1. Assessee is a firm of Solicitors. It is operating as a partnership firm in the United Kingdom and is tax resident in UK. Assessee was appointed as English Legal Advisors for the following three infrastructure projects in India : (1) Bhadiavati Power Station Project--It is a three-way joint venture for the construction of a power plant with three participants, viz. M/s Ispat Industries Ltd., a resident of India; M/s GEC Alathom Group, a non-resident and M/s Electricite de France, another non-resident. These three participants were the clients of the assessee-firm.
(2) Vizag Power Project--It is a two-way joint venture for the construction of a power plant with two participants, viz. M/s National Power pcl and M/s Machen. Both the non-resident participants were its clients.
(3) Rawa Oil 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 5th May, 1997 a notice was issued on the assessee under Section 148 of the IT 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 31st March, 1998 declaring therein Nil income. It claimed refund of Rs. 88,64,695 being the amount of tax deducted at source by M/s Ispat Industries, Mumbai on the fees amounting to UK 3,96,893 equivalent to Rs. 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 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 per cent. Thus assessee reflected total income in UK Pounds at 3,16,243 which is equivalent to Rs. 1,64,44,618. This income was towards the fees attributable to services rendered in India for Bhadravati Power Station Project and Vizag Power Project.
3. It was claimed in the return that since the cumulative number of days, during which one or more of its partners was in India, was less than 90 days, the aforesaid total income of Rs. 1,64,44,618 was not exigible to tax in terms of the provision of Section 90 of the Act r/w Article 15 of the Indo-UK Tax Treaty. AO computed the total income at UK 16,72,262 equivalent to Rs. 8,69,57,624 on the basis of the statement filed by the assessee reflecting therein the total fees earned from the three Indian projects as per the audited financial statements for the year ended 31st March, 1996.
4. Vide Clause 3, of letter dt. 30th May, 1995, to M/s Nippon Denro Ispat Ltd., M/s Ispat Alloys Ltd., M/s Electricite de France and M/s General Electric Company (in respect of provision of legal advisory services to M/s Bhadravati Power Station Project), responsibilities of the assessee included, inter alia, the following : "(i) Initial general review of applicable Indian law and any existing documentation; (ii) Co-ordinating all Indian legal advice given to the Investor Group on connection with the Project including reviewing and advising on any documents or advice prepared by the Indian lawyers; (iii) English legal and tax advice on joint venture structures, co-ordination of the incorporation of any joint venture companies and preparation of shareholder agreements and related documentation; (iv) Drafting and/or negotiating the construction contract, the operation agreement, the coal supply and transportation agreements, the water supply agreement and the power purchase agreement and related guarantees as well as any other commercial documentation required in connection with the Project; (v) In conjunction with the Indian lawyers, identifying any licenses and consents required including assistance in obtaining the granting thereof; (vi) Reviewing, advising on and negotiating all loan and security documentation (it is assumed that this documentation will initially be drafted by lenders' counsel); (vii) Reviewing and advising on any information memorandum required for the Project; (viii) Assisting in the satisfaction of all conditions precedent to Financial Close; and (ix) General English legal and tax advice 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: 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 25th Jan., 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 23rd Nov., 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 essential areas.
7. It was argued by Shri Dastur that in order to tax the income in India as per Article 15 of the DTA it is a condition precedent that the assessee must be present in India for a period or periods aggregating to 90 days in the relevant fiscal year or the assessee must have fixed base regularly available to it in that other State for the purpose of performing his activities. It was stated that the presence of the assessee in India was less than 90 days, therefore, no tax liability can be fastened on the assessee. Revenue authorities discussed only the issue of 90 days presence under Article 15(1)(a) of the DTA. It is not the case of the Revenue that assessee did have a fixed base in India within the meaning of Article 15(1)(b) of the DTA. Therefore, what all needs to be established is that whether the assessee was present in India for more than 90 days in the relevant fiscal year. It was admitted that from time to time partners and employees of the assessee-company visited India for rendering the services. According to the learned counsel only presence of partners is to be noted for computing the period of 90 days. Multiple counting of common days is to be avoided. The days when two or more partners were present in India together; are to be counted only once. It was stated that multiple counting would go against the object of Article 15(1)(a) of the DTA, which is to provide the criteria for a substantial and permanent presence in India, as opposed to a transient and fleeting one. It was further stated that multiple counting would lead to absurd results.
Reference was made to the decisions of the apex Court rendered in the case of Addl. CIT v. Sumt Art Silk Cloth Mfg. Association 378 : (1980) 121 ITR 1 (SC) and K.P. Varghese v. ITO (1981) 131 ITR 597 (SC).
8. It was further stated that where no professional services were rendered, such visits to be excluded from the counting. Business promotional visits should not be considered for computing the days within the meaning of Article 15 of the DTA. Emphasis was laid on the words used in the DTA "performance of services". In Article 15(1) it is stated that "if such services are performed in that other State" and "only so much of the income as is attributable to those services".
Similarly, Article 15(2) reads "and perform professional services............ in that State", 9. Shri Dastur stated that the 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 37 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 that the word "partner" and "member" are inter-changeable. Learned counsel argued that the reference to "partnership" in Article 15 of the DTA is a reference to "firm" or to a "partnership firm" as such. The employees of a firm cannot be regarded as its members as they do not render "Independent personal services" but are covered by Article 16 of the DTA that deals with "Dependent personal services". It was contended that CIT(A)'s reliance on Article 14(1)(6) of the Double Taxation Avoidance Agreement between India and Australia is misplaced, 12. Shri Dastur submitted that the Revenue authorities were not correct in reading Article 5(2)(k) of the DTA into Article 15 of the DTA so as to conclude that--(a) the number of days' presence is to be reckoned, not with reference to the fiscal year, but with reference to a "rolling period" of 12 months; and (b) the presence of employees is also to be considered.
13. Shri Dastur stated that Article 5(2)(k) of the DTA is relevant for construing the business profits as enunciated under Article 7 of the DTA. But the case of the assessee is not governed by Article 7.
Assessee is deriving professional income. As such, the case of the assessee is governed by Article 15 of the, DTA. Article 15(1)(a) of the DTA provides a specific test for professional firm (that is presence in the fiscal year, which is from 1st April to 31st March following, for the members in the case of a partnership). Reading Article 5(2)(k) of the DTA (which refers to any twelve-month period and to the presence of employees) "into" Article 15 of the DTA would render the specific test prescribed by Article 15(1)(a) of the DTA otiose and would create a conflict.
14. Adverting to 'permanent establishment' in Article 5 of the DTA, Shri Dastur submitted that it is relevant for the assessment of business profits only which are discussed under Article 7 of the DTA.The scope of Article 7 cannot be elongated so as to include the assessment of professional income. Article 15 of the DTA refers to a fixed base regularly available to the partnership. This is the determinative factor. It was submitted that the concept of "permanent establishment" in Article 5 of the DTA cannot be grafted on to Article 15 of the DTA as because the concept of "permanent establishment" is different from the "fixe'd base", Reference was made to the commentary on Double Taxation Conventions 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 p. 296 of the Book by Philip Baker: "The difference between fixed base and permanent establishment is mentioned in a further Bundesfinanzhof decision 14th Jan., 1982, IV.R., 168/78 (1982) BStBI, H, 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. The case is interesting because the definition of permanent establishment in the treaty had an express provision Article 7(7) of the Germany-Switzerland Treaty of 1971, deeming the participation in an AOP to be a permanent establishment, The Bundesfinanzhof did not apply that deeming provision to the issue whether there was a fixed base." 15. Reference was made to the Book of Klaus Vogel on Double Taxation Conventions. The learned author at p, 861 of the said book has stated that the independent activity performed in the other state may not be taxed by that State unless a fixed base is available for that activity.
The term "fixed base" is not defined in the convention. The OECD Committee of Fiscal Affairs did not consider such a definition to be necessary. It names as a typical example of such a fixed base a physician's consulting room or the office of an architect or a lawyer.
For the purposes of interpretation, resort may additionally be had to the principles relating to the permanent establishment of business enterprises. Permanent establishments and fixed bases have the same raison d'etre, namely to determine when the State of residence and when the State of source have primary taxation. An activity exercised abroad shall not attract tax in the foreign State unless there is an intensive economic connection. The existence of a permanent establishment or a fixed base is the criterion for assuming a certain intensity of such economic connection. Basically, this criterion must be the same, irrespective of whether business enterprises or professional services are concerned. The fixed base 'in a way corresponds' to a permanent establishment of a business enterprise.
It was argued that though certain items of Article 5(2) of the DTA may be relevant for construing the meaning of Article 15 of the DTA (e.g. a branch or an office) but it is impermissible to extend fictional or artificial definitions of a permanent establishment to Article 15 of the DTA. Stress was laid on the specific wording of the provisions of Article 15(1)(a) and (b) of the DTA.16. Reference was made to the letter dt, 25th March, 1997. It was stated that the" error crept in the said letter in making computation of the days cannot be used against the assesses. It was stated to be inadvertent error, learned counsel submitted that assessee cannot be estopped from correcting 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: Number of days partners were present excluding (i) days spent by partners on business development and (ii) common days Number of days partners were present including days spent by partners on business development but excluding common days Number of days partners were present excluding days spent by partners on business development but including common days Number of days partners were present including days spent by partners on business development and also common days 17. Without prejudice to the above, it was contended that assessee can be charged to tax only on that quantum of its income that is attributable to services rendered by it in India, The services of the assessee were rendered apropos the M/s Bhadravati Power Station Project, M/s Vizag Power Project and M/s. Rawa Oil and Gas Fields Project in India. In regard to these projects assessee provided legal services to the clients. Six of the assessee's clients were connected with these three projects. Out of the six clients, five of the assessee's clients were non-resident and M/s Ispat Industries Limited was a resident in India. It was further pointed out that out of these projects, M/s Bhadravati Power Station Project and M/s Vizag Power Project failed to come to fruition. The services rendered by the assessee to its clients in India and elsewhere were confined to legal services. It was submitted that only that portion of assessee's income, which can be attributed to services performed in India, could be charged to tax having regard to the Domestic Law and the DTA." 18. Explaining the provisions of Domestic Law, Shri Dastur invited our attention on the prescription of Section 5 of the Act. The assessee, being a non-resident, is liable to Income-tax in India only on :--(i) income received or deemed to be received by it in India; and (ii) income which accrues or arises or is deemed to accrue or arise to it in India. As regards actual accrual or arising, what can be regarded as accruing on arising to the assessee in India is only that portion of the fees, which is relatable to services rendered in India. The portion of the fees, which is relatable to services rendered outside India, cannot be regarded as having accrued or arisen in India. Reference was made to the 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 nonresidents in India as contemplated by Clause (a) of the Expln. to Section 9(1)(i) of the IT 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 only in respect of that portion of its income, which is relatable to services rendered by it in India, and not in respect of that portion which relates to services rendered outside India. The learned counsel further argued that the quantum of income which is exigible to tax in India under the Act, therefore, be only that portion which is attributable to services performed by the assessee in India. It was stated that the assessee reflected this amount in its return. Reference was made to Section 90(2) of the Act.
On that basis it was argued that the DTA need not be applied, as under the Domestic Law assessee is not liable for payment of tax.
21. Coming to the provisions of the DTA, learned counsel submitted that Article 15 being the specific article of the DTA, which deals with lawyers, as such it applies in the facts of the present case. As per the prescription of this Article, the assessee is liable to be taxed in India only on the portion of its income, which is attributable to services performed in India. Our attention was invited on the wordings "Such income may also be taxed in the other Contracting State if such services are performed in that other State..........but in each case only so much of the income as is attributable to those services". It was stated that the Contracting State in this case is India. Services were rendered in India as well as outside India. Accordingly the income attributable to the services rendered in India would only be liable for tax in India.
22. It was submitted that under the Domestic Law as well as under the DTA assessee cannot be taxed in respect of income attributable to, services rendered by it outside India. Coming to the facts, learned counsel stated that the calculation made by the assessee was based on the fees relatable to the services rendered by it in India. It was completely in line with both the provisions of Domestic Law and the DTA. In offering its income to Indian tax, the assesses has included the fees referable to the services performed in India both by its partners and its employees.
23. It was contended that since the case of the assessee is governed by the provisions of Article 15 of the DTA, no other article can be applied. The fees earned by the assessee cannot be construed to be business income. Once it is concluded that the assessee earned professional income, the question of having recourse to Article 7 of the DTA does not arise. Even under the IT Act it is incumbent on the AO to first classify a particular income under the appropriate head and then determine 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). 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 (SC). 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 1st March, 1957. In the years 1958 and 1959, he received certain moneys on account of fees outstanding for professional work done by him. Hon'ble apex Court has held that the receipts were not chargeable to tax. The receipts were the outstanding dues of professional work done and were clearly the fruits of assessee's professional activity. They were the profits and gains of a profession and they fell under the fourth head, viz, "Profits and gains of business, profession or vocation". They were not chargeable to tax under that head because under the corresponding computing section, i.e., Section 10 of the IT Act, 1922, an income received by an assessee, who kept his accounts on the cash basis, in an accounting year in which the profession had not been carried on at all, was not chargeable to tax, nor could the receipts be brought to tax under Section 12 as "Income from other sources". As heads of income were mutually exclusive and the receipts could be brought under the fourth head, they could not be brought under the residuary head "Income from other sources".
24. The following principles emerge from the decision of the apex Court : (i) Several heads of income mentioned in Section 6 of the Indian IT Act, 1922 are mutually exclusive; a particular income can come only under one of them.
(ii) If the receipts can be brought under one head of income, i.e., the fourth head of income in Section 6, viz. "Profits and gains of business, profession or vocation", they cannot be brought under the residuary head, as the heads of income are mutually exclusive.
(iii) Whether an income falls under one head or the other has to be decided according to the common notion of practical men, for, the act does not provide any guidance in the matter. In other words, the heads of income must be decided on the nature of the income by applying practical common notion and not by reference to the assessee's treatment of income.
(iv) Whether an income is included in any of the heads other than the residuary head would depend on what kind of income it is, and if the income is the profit or gain of profession, it cannot come under Section 12, for, Section 12 does not say that an income which escapes taxation under a preceding head will be computed under it for chargeability to tax.
(v) An income has to be brought under one of the heads in Section 6 and can be charged to tax only if 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 the permanent establishment. Under neither of these articles would any part of the fees charged by the assessee for services rendered by it outside India, be taxable in India. Even on general principles the fees earned by the assessee for services performed outside India would not be regarded as indirectly attributable to operations in India. Reliance was placed on the decision of the. apex Court, rendered in the case of CIT v. Prem Bhai Parekh (1970) 77 ITR 27 (SC). In this case gift was made to minor sons who were admitted to the benefits of partnership in firm from which the assessee retired. The question before the apex Court was that whether on the basis of capital invested in firm by minors, income of minors from firm could be included in the total income of the assessee. The apex Court considered the connection between transfer and income. It was held that the connection between the. gifts made by the assessee and the income of the minors from the firm was a remote one and it could not be said that that income arose directly or indirectly from the transfer of the assets. The income arising to the three minor sons of the assessee by virtue of their admission to the benefits of partnership in the firm could not be included in the total income of the assessee.
26. In regard to the decision rendered by the Authority for Advance Ruling in the case of Steffen Robertson & Kirsten Consulting Engineers & Scientists, In re (1998) 230 ITR 206 (AAR) learned counsel submitted that it is not a binding precedent. In that case issue related to s, 9(1)(vii) of the Act which is dealt separately in Art, 13 of the DTA.Section 194J of the Act clearly recognizes distinction between professional fees and fees for technical services.
27. In regard to the case of GVK Industries Ltd. v. CIT (1997) 228 ITR 564 (AP) learned counsel submitted that DTA was not enforced and the issue pertained to the technical service fees which is distinct from professional fees, Even assuming that the fees constitute technical service fees, they would be still governed by Article 15 of the DTA in view of this specific provisions of Art, 13(5)(e) of the DTA. Even if, for the sake of argument, Section 9(1)(vii) of the Act alone is considered, the effect will be that only the fees received by the assessee from Ispat Industries Limited, the only resident company, would be taxable. Similarly, in regard to the decision of the Authority for Advance Ruling in XYZ, In re (1999) 238 ITR 99 (AAR) learned counsel submitted that it is not binding precedent and it is concerned with taxability of a royalty for the use of a trademark, 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 (Del) 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 AO to allow the deduction claimed on this count.
30. Shri M.K. Pandit along with Shri Sudhir Chandra appeared on behalf of the Revenue. At the outset our attention was invited on the heading of Article 15 which reads as under: 31. It was stated that Article 15 deals with the independent services.
Independent services cannot be rendered with the help of employees.
Similarly, personal services also could not be rendered through some one else. Our attention was invited on the words "Income is derived by an individual, whether in his own capacity or as a member of a partnership........". While giving meaning to these words learned Departmental Representative pointed out that the word "derived" has got a narrow connotation. The income must be derived by an individual. The individual can get this income in his own capacity or as a member of partnership. Learned Departmental Representative described in detail the meaning and purport of the word "Member" as is used in Article 15, It was stated that the term "Member" is wide enough to include all those belonging to the firm. As such, it includes within its ambit the employee lawyers also who participated in income earning activity on behalf of the firm.
32. It was further stated that assessee is a UK based partnership firm having branches in more than 25 countries. Assessee did not disclose the contents of the contract to the Department, The services were rendered in relation to three different projects. Assessee produced bills so far work done for M/s. Bhadravati Power Station Project only.
Bill for remuneration or receipt for other two contracts were not furnished. How much amount received on account of each contract is not known to the Department. Assessee claimed deduction in respect of the services rendered outside India. It was not established that how much work it did outside India. No documentary evidence apropos the presence of partners such as passports etc, was produced for the examination.
Assessee did not furnish even the copy of the deed of partnership. It is clear from the details available on record that assessee rendered composite services, Assessee was not engaged only in legal work, it rendered financial services, also. It transpires from the perusal of the various documents and papers available on record that the services rendered by the assessee were not purely professional 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 expands 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 Departmental Representative emphasized that the employees were also professionals. They were well qualified. They were getting almost the same remuneration what the partners were getting. Our attention was invited at p. 158 of the paper book. It was pointed that the senior lawyer got the same amount what the partner got for rendering the professional services. This example relates to the subsequent assessment year and is not relatable to the assessment year in question.
34. Learned Departmental Representative argued that assessee was carrying on business. Its case comes within the ambit of Article 7.
Assessee had its permanent establishment in India. The tax treaty is decisive for allocation of taxing jurisdiction over incorporated business activities with economic allegiance to more than one country.
Reference was made to Article 5 of the treaty. As per definition given in Article 5(3)(k) furnishing of service through an employee or partner of the enterprise constitutes a permanent establishment, if the said person was present in the Contracting State for more than 90 days.
Learned Departmental Representative stated that in the present case it was found that partners of the firm and its employees were present in India for more than 90 days in the 12 months period. For this purpose roE over period of subsequent fiscal year can also be counted, as there is no restriction in what way the period should be counted. Hence physical presence of partners and employees in subsequent or earlier period of 12 months constitute permanent establishment as per duration test in the treaty. Consequently it is a fixed base as per treaty.
Reference was made to the book of Klaus Vogel. His commentary on Article 5 was read out. It was stated with reference to that book that the furnishing of services including consultancy services through an employee or other personnel of an enterprise of the Contracting State constitutes a permanent establishment in the State where such services are performed. It was stated that the term "enterprise" connotes both the activity itself and means by which the activity is engaged. As such whatever activity undertaken by the assessee in India is an enterprise.
As such, it can be said that enterprise had permanent establishment in India within the meaning of Article 5 of the DTA.35. Next it was argued that even if the assessee is coming under Article 15 of the DTA, its income is exigible to tax as because heading of the article is important in construing the meaning of the provision.
The term "member" was explained. It was stated that it is a wider term, It includes within its ambit all 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 Departmental Representative 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 Departmental Representative 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 Departmental Representative submitted that since the fixed base is not defined, surrounding circumstances should be taken into consideration for construing its meaning. Assessee had fixed client, fixed remuneration and fixed facilities available.
38. Coming now to the next issue, learned Departmental Representative relied on the decision of the apex Court rendered in the case of CIT v.Sterling Foods (1999) 237 ITR 579 (SC). This precedent was cited to explain the difference between the meaning of word "derived" and "attributable", It was stated that assessee received the consideration contained in the contract because of the Indian connection, It was stated that indisputably operations were carried out in India in respect of the three projects, Assessee did not explain its modus operandi. How the work was done. What portion of the work done in India and what portion of the work done outside India is not known. No documentary evidence was ever produced by the assessee to indicate the nature of work connected with the project located in India done outside India. Copies of agreements were not filed. What advice it rendered outside India is not known. Assessee filed copy of service agreement dt. 30th May, 1995 in relation to M/s. Bhadravati Power Station Project only. It has received an amount aggregating to 17,60,275 in respect of the legal advice and services rendered for all the three projects in India. Agreements in relation to M/s. Vizag Power Project and M/s.
Ravva Oil and Gas Fields Project were not filed by the assessee.
However, it is not denied that the nature of services rendered for these two projects were the same as for M/s. Bhadravati Power Station Project. Learned Departmental Representative contended that every thing was structured in India. Therefore, it can very well be presumed that main services were rendered in India only. If some minor work was done outside India, it was only of allied and incidental nature. Since power plants are located in India, therefore, it cannot be inferred that the main activities were conducted outside India and not in India. It was a composite activity. Tax cannot be on piecemeal basis. Either entire activity is to be taxed in India or outside India.
Commenting on the decision rendered in the case of IRC v. Hang Seng Bank Ltd. (1991) 1 AC 306, learned Departmental Representative submitted that the facts are distinguishable. In the present case it is admitted fact that assessee rendered services in India in connection with the projects which were located 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 & Kirsten Consulting Engineers & Scientists v. CIT (supra) and (ii) XYZ, In re case (supra).
39. In regard to the reimbursement of expenditure, it was stated that CIT(A) only asked the AO 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: 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 services are performed in that other State and if: (a) he is present in that other State for a period or periods aggregating to 90 days in the relevant fiscal year; or (b) he, or the partnership, has a fixed base regularly available to him or it, in that other State for the purpose of performing his activities; but-in each case only so much of the income as is attributable, to those services.
2. For the purposes of para 1 of this article an individual who is a member 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 professional 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." 42. The panoply of the provision dealing with the 'independent personal services' needs to be examined. This concerns with the income derived from profession by an individual. Income may be earned by an individual-- Some professionals are 'solos', who work by themselves. Other works in firms as partners or as persons working for the partners on salary and hope to "make partner" some day.
43. The dictionaries state that the word 'derive' is usually followed by the word 'from', and it means; get or trace from a source; arise from, originate in; so the origin or formation of. As a matter of plain English, when it is said that one word is derived from another, often in another language, what is meant is that the source of that word is another word, often in another language. As an illustration, the word 'democracy' is derived from the Greek word 'demos', the people, and most dictionaries will so state. That is the ordinary meaning of the words 'derived from' and there is no reason to depart from that ordinary meaning here.
44. As per Bouvier's Law Dictionary, member-means; "an individual who belongs to a firm, partnership, company or corporation". As per the Random House Dictionary of English language the word "member" means any of the persons composing a society, party 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 principal 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 : socil 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 partnership. This branch of law owes its origin from the dictum : qui facit per alium facit per se. He who acts through another acts himself. The acts of the agents are the acts of the principal.
Let us ponder the practical aspect. Take an example. If a pedestrian is hit by a truck that belongs to XYZ firm, the pedestrian will almost sue the firm, even though the actual wrong was committed by the driver. Can the pedestrian sue the truck driver instead? The answer is yes, but the firm has more money and is a better target. And the firm is liable for the acts of its agents. This is the doctrine of respondeat superior-- "let the superior answer"; in cruder language, "Soak the boss".
47. What is the stock in trade 'of the lawyer's firm? Obviously it is law. The lawyer advises his clients and tells them how to use law or how to pick a path among legal minefields. He works in the shadow of law. The practice of law is a perfectly distinct Article The law is not a profession so easily acquired. The lawyers working in a law firm cannot be compared with the other employees.
48. We have considered the text and context of Article 15 of the DTA.This article deals with the "independent personal services" of professionals. Such services could only be rendered by competent professionals. It is true that Article 16 of the DTA deals with "Dependent personal services" but that article is not relevant for the professionals. Assessee-firm did not make resort to that article for giving tax treatment to its employees. As per the language of Article 15, the income must be derived from profession by an individual. The individual can get this income in his own capacity or as a member of partnership.
The term member in the context of firm, is relevant for ascertaining the availability of the firm in the other State for the purpose of performing its activities. The word 'perform' denotes, execution, accomplishment or completion of contractual duty. If we see the contract (only contract furnished before us is in respect of Bhadravati Power Station Project), the contractual duties are concerning the legal work. This can only be executed by the competent professionals.
It is evident that in the present case contractual duties were performed by the partners and the professionals in the employment of the firm. These professionals were getting almost the same remuneration what the partners were getting. Our attention was invited at p. 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 are employed in the firm.
The presence of the partner solicitor can just be avoided to hoodwink the cause of Revenue. Certainly this could not be the intention of treaty maker that members will include only the partners of the firm.
In our opinion the term 'member' as is used in An. 15 of the DTA is nomen generalissimum (term of most general meaning). Taking into consideration the entire conspectus of facts we hold that lawyers representing the firm as employee also come.s within the ambit of the term 'member'.
In view of the above, it can be said that the assessee was present in India for a period aggregating to more than 90 days in the relevant fiscal year and as such the income of the assessee is exigible to tax in India in consonance with the provisions of DTA.50. In view of this finding other points raised apropos this issue have become academic. But for the sake of completeness we would like to decide those issues also.
51. In our opinion multiple counting of the common days is to be avoided so that the days when two or more partners were present in India, together, are to be counted only once. Multiple counting would lead to absurd results. For example, if 20 partners were present in India together for 20 days in one fiscal year, multiple counting would result in 400 days. There cannot be more than 365 days in a year.
Therefore this system of multiple counting leads to absurdity.
Therefore it should be avoided.
52. Apropos the alleged business promotional visits assessee failed to discharge the onus. Purpose of visit was not explained explicitly before the Revenue authorities. Even before us no' sufficient evidence was adduced. For ascertaining the onus it is to be considered that which party would succeed if no evidence were given on either side; and what would be the effect of striking out of the record the allegation to be proved Testing the case of the assessee on the touchstone of this rule we find that in the absence of evidence that visits of partners were for some other purposes, these will be considered as professional visits and if visits are professional these will be considered for the purpose of charging the tax, Assessee failed to discharge the onus probandi. We therefore decide this issue against the assessee.
53. Adverting to the applicability of Article 7 of DTA, we have considered various arguments without prejudice 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 "laymen". The reasoning that the association of non-qualified persons for the establishment of a firm to run a private hospital would only be to gain profits. The, activities, which constitute carrying on business, need not necessarily consist of activities by way of trade, commerce or manufacture or activities in the exercise of a profession or vocation. They may even consist of rendering services to others, which services may be of a variegated character.
54. In these days of advance science and ebullient developments commensurate with the need of the community, society and country, eccentric activity, though related to a provision as such, may not in a given case be interpreted as a wooden exercise thereof, if other compelling and surrounding circumstances need an extensive understanding of it in a commercial way. An expert professionalist, if he has the inclination capacity and zeal to expand his activities may do so. As a result thereof he might enter into the arena of business activity. Such a composite activity is conceivable and indeed is plausible in modern days. If, for instance, an expert'equips himself, with plant and machinery with which he, with the aid of his professional skill and in collaboration with qualified assistants is able to turn out an activity which is not strictly a professional activity but savours of a commercial activity as well, it is a case of commercial activity telescoped to professional activity and amounts to business. This view was taken in the case of Dr. P. Vadamalayan v. CIT (1969) 74 ITR 94 (Mad). Similar view was taken in the case of CIT v.Dr. V.K. Ramachandran (1981) 128 ITR 727 (Mad) and S. Mohan Lal v. R.Kondiah AIR 55. Merely because a person happens to be professionally qualified, it cannot be said that such person's activity cannot be treated as an activity of carrying on business, The professional activity can also be characterized as an activity of carrying on business if it is carried on like a commercial activity. Therefore, it is important to see that how the activity is carried on, In the case of CIT v. Upasana Hospital (1997) 225 ITR 848 (Ker). Hon'ble High Court has held--"Thus it can safely be said that when a medical practitioner, without confining himself to his conventional function of examining patients and prescribing medicines, establishes a x-ray plant and machinery for augmenting his professional work, it cannot be said that he has no profit motive in such adventure. That means he is carrying on a business activity", 56. In the context of Rent Control Legislation, the profession carried on by an advocate was held to be a business by the apex Court in the case of Dr. J.S.Raphel v. Mrs. K.L. Regina Joseph (1995) Suppl (3) SCO 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 proceed against the assessee under Article 7. But it must be remembered that several heads of income mentioned in the Act are mutually exclusive. A particular income can come only under one of them. We have already decided that the income of the assessee is exigible to tax under Article 15. As such, it is not necessary to decide this issue.
59. We now focus our attention on the next issue that whether tax can be charged on the entire earning relatable to the projects listed in para 1 or it can be charged on that quantum, which according to assessee, is attributable to services rendered by it in India. The services of the assessee were rendered in relation to the three infrastructure projects in India, This is an admitted fact, Details in regard to the work done were not provided. There is absolutely nothing on record to indicate that what work assessee did in India and what work was done outside India. The attendant circumstances may lead to certain presumptions, which may serve as aids in the determination of the question whether services were rendered in India or outside India when the projects in relation to which assessee was appointed were located in India, From the letter dt. 30th May, 1995, which was given in respect of services to Bhadravati Power Station Project, it appears that assessee was required to review all applicable Indian law and any existing documentation, carrying of legal advice given to the investor group in connection with the project, in conjunction with the Indian lawyers, identifying any license and consents including assistance in granting thereof etc, It was also required to negotiate all loan and security documentation and reviewing and advising information and other incidental work. From the nature of duties it appears that the fees charged by the assessee was attributable to the work done in India.
60. If the services were rendered outside India, it was incumbent on the part of the assessee to establish beyond the shadow of doubt that how and where such services were rendered. It is true that parties to contracts are to be allowed to regulate their rights and liabilities themselves and the Court only gives effect to the intention of the parties as it is expressed by them in the contract. In the present case, there is absolutely no indication in the agreement that work assigned to the assessee will be executed outside India.
61. 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 Kong.
The question whether the gross profits resulting from a particular transaction arose in or derived from one place or another was always in the last analysis a question of fact depending on the nature of the transaction. It was impossible to lay down precise rules of law by which the answer to that question was to be determined. The broad guiding principle, attested by many authorities, was that one looked to see what the taxpayer had done to earn the profits in question. If he had rendered a service or engaged in an activity such as the manufacture of goods, the profits would have arisen or derived from the place where the service had been rendered or the profit-making activity had been carried on. But if the profits had been earned by the exploitation of property assets as by letting property, lending money or dealing in commodities or securities, the profits would have arisen in or derived from the place where the property had been let, the money had been lent or the contracts of purchase and sale had been effected.
62. The facts of the present case are different. In this case the assessee rendered services in connection with the projects located in India. In the case of Hang Seng Bank Ltd. (supra) it was established that at the relevant time there was no market for certificates of deposit in Hong Kong. As such, it was concluded that assessee was not in a position to carry the business activity in Hong Kong. But in the present case assessee rendered professional services in India. It was in relation to the work, which had its origin in India. No evidence was adduced by the assessee to demonstrate that it rendered services outside India also in connection with the project for which it was appointed. As such, the ratio laid down in the Hang Seng Bank Ltd. cannot be applied in the facts of the present case because we find that the facts of the present case are different from the facts of the case of Hang Seng Bank Ltd. Similarly in the case of Toshoku Ltd. (supra) the apex Court found that assessee did not carry on any business operation in the taxable territory. In the present case it is not found that assessee did not carry profession in the taxable territory. As such, the ratio of this decision also cannot be applied.
63. In the case of Steffen, Robertson & Kirsten Consulting Engineers & Scientists (supra) amount was paid for preparatory studies 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 per cent 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 trademark. It was agreed that trademark users to continue for a phase out period of 24 months. Royalty for right to use trademark 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 IT 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 is reported in (1999) 238 ITR 99 (AAR) (supra).
64. The question in the present case is very simple. If assessee proves that it rendered services outside India, its income to that extent can be excluded while computing its total income for determining tax payable in India. But this was not done. In the absence of any document and proof issue cannot be decided in favour of the assessee. Taking into consideration the entire conspectus of the facts we find that the assessee received consideration in respect of legal advice and services rendered for all the three projects in India. Agreements in relation to Vizag Power Project and Rawa Oil and Gas Fields Project were not filed by the assessee. We also find that every thing was structured in India.
Therefore, it can very well be presumed that the main services were rendered in India only. If some minor work was done outside India, it was only of allied and incidental nature. Assessee charged the fee for a composite activity. As such, it can be said that the amount received by the assessee in respect of the services rendered in relation to three infrastructure projects in India is exigible to tax in India.
65. Next it was argued that even if the income of assessee was subject to tax, the CIT(A) ought, in any event, to have given a specific direction to the AO to exclude UK 1,48,089.08 being the reimbursement received by the assessee from its clients, of expenses incurred by it on their behalf.
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 AO did not make any disallowance on this count. CIT(A) noted that this issue escaped the notice of the AO. As such, he directed the AO to consider the claim on merits and allow the same after verification. We agree to the extent that before making the allowance in regard to this claim, AO 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.
67. Next it was argued that the CIT(A) ought, in any event, to have given a specific direction to the AO to grant the assessee a deduction of UK 1,86,927.77 being the salary expenses incurred by the assessee outside India in relation to the professional services rendered by it to the parties engaged in executing the Bhadravati, Ravva and Vizag Projects.
68. The total salary claimed by assessee was UK 1,86,927,77 equivalent to Rs, 97,20,244. CIT(A) noted that this escaped the notice of the AO. As such, he directed the AO to make proper verification. We agree with the view that the expenses on salary to the staff members can be allowed, We direct the AO to allow the same after necessary verification.