Treaty protection for legal consultancy fees: special professional services article prevails, so no withholding tax arose.

Legal consultancy fees paid to a UK firm were treated as professional services under the India-UK DTAA. The special treaty provision for professional services prevailed over the more general article covering managerial, technical or consultancy services, and its wording was not limited to individuals but extended to a resident of a contracting state. On the facts, the conditions for taxing the payment in India under that treaty article were not satisfied, so the payment was not chargeable to tax in India. As no income was chargeable under the treaty, no obligation to deduct tax at source arose under section 195, and grossing up under section 195A was also unwarranted.

---

---

Issues: Whether the assessee was liable to deduct tax at source from payments made to a UK firm of solicitors for legal advisory services, and whether such payments were taxable in India under the applicable India-UK tax treaty.

Analysis: The services rendered were legal consultancy services requiring specialised intellectual skill and were held to be professional services. Article 15 of the applicable India-UK DTAA applied specifically to income from professional services and was not confined to individuals; its language extended to a resident of a contracting state and did not justify reading in a restriction excluding firms or other entities. Article 13, dealing generally with managerial, technical or consultancy services, could not displace the more specific treaty provision governing professional services. Since the treaty provisions governing Article 15 were not satisfied on the facts, the payment was not exigible to tax in India. Where no income is chargeable in India under the treaty, the obligation to deduct tax under section 195 does not arise, and grossing up under section 195A was also not warranted.

Conclusion: The assessee was not liable to deduct tax at source on the impugned legal consultancy payments, and the demand based on Article 13 and grossing up was unsustainable.

Ratio Decidendi: Where a treaty specifically governs professional services, that special provision prevails over a more general fees-for-technical-services article, and no tax is deductible under section 195 when the payment is not chargeable to tax in India under the applicable treaty.

---