2001 (9) TMI 1141 - AT - Income Tax

Foreign partnership's legal service fees earned in India under India-UK DTAA: taxable if lawyers' India stay exceeds 90 days

The dominant issue was whether professional fees earned by a foreign partnership from legal services rendered in India were taxable in India under s.90 ... Taxability of income to tax in terms of the provision of section 90 of the Act read with Article 15 of the Indo-UK Tax Treaty - Notice issued u/s 148 - compliance to the said notice assessee filed return declaring therein Nil income - claimed refund being the amount of tax deducted at source - permanent establishment in Article 5 of the DTA - statement of income attributable to its Indian operation and computation of income - reimbursement of expenses - fees attributable to services rendered in India - HELD THAT:- 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 Article 13(5)(e) of the DTA. It is nobody’s case that the assessee’s fees constitute royalty income. 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. [1992 (7) TMI 38 - DELHI HIGH COURT], 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. 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. 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 Article 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 comes within the ambit of the term ‘member’. Thus, 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. 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. 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 'lay men'. The reasoning that the association of non-qualified persons for the establishment of a firm to run a private hospital would only be a 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. The total salary claimed by assessee was UK Pounds 1,86,927.77 equivalent to ₹ 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. In the result, appeal of the assessee stands partly allowed. Issues Involved:1. Taxability under Article 15 of the Indo-UK Tax Treaty.2. Period of presence in India for tax purposes.3. Inclusion of employees' presence in the computation of days.4. Attribution of income to services rendered in India.5. Reimbursement of expenses.6. Allowability of salary expenses.Summary:1. Taxability under Article 15 of the Indo-UK Tax Treaty:The assessee, a UK-based partnership firm, claimed that its income was not exigible to tax in India as per Article 15 of the Double Taxation Avoidance Agreement (DTA) between India and the UK. The firm argued that it did not have a 'fixed base' in India and the partners' presence was less than 90 days in the relevant fiscal year. The Tribunal held that the term 'member' in Article 15 includes both partners and employees. Thus, the presence of the firm's employees in India should be considered, making the firm's income taxable in India.2. Period of presence in India for tax purposes:The Tribunal agreed that multiple counting of common days should be avoided to prevent absurd results. However, the assessee failed to prove that certain visits were for non-professional purposes. Consequently, all days of presence were considered for tax purposes.3. Inclusion of employees' presence in the computation of days:The Tribunal held that the term 'member' in Article 15 includes employees. Therefore, the presence of the firm's employees in India should be counted, leading to the conclusion that the firm was present in India for more than 90 days, making its income taxable.4. Attribution of income to services rendered in India:The Tribunal found that the assessee did not provide sufficient evidence to show that services were rendered outside India. The services were related to projects located in India, and the income was deemed attributable to services performed in India. Thus, the entire income from the projects was taxable in India.5. Reimbursement of expenses:The Tribunal agreed that reimbursement of expenses should not be treated as income. The Assessing Officer was directed to verify and allow the reimbursement claims if they were purely of the character of reimbursement.6. Allowability of salary expenses:The Tribunal directed the Assessing Officer to verify and allow the salary expenses incurred by the assessee outside India, related to the professional services rendered for the projects in India.Conclusion:The appeal of the assessee was partly allowed, with specific directions for verification and allowance of reimbursement and salary expenses.