Territorial nexus for non-resident legal fees limits Indian taxation to services actually performed in India.

For a non-resident providing composite legal advisory services, only the portion of fees attributable to services actually performed in India was taxable under Article 15 of the DTAA read with sections 5 and 9 of the Income-tax Act, 1961. Services rendered outside India could not be taxed merely because the underlying project or client use was connected with India. The Court also accepted billing by hours and time sheets as a reliable method to allocate income between Indian and ? need English. Let's craft cleanly. The time-based computation could be used to identify the India-linked portion, and the Revenue could not treat the composite fee as an inseverable whole. Income assessable in India was therefore confined to the services performed within India.

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Issues: (i) Whether the assessee's income from composite legal advisory assignments in India had to be confined to the portion attributable to services rendered in India, excluding services rendered outside India. (ii) Whether the taxable income could be computed by reference to billed hours and the services performed in India.

Issue (i): Whether the assessee's income from composite legal advisory assignments in India had to be confined to the portion attributable to services rendered in India, excluding services rendered outside India.

Analysis: The applicable framework was Article 15 of the Double Taxation Avoidance Agreement and sections 5 and 9 of the Income-tax Act, 1961. The decision emphasised that, for a non-resident, taxability depends on territorial nexus and that income from professional services may be taxed in India only to the extent attributable to services performed in India. The Court accepted that services rendered outside India could not be brought to tax merely because the underlying projects were situated in India.

Conclusion: The exclusion of income attributable to services rendered outside India was upheld, in favour of the assessee.

Issue (ii): Whether the taxable income could be computed by reference to billed hours and the services performed in India.

Analysis: The Court held that the relevant inquiry was the place of performance of the services and not merely the place where the projects were utilised. On the facts, the billing method based on time sheets and hourly charges provided a reliable basis for identifying the portion of income attributable to services rendered in India. The Court rejected the Revenue's attempt to tax the entire composite fee as an inseverable whole.

Conclusion: The income was required to be limited to the portion referable to services performed in India, in favour of the assessee.

Final Conclusion: The appeals succeeded and the income assessable in India was confined to the part attributable to services performed within India.

Ratio Decidendi: For a non-resident rendering professional services, only that part of the composite fee which is attributable to services actually performed in India can be taxed in India; services rendered outside India are not chargeable merely because the underlying project or client use is in India.

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