Asst DIT v M/s Clifford Chance (ITA Nos. 5034/Mum/2004, 5035/Mum/2004, 7095/Mum/2004, 3021/Mum/2005 AND 2060-61/Mum/2008) (Mumbai Special Bench)
The assessee is a U.K. partnership firm of Solicitors. It is engaged in providing international legal services. During the years under consideration, it rendered legal consultancy services in connection with different projects in India. Although it did not have an office in India, some part of the work relating to the projects in India was performed in India by its partners and employees during their visits to India. For assessment years 1999-2000, 2000-01, 2001-2002 and 2003-04, the returns of income were filed by the assessee declaring NIL income on the ground that the aggregate period or periods of stay of its partners and employees during the said years did not exceed 90 days and its income therefore was not taxable in India in these years.
On perusal of the Article 15 of India-UK Treaty, the A.O., was of the opinion that the same is not applicable in the case of the assessee since it does not cover partnership firms within its ambit.
Reference was also made by the A.O. to the latest OECD Model for DTAA which has done away with the concept of Independent Personal Services as contained in Article 15 of the India-UK Treaty and has merged the same with the concept of business profits as defined in Article 7 of the Tax Treaty.
In any case, the aggregate stay of its partners and employees having exceeded 90 days at least in A.Y.1998-99 and 1999-2000, the entire income of the assessee derived from services rendered in connection with the projects in India was taxable in India for the said years as per Article 15.
The case of the assessee even otherwise was covered by Article 7 of the India-UK DTAA read with Article 5 thereof. The AO held that the assessee had a PE in India in terms of the “duration of stay” test provided in the treaty. He held that the assessee also was having fixed place PE in India in the years under consideration through which services were rendered by its partners and employees during their stay in India.
Having held that the assessee had a PE in India during the years under consideration and it was carrying on business in India through the said PE, the A.O. held that the profits of the assessee to the extent they are directly or indirectly attributable to PE in India are taxable in India as per Article 7 of the India-UK DTAA.
He then proceeded to determine such profit which should be brought to tax in India. The A.O. held that the amount received by the assessee from its clients for the services utilised in relation to the project in India was taxable in India even though such services were rendered outside India. Accordingly, the entire fees received by the assessee from its clients for the services utilised in relation to the projects in India was brought to tax by the A.O. in India in the hands of the assessee after allowing deduction u/s 44C of the Act.
The CIT(A) found that most of the issues raised by the assessee were squarely covered by the order of the Tribunal passed in assessee’s own case for A.Y. 1996-97 dtd 27th September, 2001 in ITA No. 1327 (Mum) of 2001. The CIT(A) agreed with the stand taken by the assessee and directed the AO to delete the disallowance.
Mumbai ITAT’s ruling
Tribunal took note of the fact that the decision of the Tribunal in assessee’s own case for A.Y. 1996-97 82 ITD 106 (Mum.) has already been affirmed by the Hon’ble Bombay High Court by the judgment (2009) 176 Taxman 485. The Tribunal however found that the said decision of the Hon’ble jurisdictional High Court was held to be no more a good law by a co-ordinate Bench in the case of Linklaters LLP vs. ITO (International Taxation) 40 SOT 51 (Mum) in view of the amendment brought by Finance Act, 2010 by substituting an Explanation to section 9(1) retrospectively w.e.f. 01-06-1976. It was held by the Division Bench of this Tribunal in the case of Linklaters LLP that the said amendment in the statute has virtually negated the judicial precedents supporting the proposition that rendition of services in India is a sine qua non for its taxability in India. The submission made on behalf of the assessee on this aspect before the Division Bench in the case of the present assessee was that the amendment made by the Finance Act, 2010 was applicable to clause (v) or (vi) or clause (vii) of section 9(1) whereas the income of the assessee was covered by clause (i) of section 9(1). This submission made on behalf of the assessee was apparently found acceptable by the Division Bench of this Tribunal keeping in view that the amendment made by the Finance Act, 2010 w.e.f. Ist June, 1976 was not applicable in the case of the assessee as its income was chargeable in India u/s 9(1)(i).
As held by the Tribunal in the case of Linklaters LLP (supra), the use of the said expression would mean that the “force of attraction” rule is applicable and the entire earnings relatable to the projects in India would be chargeable to tax in India. It was held that the extension of taxability of profits of PE by including profits directly or indirectly attributable as per the provisions of Article 7(1) of the India-UK DTAA was akin to Article 7(1)(b) and 7(1)(c) of the UN Model Convention which provided that in addition to the profit attributable to the PE, the taxability of PE profits will also extend to other business activities carried in that other State of goods or merchandise of the same or similar kind as those sold through that PE. It was held by the Tribunal in the case of Linklaters LLP (supra) that the basic philosophy underlying a force of attraction rule is that when an enterprise sets up a PE in another country, it brings itself within the fiscal jurisdiction of that country to such a degree that such another country can properly tax all profits that the enterprise derives from that country, whether the transactions are routed and performed through the PE or not.
Keeping in view the divergent views expressed by the co-ordinate Benches in the case of Set Satellite (Pte) Ltd. (supra) and Airline Rotables Ltd. (supra) on the one hand and Linklaters LLP (supra) on the other hand and having noticed prima facie merit in the contention raised on behalf of the assessee that the income of the assessee being taxable u/s 9(1)(i) of the Act, the amendment made by Finance Act, 2010 by way of substitution of Explanation to section 9 w.r.e.f. 01/06/1976 is not applicable in the case of the assessee [the acceptance of which would
lead to taking a view which is contradicting the view taken by the coordinate Bench in the case of Linklaters LLP (supra)], the Division Bench of the Tribunal referred the case to the Hon’ble President for constituting a Special Bench. Accordingly this Special Bench has been constituted.
The view taken by the Tribunal and the High Court in Clifford Chance was that if Article 15 of the India-UK Treaty is not applicable because the stay of the partner exceeded 90 days, then the taxability of the income would be determined by s. 9(1)(i) of the Act. It was held that for determination of income u/s 9(1)(i), the territorial nexus doctrine plays an important part and if the income arises out of operations in more than one jurisdiction, it would not be correct to contend that the entire income accrues or arises in each of the jurisdictions. The High Court applied the law laid down by the Supreme Court in the context of s. 9(1)(i) that if all the operations are not carried out in the taxable territories, the profits and gains of business deemed to accrue in India through and from business connection in India shall be only such profits and gains as are reasonably attributable to the operations carried out in the taxable territories. Accordingly, the view expressed in Linklaters LLP that the judgment of the Bombay High Court is based on the premise of s. 9(1)(vii) and that the said premise no longer holds good in view of the retrospective amendment is not correct. The law laid down by the High Court continues to be good law;
As regards the rule of “force of attraction“, Article 7(1) provides that the profits of the UK enterprise “directly or indirectly attributable to the PE” may be assessed in India. The connotation of what is “directly attributable to the PE” is set out in Article 7(2) while the connotation of what is “indirectly attributable to the PE” is set out in Article 7(3). When the connotation of “profits indirectly attributable” to the PE is defined specifically in Article 7(3), one cannot refer to Article 7(1) of the UN Model Convention which is materially different from Article 7(1) & 7(3) of the India-UK DTAA. The reliance placed in Linklater on the UN Model Convention to come to the conclusion that the connotation of “profits indirectly attributable to PE” in Article 7(1) incorporates the “force of attraction” rule thereby bringing an enterprise having a PE in another country within the fiscal jurisdiction of that another country to such a degree that such another country can properly tax all profits that the enterprise derives from that country – whether the transactions are routed and performed through their PE or not – is clearly misplaced and not acceptable.