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| DATE: | May 14, 2013 (Date of publication) |
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| Click here to download the judgement (clifford_chance_linklaters_force_of_attraction.pdf) |
Taxation of foreign professional firms & concept of “force of attraction” under India-UK DTAA explained. Linklaters LLP 40 SOT 51 (Mum) held to be not good law
The assessee, a U.K. partnership firm of Solicitors, provided legal consultancy services in connection with different projects in India and claimed that the taxability of the income arising there from had to be processed under Article 15 (“independent professional services“) of the India-UK DTAA. The AO rejected the claim regarding applicability of Article 15 and held that as the assessee had a PE in India as per Article 5 and as the services had been rendered in India, the entire income was chargeable to tax in India under Article 7. In AY 1996-97, the Tribunal (82 ITD 106 (Mum)) accepted the claim of the assessee that if the aggregate period of stay of the employees/ partners did not exceed 90 days, the income was not taxable under Article 15 of the DTAA and if it exceeded that period, only the Indian activity was taxable u/s 9(i). The said verdict was affirmed by the Bombay High Court in 176 Taxman 485. Later, another Bench in Linklaters LLP vs. ITO 40 SOT 51 (Mum) held that as the aforesaid verdicts of the Tribunal & High Court in Clifford Chance turned on the basis that fees for technical services rendered outside India were not chargeable to tax u/s 9(1)(vii) and that they were not good law in view of the retrospective amendment to s. 9(1) by the Finance Act, 2010 w.e.f. 1.6.1976 which provided that “fees for technical services” would be taxable in India even if they were rendered outside India. In Linklaters LLP it was also held that the expression “directly or indirectly attributable” in Article 7(1) triggered the “force of attraction” rule and that the entire earnings relatable to the projects in India would be chargeable to tax in India. As there was doubt as to the correctness of the view in Linklaters, the Special Bench was constituted to consider two issues (i) whether the verdict of the High Court in Clifford Chance was good law after the retrospective amendment to s. 9 & (ii) whether the expression “directly or indirectly attributable to the PE” in Article 7(1) meant that the consideration attributable to the services rendered in the State of residence is taxable in the source State. HELD by the Special Bench:
(i) 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;
(ii) 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.
right view by sensible interpretation. Tax laws are made more and more complicated by every finance minister in his finance Acts every year with really appreciating effects on Assessees. Besides AOs are not qualified in interpretation of sectios of laws or rules of very income tax revenue laws. You make AO as a super legal tax expert that creates more and more problems to Assessees, when you do not give them really expert -well experiences tax lawyers who are not available to AOs as their fees are astronomical. Besides all CAs also are not good lawyers except a very few. Indeed finance ministers whenever making finance Acts need to repeal previous finance Acts sections that cannot be possible as no retrospective amends are acceptable. so finance ministers need to work on prospective amends only that will make Revenue and Assesses as made for each other that is indeed Natural justice. There is no point allowing AOs to revisit old assessments after more than 12 months maximum that way unnecessary litigation will just come down. Litigation unnecessarily cost tax payer assessee as also tax payers moneys already with govt. so when you run a govt revenue it need to understand that the govt is of people for people and to people so no arbitrary action is permissible. so indeed such irrational AO actions are just arbitrary and need to be declared ultra vires constitution that way finance ministers can be made to understand their limitation of their power in making rules under finance acts that way revenue officials need not be too much pushed too much to do some illegal acts. any way my kudos to Members of tribunal for their research to help them pass sensible orders on examining all facts of the case concerned. tks n regards.
Reaction (for sharing own thoughts):
On the first blush, one would urge that, in none’s (legal pundits being no exception) considered opinion, the view taken by the ITAT, could conceivably be rightly assailed or logically faulted to be without substance or merits in law. For, it is seen to be prima facie strictly within the four corners / parameters of the applicable rules of jurisprudence; especially, having been based upon the commonly acceptable /accepted understanding of the concept of “extra-territorial jurisdiction “, within the meaning of its origin being the “common law”.
The fact that the Revenue /tax authorities, or any other governmental authority, in any other country, in the course of administration of any of its fiscal or other laws are increasingly accustomed to taking a different view ought not to, in one’s longstanding conviction, be taken for guidance or relied on as a justification; or be a influencing factor for questioning the right direction the ITAT has chosen to take and follow.
In short, what ought not to be forgotten or sidetracked is, – the fundamental principle that any domestic enactment (a man-made law), in order to be successfully enforceable / properly enforced, more so in a global environment, must stand the ultimate wholesome tests namely, :
whether or not any such highly disputable (ted) provision, in order to stand the tests of incisive judicial scritiny, has sound reasons to support, based on ‘common sense’, being the touch stone of ‘logic’; and
has ‘logic’ for its corner stone.
(Left unedited; for experts on international taxation to pitch (chip!) and putt >>>>)
i mean finance ministers not properly appreciating revenue laws properly and thus you read my above comment. No finance minister is an ocean of tax laws knowledge as every revenue dispensation is to be tested on anvils of constitutional law on constitution of india.Even constituent functions under Part IV of constitution is not a free ride for any government but amenable to courts superintendence that way Art 12 institutions were and are born. Every Art 12 institution has appointed functions but subject to control of constitution, so Art 12 institutionS C is given functional right to supervise all other Art 12 institutions functions whether these other Art 12 institutions function with in limits their functions as ordained by constitution, that way Art 226 application by High courts are much more empowered be sufficient expansion of their powers subject however if matters from different states emanate under Art 226 r/w 227 gets into conflicts then Apex SC consolidates all such cases and makes a uniform judicial dispensation which may be ratio decidenti; and obiter dicta observations of Apex court is to be followed if similar kinds of cases emerge. tks n regards
“and thus you read my above comment”.
Don’t quite get it; any way, just to clarify, my comment was posted with no reference to the learned dr. g.b.’s. In fact, his comment was not to be seen, when i posted mine.
Albeit, that should make no difference whatsoever; as, after all, his comment is, in effect, on the self-same lines.
tq swamiji
Administrative law is that it is the law relating to the control of government in power. At any rate this is the heart of the subject per many lawyers. Governmental power in question is not that of parliament(to be noted carefully).Parliament as a legislature is sovereign in British circumstances as there is no written constitution as such.In India we have cear cut written constitution well drafted by constituent Assembly so that is the sovereign Rule of Law and any statutes or rules made perforce need to conform to that constitution’s yard stick only, even constitutional amendments under Article 368 is not gospel as these amendments may be attacked any time by erudite judges of Apex courts as every one knows the fate of schedule IX in january 2007 when then CJI Y K Sabarwal in I E COELHO V ST TN duly struck it dwn in such a way as in Tanlore temple the shiva’s growing bull statute was duly nailed not to grow further for that growth may affect the very temple as it is, so here the temple of constitution of india by allowing first abot 13 statutes out of 239 or so statutes brought by parliament were permitted to be outside purview of courts. so first constitutional amendment got the blow that is in every body’s knowledge i suppose.
so constitutional amendments may any time face problems, no one knows when.
therefore government executive actions in the name of rules may be facing anytime court action of rectification or setting aside situations as ‘ultra vires’ doctrine due to any kind of arbitrariness when identified by tribunals or constitutional courts.
Indian parliament is sovereign as long as constitution of india tolerates, as the real power lies with citizens but they are also subjects of the constitution so they too cannot cross that Lakshmana Rekha.
It is futile to excessively expand sovereignty of parliament of india, more so the governments under it control that means even state legislatures. so excessive public policy extrapolation will not work for ever as ever legal eagle eye of constitutional courts are always fanning over such improprieties.
parliament is still subject to one exception is ‘beyond legal control’ ( European community law) – Supremacy of EU Law so too is Indian constitution is to be noted.
Principle is laid down by court in two celebrated cases. In Costa v ENEL, 6/64(1964), IT SAID; ‘In contrast with ordinary international treaties, the Treaty has created (Here constituent Assembly draft of constitution), has created its own legal system which, on entry into force of the treaty, become an integral part of the legal system of the member states (indian states after 1956 reorganisation of states) and which their courts are bound to apply.
In ‘Simmenthal’, the court held (Amministrazione della Finanze dello Stato v Simmenthal Spa (No.2), 106/77(1978) 3 CMLR …
‘Every national court must, in a case within its jurisdiction, apply….to be continued..
…jurisdiction apply Community Law (European Community Law) in its entirety and protect rights which the latter confers on individuals, and must accordingly set aside ANY PROVISIONS of National Law which may conflict with it, whether prior or subsequent to the Community Rule’.
The powers of all other public authorities are subordinated to the law, just as much in the the case of the Crown and ministers as in the case of local authorities or other public bodies.
All such subordinate powers have two inherent characteristics.
First, they are all subject to legal limitations; there is no such thing as ‘absolute’ or ‘unfettered administrative power’;
Secondly, and consequently, it is always, it is always possible for any power to be abused.
that way the revenue has done in the matter under consideration, after all treaty is a vital document of unassailable contract is to be understood under any rule of law! is my perception. if any finds my view is wrong may please counter by their post here in this website!
So, i opine tribunal did extensive research if not duly followed constitutional court decisions. anyway decision of tribunal is good and right.
To digress:
Going by by very limited know of such matters, believe the “European Community” made a mention of in the penultimate post has reference to “European Union” (EU) / “European Commission” (EC) having its own set of governing laws, treaties and regulations. If so, attention may be drawn to a discussion elsewhere, though not on a directly related topic, but very much related to the same governing body – EU ( Ref. ICLBlog @ Competition Law Risks: Non-Compete Clauses in M&A Transactions – Part 1 (also Part 2)- (hyperlinks). The subject has been covered also in the personal blog (swamilook).
It may be of relevance to note that, lately some of the decisions of the EU have come to be challenged by its own constituents ; for instance, against the imposition by the EU, of what is known as Tobin Tax; that too on the ground of concern aginst, -‘Extra-territorial aspects” – same as herein.
May view the referred personal blog @
http://vswaminathan-swamilook.blogspot.in/2013/05/icl-ec-or-cci-powers-to-investigate-wrt.html
NO WHERE ANY TWO INTELLIGENT AGREE SO ARGUMENTS BUILD LIKE ARGUMENTATIVE INDIAN!
Sorry; have been late in catching up.
tq balakrishnanji !
May revert, if so wish and mind to do, with a fitting reply!
tks n regards
i like to hear from you swamiji after all discussions only improve application of minds that way world of society is built up after all developmental laws is indeed evolutionary!
i really do not know as much as you know. like to get educated. tq
i like to hear from you swamiji after all discussions only improve application of minds that way world of society is built up after all developmental laws is indeed evolutionary!
On one of the ingeneous RULE – IN INDIVIDUAL’S OWN OPINION, that offends the nature-given human faculty OF SOUND REASONING AND LOGICAL THINKING- given BY HUMAN unto himself – the Rule of Force of Attraction:
A feedback (wholly and exclsively well-intended one; sole objective is to share the info. as it appeared, certainly not to ‘educate’)
@Taxmann Daily>
Rule of ‘force of attraction’ given in Article 7 of UN Model treaty can’t be imported into Article 7 of India-UK DTAA
(hyperlink)
Rider>
Further, may be worthwhile to read another itat case (notably, argued by SED)
Linklaters & Paines Versus Income-tax Officer, (International Taxation)
onlineshoppingmart.co.in/…/1885-linklaters-a-paines-versus-income-tax-…
Feb 21, 2013