2020 (11) TMI 520 - AT - Income Tax

Tribunal upholds disallowance under Section 40(a)(i) but deletes remaining disallowance; directs AO to verify recipients' tax liability.

The Tribunal upheld the disallowance under Section 40(a)(i) for payments not qualifying under 'independent personal services' articles, amounting to Rs. ... TDS u/s 195 - professional charges to counsel/ lawyers outside India - fees for professional services rendered by foreign practitioners on which no tax is deducted by the assessee - assessee is a lawyer by profession and derived income from business or profession and income from other sources - HELD THAT:- The services are definitely qualifying as “independent Personal services”. Therefore wherever in DTAA there is clause of Independent personal services and, if the recipient qualifies i.e. he does not have fixed base regularly available to him in source country and he does not reside for N number of days in source country, for benefit of that particular clause of DTAA, then, such income shall be taxed in the country of residence of the provider of the services and same shall not be chargeable to tax in India. Then on such payments there is no requirement of withholding tax u/s 195 of the act. Assessee has made payment to the recipient of fees in Brazil, China, Chez Republic, Japan, Philippines, Thailand (article 14 of Double Taxation Avoidance Agreement of India with those countries) and Vietnam (article 15 of Double Taxation Avoidance Agreement). According to the Double Taxation Avoidance Agreement of India with these countries Independent Personal Services, if paid to resident of those countries, shall be taxable in those countries subject to certain exceptions. Who are resident of those countries are already specified as per article 4 of those agreements. He shall be “liable to be taxed” in those country of residence. Therefore, assessee is directed to produce necessary evidences before the learned assessing officer that those residents are ‘liable to tax’ in those respective countries of the residence. Therefore, the learned assessing officer is directed to examine the evidence produced by the assessee that recipient of the above payment are ‘resident’ of those countries and ‘liable to be taxed’ in those countries. Payment made to partnership firm of resident of Australia where independent personal services according to article 14 of the Double Taxation Avoidance Agreement, an individual or a firm of individuals (other than a company) who is a resident of Australia subject to certain exceptions covered therein shall be taxable only in Australia. The only condition is to be seen that according to article 4 (1) such individuals or form of individuals are resident of that country, liable to tax therein. The assessee is directed to produce before the assessing officer necessary details with respect to their residential status. If same is found that those parties are resident of Australia according to article 4 (1) of the Double Taxation Avoidance Agreement and the necessary conditions of article 14 are satisfied, then assessee is not required to deduct tax at source on such payment. Accordingly, after examination, the learned assessing officer may delete the disallowance, if found in accordance with the law in terms of the agreement. Payment to an individual of Republic of Korea - According to article 14 of The Double Taxation Avoidance Agreement if the payment is made to an individual who is a resident of Korea and does not have a fixed base available to him regularly or number of days stayed in India is less than specified, then same shall be taxable only in Republic of Korea. The assessee is directed to produce evidence that the recipient of the income is an individual and also resident according to article 4 (1) of the act and does not satisfy the necessary conditions of availability of regular fixed base as well as stay of number of days, the learned assessing officer may verify the same and if found correct then assessee is not required to deduct any tax at source u/s 195 of the income tax act. Payment to the various parties of Norway, Denmark, Sri Lanka, Malaysia, Russia, Luxembourg, Australia, Republic of Korea, South Africa, New Zealand, Mexico, Indonesia, Colombia and Serbia - Two different articles negotiated between the countries for taxability of two different types of business activities. Therefore there is a strict compartment between the incomes received by the recipient residents of those countries in these two different articles. It cannot be said that if an assessee fails to claim non taxability in the source country as per article 14 or 15 of the Double Taxation Avoidance Agreement automatically he can claim the benefit under article 7 of the Double Taxation Avoidance Agreement. Income of the assessee is correctly characterised as professional services under article of Independent personal services under DTAA. But because of some reason it fails to qualify for exemption from taxation in source country. Therefore same becomes income taxable in the sources country, Source country gets right to tax such income of non residents. We hold that assessee should have deducted tax at source on the above payment u/s 195 as the recipient of the income are not entitled to avail benefit of article 14 or article 15 of the respective Double Taxation Avoidance Agreements. The disallowance made by the learned assessing officer cannot be found fault with. Accordingly disallowance u/s 40(a) (i) of the act to that extent of ₹ 2,26,94,888/- is upheld for non-deduction of tax at source u/s 195 of the act. Disallowance of travelling expenditure - HELD THAT:- In the present case undoubtedly the assessee has incurred foreign travel expenditure and the learned assessing officer has disallowed an ad hoc amount applying the ratio of 10% to prevent any leakage as assessee could not produce the relevant evidences holding that those expenditures have not been incurred for the purposes of the business. We do not subscribe to the view of the learned lower authorities. AO should have disallowed only the sum for which no evidences have been produced by the assessee. Applying an ad hoc percentage of 10% without any finding about the amount of expenditure for which no evidences were furnished by the assessee is not in accordance with the law. Accordingly we direct the learned assessing officer to delete the above disallowance Issues Involved:1. Disallowance under Section 40(a)(i) for non-deduction of tax at source on payments made to foreign legal practitioners.2. Disallowance of foreign travel expenses.Issue-wise Detailed Analysis:1. Disallowance under Section 40(a)(i) for Non-Deduction of Tax at Source:Facts:The assessee, an advocate, made payments to foreign legal practitioners for professional services without deducting tax at source, leading to a disallowance of Rs. 3,70,95,299 under Section 40(a)(i) of the Income Tax Act. The Assessing Officer (AO) treated these payments as Fees for Technical Services (FTS) under Section 9(1)(vii) of the Act, which are chargeable to tax in India.Arguments by Assessee:- The services rendered by foreign legal practitioners are purely professional and do not qualify as managerial, technical, or consultancy services.- Payments made for professional services are not chargeable to tax in India under Section 4 read with Sections 5 and 9 of the Act.- Double Taxation Avoidance Agreements (DTAAs) classify these payments as professional services, not FTS.- Payments fall under 'independent personal services' and are not taxable in India if the recipient does not have a fixed base in India.Arguments by Revenue:- The AO and CIT(A) classified the payments as FTS, requiring tax deduction under Section 195 of the Act.- The services provided by foreign firms involve consultancy and advisory, thus falling under FTS.Tribunal's Analysis:- The Tribunal examined the nature of services rendered, which included filing applications, reporting examination reports, and maintaining records, among others.- It referred to the definition of consultancy services, which includes advisory services requiring specialized knowledge.- The Tribunal relied on the decision in ACIT v. Subhatosh Majumdar, where similar payments were classified as consultancy services under FTS.- The Tribunal rejected the distinction between professional and technical services under Section 194J, emphasizing that Section 9(1)(vii) does not differentiate between them for non-residents.- Payments to countries with DTAAs having 'independent personal services' articles were examined. If the recipient qualifies as a resident and does not have a fixed base in India, the payments are taxable only in the recipient's country.Conclusion:- The Tribunal directed the AO to verify the residential status of recipients and their tax liability in their respective countries.- Disallowance of Rs. 2,26,94,888 was upheld for payments not qualifying under 'independent personal services' articles.- The remaining disallowance was deleted upon verification.2. Disallowance of Foreign Travel Expenses:Facts:The AO disallowed 10% of the total foreign travel expenses amounting to Rs. 11,23,312 due to the assessee's failure to produce complete supporting documents.Arguments by Assessee:- The expenses were incurred for business purposes.- Complete details of expenses were provided.Arguments by Revenue:- The AO and CIT(A) justified the disallowance due to the lack of supporting documents.Tribunal's Analysis:- The Tribunal found the ad hoc disallowance of 10% without specific findings to be unjustified.- The AO should disallow only the amount for which no evidence was furnished.Conclusion:- The Tribunal directed the AO to delete the disallowance, allowing the assessee's appeal on this ground.Final Order:- The appeal was partly allowed. The Tribunal upheld the disallowance under Section 40(a)(i) for Rs. 2,26,94,888 and deleted the disallowance of foreign travel expenses.