on account of -

(i)

being

contrary

the

evidence

and the material which

was

admittedly

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

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

an hourly

rate

basis,

whether

the

ITAT erred in law

not

ascertaining the income of the Appellant

India

on the basis of the

services

rendered in India as measured by the Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:50:43

- 3 -

billed hours of work done in India ?

FACTUAL FACTUAL FACTUAL SCENRAIO: SCENRAIO: SCENRAIO:

---------------- ---------------- ----------------

The factual scenario common to both appeals

arising out of the orders relating to the Assessment

Years

1996-97 and 1996-97, lies in narrow

campass.

The

facts are drawn from Appeal No.

1327/Mum/2001

relating to the Assessment Year 1996-97 for the sake

clarity.

Both the appeals are being disposed of

this

common

order.

The

appellant

international

firm

of solicitors resident

the

United Kingdom (UK). It has no office or fixed base

in India.

The appellant, during the previous year ended

March 31, 1996 (relevant to the Assessment

Year

1996-97), was appointed as English law legal

advisers for three projects in India, namely :

Bhdravati Power Project

Vizag Power Project; and

Ravva Oil and Gas Fields

Project.

The Bhadravati Power Project was a three-way

joint

venture for the construction of a power plant

between three participants :

Ispat Industries Ltd.,

GEC

Alsthom

Group and Electricite de

France,

GEC Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:50:43

- 4 -

Alsthom

Group

and Electricite de France

were

not

resident in India. Only one of them, Ispat

Industries Ltd., was a resident in India.

The Vizag Power Project was a two-way joint

venture

project

for

the construction of

power

plant between two non-resident participants, namely,

National Power PLC and Machen Development

Corporation.

The Ravva Oil and Gas Fields Project, was the

only

client of the assessee, who was a non-resident

Australian company called Chase Manhattan

(Australia) Limited.

The Appellant, during the previous year ended

March 31, 1997 (relevant to the Assessment

Year

1997-98),

was

appointed

English

law

legal

advisers additionally for the Vemagiri Power

Project.

In the case of the Vemagiri Power Project,

assessee’s client, Avondale Ltd. was also not

resident in India.

The position in regard to the Four Projects Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:50:43

- 5 -

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 : : 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 Clients

for the services rendered by the Appellant to them

was, briefly, as follows :

(i)

each partner and employee

the Appellant who was

involved

doing

work

for

the

clients

was

required

maintain

detailed

time

sheets

recording

the time spent

them

such

work; Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:50:43

- 6 -

the

said

time

sheets

separately

showed

the

time

spent on doing such

work in India and outside

India;

(ii)

the

time

spent

was

multiplied

by the hourly

billing

rates applicable

each

respective

partner

employee

specified in the terms of

appointment

between

the

Appellant and the

Clients;

(iii)

the

case

the

Bhadravati

Power Project

and

Vizag Power Project,

the

amounts

arrived

under

(ii)

above

were

appointed

among

the

different participants of

the

joint

venture

proportion

their

respective shares therein

and

bills

were

accord

ingly

raised

the

Appellant upon such

participants; and

(iv)

the

bills so raised were

paid

to the Appellant by

the Clients outside

India.

ASSESSMENT ASSESSMENT ASSESSMENT OF INCOME: OF INCOME: OF INCOME:

-------------------- -------------------- --------------------

11.

During the previous year relevant to the

assessment

year

1997-98,

the number of

days

the

Appellant’s

partners

were present in India

during

the

previous year, relevant to the Assessment

Year

1997-98,

exceeded

90 days.

The appellant filed

a Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:50:43

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Return of Income showing an income, liable to Indian

taxation,

of Rs.5,08,87,950/-.

The said figure

Rs.5,08,87,950/-

was arrived at on the basis of the

income

of the Appellant, which was attributable

its operations in India in respect of the above Four

Projects.

12.

The Assessing Officer, took up the Appellant’s

above Return of Income for scrutiny and proceeded to

assess the quantum of the Appellant’s income, which,

according to the respondent, Assessing Officer was

liable to Indian Taxation.

13.

The Assessing Officer, however, by his order

dated

29th

March

2000 held that the

entire

fees

received

by the Appellant from the Clients

engaged

the

above Four Projects was taxable

India.

The relevant portion of the assessment order is

extracted hereinbelow-

"As against the $ 31,11,727 the

assessee

has returned a sum of

$£ 8,71,369 which is considered

taxable and is attributable

to services performed in India.

is also stated that

income

attributable

services

performed

outside India is not

taxable

India.

This

contention of the assessee

cannot be accepted.

For

the

earlier Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:50:43

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Assessment

Year

1996-97,

the

total

fees

received,

whether

the

work was done in India

outside

India

but

for

the

Indian

Project as a whole

was

taken

together and total

fees

received

were

taxed,

for

detailed

reasons mentioned

that

year.

Since there is

change

in this year also,

the

total

fees received for

these

projects taken together are

taxed".

14.

On this basis of the total fees received by

the

Appellant from all clients engaged in the above

Four

Projects, assessed the Appellant on an

income

Rs.17,26,38,634/-

against

the

figure

Rs.5,08,87,950/- shown by the Appellant on the basis

of the income as attributable to the services

rendered by it in India.

15.

Being aggrieved by the above order dated 29th

March,

2000

passed by the Assessing

Officer,

the

Appellant

preferred

an appeal to the CIT

(A)

and

reiterated

its

contentions to the effect that

the

quantum

its income which could be subjected

Indian

taxation was only that portion of its income

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 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:50:43

- 9 -

from

the

Clients 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

under

the

provisions of

the

Double

taxation

avoidance

agreement

executed

between

India

and

United

Kingdom

(UK) ("DTA" for short).

Only

that

portion

its income from the Clients

which

was

attributable

the

services

performed

the

Appellant

India

could be subjected

Indian

taxation.

support

this

contention,

the

Appellant

explained, in detail, the method followed

for

billing

Clients

and,

this

connection,

drew

pointed

reference

the

time-sheets which showed the services rendered by

partners and employees, in India and outside India. Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:50:43

- 10 -

18.

The ITAT, by its order dated 27th September,

2001

accepted

that

Article

the

DTA

was

applicable to the Appellant case and the Appellant’s

income

which

was

attributable

the

services

rendered

the Appellant outside India has to

excluded

while

computing

the

Appellant’s

income

chargeable

to tax in India.

The ITAT then went

hold

that "the work of the assessee related

(a)

the

general advice in relation to

the

entire

projects,

(b)

the projects were to be executed

India,

(c)

the

assessee

had

not

provided

full

details

three out of four projects, and (d)

the

absence

of details as to the projects and

the

nature of the work done, it was not possible to find

fault

with the findings of the AO that income could

not

limited to the billed hours in

India.

principle, the Tribunal accepted the view that it is

the

nature

the

work

that

will

decide

the

tax-liability

India

would

have

ascertained." In view of this finding, the ITAT held

that

the

entire income received by

the

Appellant

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 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:50:43

- 11 -

invoked the appellate jurisdiction of this court.

Rival Rival Rival Submissions : Submissions : Submissions :

----------------- ----------------- -----------------

20.

Mr. Harish Salve learned senior counsel

appearing

for the appellant, urged that the finding

the

Tribunal

that the assessee did

not

place

material it has to be understood in the

context

which

was

rendered.

submitted

that

complete

details

the presence of each

the

"members"

Clifford

Chance

(partners

and

associates)

and their billing hours on the basis of

which clients were invoiced were have seen placed in

full before the assessing authorities all along.

further

submitted that if (as contended by

the

assessee) the fees generated in India is the correct

basis, then the requisite material to ascertain

income was and is very much on record.

21.

It is further urged that in the case of a

legal

professional rendering advisory services, the

services

are

only

rendered at a place

where

the

professional

personally

present.

the

submission of Mr. Salve, any other rule would

create chaos and uncertainty.

22.

Mr.

Salve

submits

that

the

tax

on Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:50:43

- 12 -

professionals

who has crossed the 90 day rule would

chargeable

to tax under Section 9(1)(i) of

the

Income

Tax

Act.

In his submission in order to

taxed

in India, the income must accrue or arise

India.

According

to him, Explanation 1

makes

clear

that

only

such

income

"reasonably

attributable to the operations carried out in India"

taxable

India.

Applying this

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

the

basis

for

determining

where

income

taxable.

He submits that the billing hours are

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

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

all legal issues.

would

conflict of interest if the professionals giving the

advice were to have any kind of interest in the

project. Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:50:43

- 13 -

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

applying

Article 15 of the Treaty.

which

provides

that

"income

derived

by an

individual

....

professional services ...

may also

taxed

the

other

contracting

state

such

services

are

performed

in that

other

State

and

.....".

He submits that the income of an individual

from

professional

services, therefore, is

the

first

instance

taxable in the State of

residence.

is additionally taxable in the other contracting

State if the services are performed in that other

State.

25.

Mr. Salve urged that professional such as a

solicitor

performs

services which are advisory

character

being present in that other State

the

time

when the client needs his services.

Any

services

performed by a professional from his

home

State for a client who is overseas cannot be taxed

in a state other than the state of residence.

26.

In the submission of Mr. Salve, it is

significant

to note that the test of residence is a Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:50:43

- 14 -

test

that excludes, as it were, the application

the

Treaty and makes the income then taxable

under

Section

9(1)(i).

The

treaty

does

not-as

cannot-levy tax where no tax would be leviable under

the domestic law-i.e. the Income Tax Act 1961.

27.

According to Mr.

Salve, two independent

conditions

need to be satisfied to bring income

tax

the "other" State, viz.

(a)

the

services

have to be performed in that other State and (b) the

individual has to be present in that other State.

According

him, these conditions are

cumulative

for the reasons that the presence in the other State

for

90 days does not make the income of such person

taxable

in that other State in its entirety.

It is

only such income from "services performed in that

other State" which is taxable.

28.

Mr. Salve submits that the test of residence

obviously

not

directly

correlated

the

rendition

service.

In other words, it

not

necessary

that where the services are rendered by a

person

a client then for rendering

service

that client, the residence should exceed 90 days.

professional

who

generally

present

for

professional

work

in the other State for

days Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:50:43

- 15 -

becomes

taxable in respect of the income earned

him

in the other state.

He, thus, submits that the

key question is as to when are such services

performed in that State.

29.

submitted that it is

clear

from

the

language of the Treaty that the place of utilization

service

not

relevant

but

the

place

performance of service is what would be

determinative of the matter. Reliance is placed on

the Apex Court Judgment in the case of Ishkawajima Ishkawajima Ishkawajima

Harima Harima Harima Heavy Industries Vs. Director of Income Tax, Heavy Industries Vs. Director of Income Tax, Heavy Industries Vs. Director of Income Tax,

Mumbai Mumbai Mumbai (2007) 288 ITR, 408 (2007) 288 ITR, 408 (2007) 288 ITR, 408.

30.

According to Mr. Salve, the legal system on

which advice given is equally irrelevant.

An advice

given

Indian law, in England by a

professional England,

not

taxable

India.

Conversely,

advice

given

English

law

professional

in India and present in India would be

taxable

in India (subject to the test of number

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

legal

professional.

further

submitted that in fact it has been clearly stated by Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:50:43

- 16 -

the assessee that being English lawyers there was no

question

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

particular transaction but wherever necessary advice

Indian

Legal

issues would be obtained

from

professional

who is entitled to practice Indian Law

and

vice versa.

Mr.

Salve, thus, submits that the

impugned order is unsustainable and the appeal is

liable to be allowed.

31.

Per contra, the learned counsel appearing for

the

Revenue, urged that the term "attributable

to"

wider

in meaning than the term

"derived

from"

and, therefore, on the facts of the present case the

whole

the consideration received on account

services

rendered relating to projects in India

taxable

India. Reliance is placed on

the

Apex

Court judgment in the case of Cambay Electric Supply Cambay Electric Supply Cambay Electric Supply

Industrial Industrial Industrial

Co.

Ltd.

Vs.

Commissioner

Co.

Ltd.

Vs.

Commissioner

Co.

Ltd.

Vs.

Commissioner

Income-tax, Income-tax, Income-tax,

[1978]

113

ITR 84 (SC).

[1978]

113

ITR 84 (SC).

[1978]

113

ITR 84 (SC).

further

submits

that the Apex Court judgment in the case of

Ishikawajima-Harima Ishikawajima-Harima Ishikawajima-Harima

Heavy Industries Ltd.

(Supra)

Heavy Industries Ltd.

(Supra)

Heavy Industries Ltd.

(Supra)

cannot be applied in their favour in this case for Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:50:43

- 17 -

two reasons namely viz.

(a)

the

decision Technical

services.

The

nature

the

appellant’s

services 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 1961

reading as under:

"Explanation- For the removal of doubts, it is

hereby

declared that for the purposes of this

section,

where income is deemed to accrue

arise

India

under clause (v),

(vi)

and

(vii) of sub-section (1), such income shall be

included

to income of

the

non-resident,

whether

not

the

non-resident

has

residence or place of business or business

connection in India."

32.

Lastly

submits that ITAT has

recorded

clear finding of fact that there is no indication in

the agreement or any documentary proof that services

has

been

rendered

outside India.

This

being

a Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:50:43

- 18 -

finding

of fact the appellant cannot at this stage,

be permitted to produce any additional evidence.

submits that Tribunal has considered the submissions

made on behalf of the appellant on the "attribution"

with

which no fault can be found.

He, thus, prayed

for dismissal of the appeal and confirmation of the

order of the ITAT.

Statutory Statutory Statutory provision : provision : provision :

------------------- ------------------- -------------------

33.

Before embarking upon the rival submissions, it

necessary

to turn to the

statutory

provisions

relevant to decide the issues raised in this appeal:

Section 5(2), section

9(1)(i), section

9(1)(vii) of the Act, which are relevant for our

purpose, read as under :

"Section "Section "Section 5(2) 5(2) 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 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:50:43

- 19 -

(b) accrues or arises or is deemed to

accrue or arise to him in India

during such year.

Section Section Section 9(1) 9(1) 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 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:50:43

- 20 -

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 resident, except

where the fees are payable in

respect of services utilized in a

business or profession carried on by

such person outside India or for the

purposes of making or earning any

income from any source outside

India; or

(c) 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 source in India :

Provided that nothing contained in this clause shall

apply

in relation to any income by way of fees

for

technical

services

payable

pursuance

agreement made before the 1st day of April, 1976, Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:50:43

- 21 -

and approved by the Central Government.

[Explanation [Explanation [Explanation

1.- For the purposes of the

foregoing

proviso,

an agreement made on or after the 1st

day

April

1976, shall be deemed to have

been

made

before

that

date

the

agreement

made

accordance with proposals approved by the Central

Government before that date.]

Explanation Explanation Explanation

[2].-

[2].-

[2].- For the purposes of this

clauses

"fees

for

technical

services"

means

any

consideration (including any lump sum consideration)

for

the

rendering of any managerial, technical

consultancy

services

(including the

provision

services

of technical or other personnel) but

does

not

include

consideration

for

any

construction,

assembly,

mining or like project undertaken by

the

recipient or consideration which would be income of

the recipient chargeable under the head "Salaries".

Treaty Treaty Treaty : Double Taxation Avoidance Agreement : Double Taxation Avoidance Agreement : Double Taxation Avoidance Agreement

(DTAA) (DTAA) (DTAA) : : :

Article Article Article 15 : Independent personal 15 : Independent personal 15 : Independent personal services : services : services :

Income derived by an individual, whether in his

own capacity or as a member of a partnership, who is Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:50:43 a Contracting State in professional

services

other

independent a similar character may be taxed

that

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

periods aggregating to 90 days in the relevant

fiscal year;

(b)

he, or the partnership, has a fixed base

regularly

available

to him, or it,

that

other

State for the purpose of performing his but in each case only so much of the income as

is attributable to those services.

For the purposes of paragraph 1 of this Article

individual,

who

is a member of

partnership

shall

regarded

as being present in

the

other

State

during

days

which although

not

present,

another

individual

member

the

partnership

so prsent and performs services

other independent activities of a similar character Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:50:43

- 23 -

in that State.

The

term

"professional

services"

includes

independent

scientific,

literary,

artistic,

educational

teaching activities as well as

the

independent physicians,

surgeons,

lawyers, engineers, architects, dentists and

accountants.

Consideration Consideration 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

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 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:50:43

- 24 -

read

with of Section 9 of the Income Tax Act

which

clearly

lays

down

that

income

derived

individual

whether

his own capacity

member

partnership,

who contracting

State professional

Services

independent similar

character

may be taxed in that State.

Such

income

may also be taxed in the other Contracting State, if

such services are performed in that State, and if he

is present in that State for a period aggregating to

days

the relevant fiscal

year.

Now,

the

question

is how much income is taxable.

The answer

is : only so much of the income as is attributable

to those services.

37.

Article 15 provides for the residence rule in

relation

taxation of income of

individual,

including

members

of a partnership, the

exception

being

where

such

individual

present

the

"other"

state

for a period aggregating 90 days

more

in the relevant previous year.

In the case of

a partnership, where "an individual is a member of a

partnership

even if he is not present" but "another

individual

member of the partnership is so

present

and

performs

professional

services",

then

the

presence of all such members is aggregated to Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:50:43

- 25 -

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 the

treaty, the taxability of the income being

determined under section 9(1)(i) of the Act.

39.

The interpretation of this section 9(1)(i), is

no 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 Income

Tax, 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.

40.

Section 9 raises a legal fiction, but having

regard

the

contextual

interpretation

and

furthermore

in view of the fact that we are dealing

with

taxation statue the legal fiction

must

construed

having

regard to the object it seeks

achieve.

The legal fiction created under section 9

the

Act must also be read having regard to

the

other provisions thereof, as held by the Apex Court Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:50:43

- 26 -

in the case of Maruti Udyog Ltd. Vs. Ram Lal Maruti Udyog Ltd. Vs. Ram Lal Maruti Udyog Ltd. Vs. Ram Lal

[2005] [2005] [2005] 2 SCC 638. 2 SCC 638. 2 SCC 638.

41.

The provisions of section 42 of the Indian

Income-tax Act, 1922 provided that only such part of

income as was attributable to the operations carried

out in India would be taxable in India.

42.

The territorial nexus doctrine, thus, plays an

important

part in assessment of tax.

Tax is levied

one

transaction where the operations which

may

give

rise

to income may take place partly

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

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

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 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:50:43

- 27 -

above

question

the case of

Ishikawama

Harima Ishikawama

Harima Ishikawama

Harima

(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

business

or profession carried on by

such

person in India, or for the purposes of making

earning

any

income from

any

source

India."

Reading

the

provision in its plain sense,

per

Apex

Court

it requires two conditions to be met

the services which are the source of the income that

sought to be taxed, has to be rendered in India,

well

utilized in India, to

taxable

India.

Both

the

above

conditions

have

satisfied

simultaneously.

Thus, for a non-resident

be taxed on income for services, such a

service

needs

be rendered within India, and has

part of a business or profession carried on by such

person in India.

45.

In the above judgment, Apex Court observed Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:50:43

- 28 -

that "Section 9(1)(vii) of the Act must be read with

section

thereof, which takes within its

purview

the

territorial

nexus on the basis whereof tax

required

be levied, namely, (a) resident;

and

(b)

receipt of accrual of income.

According to the

Apex Court, the global income of a resident although

subjected

tax,

the

global

income

non-resident may not be.

The answer to the question

would depend upon the nature of the contract and the

provisions

of the DTA.

What is relevant is receipt

accrual

of income, as would be evident

from

plain reading of section 5(2) of the Act subject to

the compliance of 90 days rule.

46.

As per the above Judgment of the Apex Court

the

interpretation

with reference to the nexus

tax

territories

also

assumes

significance.

Territorial nexus for the purpose of determining the

tax

liability

internationaly

accepted

principle.

endeavour should, thus, be made

construe

the

tax-ability

non-resident of income derived by it.

Having regard

the

internationally accepted principle and DTA,

extended

meaning can be given to the words

"income

deemed

to accrue or arise in India" as expressed in

section

of the Act.

The Section 9

incorporates Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:50:43

- 29 -

various heads of income on which tax is sought to be

levied

the

Republic

India.

Whatever

payable

a resident to a on-resident by

way

fees

for

services,

thus, would

not

always

come

within

the purview of section 9(1)(vii) of the Act.

It must have sufficient territorial nexus with India

furnish a basis for imposition

tax.

Whereas

a resident would come within the purview of

section

9(1)(vii) of the Act, a non-resident

would

not,

services of a non-resident to utilized

India may not have much

relevance

determining

whether the income of the

non-resident

accrues

or arises in India.

It must have a

direct

link

between the services rendered in India.

When

such

link is established, the same may again

subjected

any

relief

under

the

DTA.

distinction may also be made between rendition of

services and utilization thereof.

47.

With the above understanding of Law laid down

the Apex Court, if one turns to the facts of the

case

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 utilized utilized

in a business or profession carried on

in a business or profession carried on

in a business or profession carried on

such such such

person in India or for the purposes of

making

person in India or for the purposes of

making

person in India or for the purposes of

making Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:50:43

- 30 -

or or or

earning any income from any source in India"

earning any income from any source in India"

earning any income from any source in India"

thus, evident that section 9(1)(vii)(c), read in

its

plain,

envisages

the

fulfilment

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 matter, contentions

raised

the

assessee/appellants

need

accepted.

Thus,

the

income of

the

assessee

charged

hourly basis in India and

utilised

India

shall only be chargeable to Income-Tax Act as

disclosed

in the return of Income.

The substantial

questions

law

framed are,

thus,

answered

favour

of the assessee and against the Revenue.

the result, appeals are allowed with no order as to

costs.

Sd/-

Sd/-

[ V. C. DAGA, J.] V. C. DAGA, J.] V. C. DAGA, J.]

[ Dr. S. Dr. S. Dr. S. RADHAKRISHNAN, J.] RADHAKRISHNAN, J.] RADHAKRISHNAN, J.] Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:50:43 Powered by TCPDF (www.tcpdf.org)