THE DDIT(IT)-1(2), MUMBAI vs. M/S. CLIFFORD CHANCE LLP, MUMBAI

M/s. Clifford Chance,LLP Vs. ADIT(IT)-1(2) Mumbai-400 001. Gurgaon-122002,HARYANA. (��या�ेपक /Cross Objector) (��यथ� / Respondent) िनधा�रती िनधा�रती ओर ओर सेसेसेसे/Assessee by: S/Shri Pawan Kumar, Ravi Sharma, Philip Courtney िनधा�रती िनधा�रती ओर ओर and Ms. Sarabjot Walia राज�व क� ओर से/ Revenue by : Shri Girish Dave सुनवाई सुनवाई क� क� तारीख तारीख / Date of Hearing : 28.01.2016 सुनवाई सुनवाई क� क� तारीख तारीख घोषणा क� तारीख / Date of Pronouncement : 02.03.2016 आयकर आयकर अिधिन यम,1961 क� क� धारा धारा 254(1)केकेकेके अ�तग�त अ�तग�त आदेश आदेश आयकर आयकर अिधिन अिधिनयम अिधिन यम यम क� क� धारा धारा अ�तग�त अ�तग�त आदेश आदेश Order u/s.254(1)of the Income-tax Act,1961(Act) खंडपीठ केकेकेके अनुसार अनुसार PER Bench- खंडपीठ खंडपीठ खंडपीठ अनुसार अनुसार Challenging the orders of the Cs.IT(A)for above mentioned Assessment Years(AY.s.)the Assessing Officers(AO.s)and the Assessee have filed appeal/Cross Objections(CO.s.).As the issue involved in the appeals/CO.s.are common,therefore,for sake of convenience,we are adjudicating them by a single common order.

ITA/5034/Mum/2004-AY.1998-99 Assessee is a partnership firm of solicitors of United Kingdom(UK).It filed its return of income on 29.12.1998 declaring income of Rs.4.84 Crores.The AO completed the assessment on 30. 03.2001,u/s.143(3)of the Act,determining the income of the assessee at Rs.17.67 Crores.

2.The AO has raised five grounds of appeal.He has also filed additional ground for the year under appeal.First effective ground (GOA-1&2) of appeal is about as to whether the assessee is entitled to the benefits of Indo-UK DTAA.The AO has also raised additional ground for the year under appeal.

3.During the course of hearing,before us,Representatives of both the sides agreed that the issues raised by the AO in his appeals stand covered against him and in favour of the assessee by the order of the Special Bench(ITA Nos.5034/Mum/2004, 5035/Mum/2004,7075/Mum/2004, 3021/ Mum/2005 & 2060-61/Mum/2000) & C.O.41-44/Mum/2008 Arising out of M/ 04,5035/M/04,7095/M/04 & 3021/M/05 AYs.1998-99,1999-00,2000-01 & 2001-02.)We find that the Special Bench of the Tribunal has not only discussed the facts of the case,but has also deliberated upon the issue in following manner: 16. We have considered the rival submissions and also perused the relevant material available on record. It is not in dispute that the assessee herein is a firm of solicitors which is a tax resident of UK. During the years under consideration, it rendered legal consultancy services in connection with different projects in India, some part of which was performed in India. Income attributable to the services so performed in India was offered to tax by the assessee in India in the return of income filed for A.Y. 1998-99 as per Article 15 of the India-UK Treaty since the aggregate period of its presence in India through partners and employees exceeded 90 days in that year. In the returns of income filed for other years, the assessee declared ‘Nil’ income on the ground that the aggregate period of its presence in India did not exceed 90 days and its income was not taxable

ITA/5034/M/04 & oths,AY.98-99-Clifford Chance,LLP in India as per Article 15 of the India-UK Treaty. According to the A.O., Article 15 of the India- UK Treaty, is not applicable - the assessee being a partnership firm. He held that the assessee having carried on the activity of rendering services in India for a period or periods aggregating to more than 90 days within any 12 months period, it was having a permanent establishment in India in terms of Article 5(2)(k) of the India-UK DTAA and the profit earned by the assessee from the rendering of services in India was chargeable to tax in India as business profit under Article 7 of the India-UK DTAA. He also held that the entire fees received by the assessee from its clients for the services rendered in India as well as outside India was chargeable to tax in India as the said services were utilised in relation to the projects in India. 17.On appeal, the ld. CIT(A) agreed with the stand of the assessee that its case was covered under Article 15 and not under Article 5(2) read with Article 7 of the DTAA by relying on the decision of the Tribunal passed in assessee’s own case for A.Y. 1996-97 as reported in (2002) 82 ITD 106 (Mum.) In 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 main services were rendered by the assessee in India and if at all some minor work was done outside India, it was only of allied and incidental nature. It was held by the Tribunal that the entire fees charged by the assessee in respect of the services rendered in relation to infrastructure projects in India as composite activity was thus chargeable to tax in India.

ITA/5034/M/04 & oths,AY.98-99-Clifford Chance,LLP the context of section 9(1)(vii)(c) requiring fulfillment of two conditions namely – the services which are the source of income that is sought to be taxed in India `must be utilised in India and rendered in India. It was held by the Hon’ble Bombay High Court that since both these conditions were not satisfied simultaneously in the case of the assessee, the income of the assessee as charged on hourly basis for the services rendered in India and utilised in India only was chargeable to tax in India.” 4.The Hon’ble Bombay High Court has upheld the order of the Tribunal(318ITR237).The Hon’ble Court has mentioned the facts of the case as under: “The assessee was a law firm incorporated in the United Kingdom. During the previous year ended on March 31, 1996, (relevant to the assessment year 1996-97), it was appointed as English law legal advisers for three projects in India, namely B, V, and R. The B project was a three-way joint venture for the construction of a power plant between three participants : I, G and E. G and E were not resident in India. Only one of them, I was a resident in India. The V project was a two-way joint venture project for the construction of a power plant between two non-resident participants, namely, N and M. The R project was a client of the assessee, a non-resident Australian company called C. The appellant, during the previous year ended on March 31, 1997, (relevant to the assessment year 1997-98) was appointed as English law legal advisers additionally for the V power project. In the case of V, the assessee’s client, A was also not resident in India. During the previous year relevant to the assessment year 1997-98 , the number of days the appellant’s partners were present in India exceeded 90 days. The appellant filed a return of income showing an income, liable to Indian taxation of Rs. 5,08,87,950 arrived at on the basis of the income of the appellant, which was attributable to its operation in India in respect of the four projects. The Assessing Officer held that the entire fees received by the appellant from the clients engaged in the four projects were taxable in India. Deciding the matter,the Hon’ble Court held as follow: “The territorial nexus doctrine plays an important part in the 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. Income arising out of operations in more than one jurisdiction would have territorial nexus with each of the jurisdictions on actual basis. Thus, it may not be correct to contend that entire income “accrues or arises” in each of the jurisdictions. For a non- resident to be taxed on income for services, such a service needs to be rendered within India, and has to be part of a business or profession carried on by such person in India. Having regard to the internationally accepted principle and the Double Taxation Avoidance Agreement, no extended meaning can be given to the words “income deemed to accrue or arise in India” as expressed in section 9 of the Income-tax Act, 1961. Section 9 incorporates various heads of income on which tax is sought to be levied by India. Whatever is payable by a resident to a non- resident by way of 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 so as to furnish a basis for imposition of tax. Whereas a resident would come within the purview of section 9(1)(vii) of the Act, a non-resident would not, as services of a non-resident to a resident utilized in India may not have much relevance in 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 a link is established, the same may again be subjected to relief under the Double Taxation Avoidance Agreement. A distinction may also be made between rendition of services and utilization thereof. Article 15 of the Double Taxation Avoidance Agreement between the United Kingdom and India provides for the residence rule in relation to the taxation of income of an individual, including 4

ITA/5034/M/04 & oths,AY.98-99-Clifford Chance,LLP members of a partnership, the exception being where such individual is present in the “other” State for a period aggregating 90 days or 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 ascertain their presence for 90 days. If the test of 90 days is satisfied, the effect is to virtually take the assessee out of the treaty, the taxability of the income being determined under section 9(1)(i) of the Act. …that section 9(1)(vii)(c) envisages the fulfilment of two conditions : services which are the 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 had not been satisfied simultaneously. The income of the assessee charged on hourly basis in India and utilised in India would only be chargeable to Income-tax as disclosed in the return.” From the above order it is clear that the issue stands decided in favour of the assessee . Considering these peculiar facts,we are of the opinion that even if the FAA had admitted additional evidences during the appellate proceedings,it would not be advisable to restore back the matter to his file for fresh adjudication.In our opinion,unnecessary litigation should be avoided.But,we would like to mention that the FAA should have called for a remand report from the AO.With these observations,we dismiss the additional ground raised by him.

5.Ground No.3 pertains to taxing UK Ponds 8,51,701 and not the total fees of UK Pond 33,39, 951 for the year under consideration.The AR and the DR stated that paragraph no.27 of the order of the Special Bench deals with the issue and is decided against the AO.We are reproducing the said paragraph and it reads as under: 27. Having answered question No. 1 referred to this Special Bench in the negative i.e. in favour of the assessee holding that the position of law as propounded by the Hon’ble Bombay High Court in assessee’s case for A.Y. 96-97 still holds good and accordingly its income derived from the professional services rendered in respect of the 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.” Respectfully,following the above order of the Special Bench,we decided ground no.3 against the AO.

6.Ground No.4 is about allowing the amounts of reimbursement of expenditure as deduction and ignoring the provisions of section 44C of the Act.We find that the Special Bench has adjudicated the issue in favour of the assessee in following manner: 66. The amount of reimbursement of expenditure could not be treated as the income of the assessee. It was stated that these were the reimbursement of actual expenses incurred by the assessee under the terms of contracts in relation to the three projects. We find that Assessing Officer did not make any disallowance on this count.CIT(A) noted that this issue escaped the notice of the Assessing Officer.As such,he directed the Assessing Officer to consider the claim on merits and allow the same after verification.We agree to the extent that before making the 5

ITA/5034/M/04 & oths,AY.98-99-Clifford Chance,LLP allowance in regard to this claim, Assessing Officer should verify the various amounts.If the amounts are purely of the character of reimbursement as is alleged before us, the same may be allowed as deduction . Following the above,the AO is directed to verify the claim made by the assessee that the amounts in question were ‘purely of the character of reimbursement.’Ground no.4 is decided in favour of the AO,in part. 7.Last effective Ground (GOA-5)deals with issue of allowing the salary expenses to the staff members incurred outside India in contravention of section 44Cof the Act.We find that the issue of salary of the staff incurred outside India was deliberated upon by the Special Bench at paragraphs no.67-68 at page no.162 of the order as under: ‘67. Next it was argued that the CIT(A) ought, in any event, to have given a specific direction to the Assessing Officer to grant the assessee a deduction of UK Pounds 1,86,927.77 being the salary expenses incurred by the assessee outside India in relation to the professional services rendered by it to be parties engaged in executing the Bhadravatl, Ravva and Vizag Projects. 68.The total salary claimed by the assessee was equivalent to Rs. 97,20,244. CIT(A) noted that this escaped the notice of the Assessing Officer. As such, he directed the Assessing Officer to make proper verification. We agree with the view that the expenses on salary to the staff members can be allowed. We direct the Assessing Officer to allow the same after necessary verification.” Respectfully following the above order,we direct the AO to verify the claim made by the assessee and allow the same.Ground no.5 is allowed in favour of the AO,in part. आयकर अपील अपील संसंसंसं/.ITA No.5035/Mum/2004,िनधा�रण िनधा�रण वष� वष�/Assessment Year-1999-2000 आयकर आयकर आयकर अपील अपील िनधा�रण िनधा�रण वष� वष� आयकर अपील अपील संसंसंसं/.ITA No.2060/Mum/2008,िनधा�रण िनधा�रण वष� वष�/Assessment Year-1999-2000 आयकर आयकर आयकर अपील अपील िनधा�रण िनधा�रण वष� वष� आयकर अपील अपील संसंसंसं/.ITA No.7095/Mum/2004,िनधा�रण िनधा�रण वष� वष�/Assessment Year-2000-2001 आयकर आयकर आयकर अपील अपील िनधा�रण िनधा�रण वष� वष� आयकर अपील अपील संसंसंसं/.ITA No.3021/Mum/2005,िनधा�रण िनधा�रण वष� वष�/Assessment Year-2001-02 आयकर आयकर आयकर अपील अपील िनधा�रण िनधा�रण वष� वष� आयकर अपील अपील संसंसंसं/.ITA No.2061/Mum/2008,िनधा�रण िनधा�रण वष� वष�/Assessment Year-2003-04 आयकर आयकर आयकर अपील अपील िनधा�रण िनधा�रण वष� वष� आयकर अपील अपील संसंसंसं/.ITA No.6628/Mum/2010 ,िनधा�रण िनधा�रण वष� वष�/Assessment Year-2005-06 आयकर आयकर आयकर अपील अपील िनधा�रण िनधा�रण वष� वष� Following our orders for the AY.1998-99,we decide grounds no.1,2 and 3 against the AO grounds no.4 and 5 in his favour,in part as indicated in earlier paragraphs of our order CO.s.No/41-44/M/08 AY.s.-1998-99 to 2001-02 We find that the grounds raised by the assessee in the CO.s.are directly related to the grounds raised by the AO.While deciding the appeals filed by the AO,we have decided grounds no.1-3 against him and in favour of the assessee.We have restored back grounds 4 and 5 to his file for verification.In these circumstances,we are allowing the CO.s filed by the assessee for statistical purposes for all the AY.s.

As a result,appeals filed by the AO.s.stand partly allowed and the CO.s.of the assessee are allowed for statistical purposes. फलतः िनधा�रती अिधका�रयो �ारा दा�खल की गई अपील� आंिशक �प से मंजूर की जाती है और िनधा�रती �ारा दा�खल िकए गए सभी ��ा�ेप सां��की �योजनों के िलए मंजूर िकए जाते ह�.

ITA/5034/M/04 & oths,AY.98-99-Clifford Chance,LLP