Treaty treatment of foreign legal fees prevails where no fixed base exists in India, defeating tax deduction and disallowance.

Fees paid to a Moroccan law firm for anti-counterfeiting litigation services were treated as professional legal services under Article 14 of the India-Morocco DTAA, not fees for technical services. Because the firm had no fixed base or permanent establishment in India, the income was taxable only in Morocco as the State of residence. The treaty position prevailed over the domestic charging provisions, so no obligation to deduct tax at source arose and disallowance under section 40(a)(i) was not sustainable.

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Issues: Whether fees paid to a Moroccan law firm for initiating and prosecuting anti-counterfeiting proceedings were taxable in India as fees for technical services under the India-Morocco DTAA, so as to attract deduction of tax at source and disallowance under section 40(a)(i).

Analysis: The services rendered were found, on the correspondence and invoices, to be legal services connected with litigation before the Tribunal of Commerce in Morocco. Article 14 of the DTAA specifically includes lawyers within professional services and taxes such income only in the State of residence unless the recipient has a fixed base or relevant presence in the other Contracting State. The Moroccan firm had no permanent establishment or fixed base in India. As the payment was covered by Article 14 and was not chargeable to tax in India, the obligation to deduct tax at source did not arise, and the treaty position prevailed over the domestic charging provisions.

Conclusion: The issue was decided in favour of the assessee. The disallowance of the payment under section 40(a)(i) was not sustainable.

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