Case Law Details
RELEVANT EXTRACTS:
34. For the purpose of taxation the authorities under the Act have proceeded on the basis that the fees received by the Appellant was for the entire Indian Project as such chargeable to tax.
35. Two basic questions which, thus, arise for our consideration are : (A) Whether fees charged for composite activity is chargeable to tax? and (B) Whether the income attributable to the services rendered by the Assessee/Appellant outside India required to be excluded while computing the tax in India?
36. The resolution of the above question would depend upon the interpretation of Clause 15 of DTA read with of Section 9 of the Income Tax Act which clearly lays down that income derived by an individual whether in his own capacity or as a member of partnership, who is resident of contracting State in respect of professional Services or independent activities of similar character may be taxed in that State. Such income may also be taxed in the other ContractingState, if such services are performed in that State, and if he is present in that State for a period aggregating to 90 days in the relevant fiscal year. Now, the question is how much income is taxable. The answer is : only so much of the income as is attributable to those services.
37. Article 15 provides for the residence rule in relation to taxation of income of an individual, including 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.
38. If the test of 90 days is satisfied, the effect is to virtuallly take the assessee out of the treaty, the taxability of the income being determined under section 9(1)(i) of the Act.
39. The interpretation of this section 9(1)(i), is no longer res-integra. It has been construed by the Hon’ble Supreme Court in the following three cases, viz :
(i) Carborandum and Co. v/s Commissioner of Income Tax, 108 ITR 335.
(ii) Commissioner of Income Tax v/s Toshuku Ltd, 125 ITR 525.
(iii) Ishikawajima- Harima Heavy Industries Ltd v/s Director of Income Tax, 288 ITR 408.
40. Section 9 raises a legal fiction, but having regard to the contextual interpretation and furthermore in view of the fact that we are dealing with a taxation statue the legal fiction must be construed having regard to the object it seeks to achieve. The legal fiction created under section 9 of the Act must also be read having regard to the other provisions thereof, as held by the Apex Court in the case of Maruti Udyog Ltd. Vs. Ram Lal [2005] 2 SCC 638.
41. The provisions of section 42 of the Indian Income-tax Act, 1922 provided that only such part of income as was attributable to the operations carried out in India would be taxable in India.
42. The territorial nexus doctrine, thus, plays an important part in 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. The question which falls for our consideration is : whether the income that arises out of the said transaction would be required to be apportioned to each of the territories or not.
43. Income arising out of operations in more than one jurisdiction would have territorial nexus with each of the jurisdictions on actual basis. If that be so, it may not be correct to contend that the entire income “accrues or arises” in each of the jurisdictions.
44. The Apex Court had occasioned to consider the above question in the case of Ishikawama Harima (cited supra), wherein while interpreting the provisions of Section 9(1)(vii)(c) of the Act, the Supreme Court held as under :
Section 9(1)(vii)(c) of the Act states that “a person who is a non-resident, where the fees are payable in respect of services utilized in a business or profession carried on by such person in India, or for the purposes of making or earning any income from any source of India.” Reading the provision in its plain sense, as per Apex Court it requires two conditions to be met – the services which are the source of the income that is sought to be taxed, has to be rendered in India, as well as utilized in India, to be taxable in India. Both the above conditions have to be satisfied simultaneously. Thus, 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.
45. In the above judgment, Apex Court observed that “Section 9(1)(vii) of the Act must be read with section 5 thereof, which takes within its purview the territorial nexus on the basis whereof tax is required to be levied, namely, (a) resident; and (b) receipt of accrual of income. According to the Apex Court, the global income of a resident although is subjected to tax, the global income of a non-resident may not be. The answer to the question would depend upon the nature of the contract and the provisions of the DTA. What is relevant is receipt or accrual of income, as would be evident from a plain reading of section 5(2) of the Act subject to the compliance of 90 days rule.
46. As per the above Judgment of the Apex Court the interpretation with reference to the nexus to tax territories also assumes significance. Territorial nexus for the purpose of determining the tax liability is an internationally accepted principle. An endeavor should, thus, be made to construe the tax-ability of a non-resident in respect of income derived by it. Having regard to the internationally accepted principle and DTA, no extended meaning can be given to the words “income deemed to accrue or arise in India” as expressed in section 9 of the Act. The Section 9 incorporates various heads of income on which tax is sought to be levied by the Republic of India. Whatever is payable by a resident to a on-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 any relief under the DTA. A distinction may also be made between rendition of services and utilization thereof.
Please also refer explanation added to section 9 by the Finance Act 2007