TaxTMI 
TaxTMI 
2015 (11) TMI 1544
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....ated 29.12.2008. 2. The only common issue in these three appeals of revenue is against the order of CIT(A) in deleting the disallowance made by AO in respect to expenses claimed by the assessee of fee for technical services for non-deduction of TDS u/s. 195 of the Act thereby invoking the provisions of section 40(a)(i) of the Act. For this, revenue has raised common grounds and the grounds as raised in AY 2006-07 read as under: "1. The ld. CIT(A) has erred in facts and circumstances of case, by considering that the amount Rs. 5,38,36,097/-paid by the assessee to the non-residents patent attorneys is not liable to tax deduction at source u/s 195. 2. The ld. CIT(A) has erred in facts and circumstances of case by disregarding the fact that the situs of payee i.e, assessee is in India and hence liable to deduct Tax at source u/s. 195. 3. The ld. CIT(A) has erred in facts and circumstances case by disregarding the fact that the foreign attorneys were hired by the assessee who is situated in India and payment was made by the assessee on the invoices raised by the foreign attorneys in the name of assessee in India. 4. The ld. CIT(A) has erred intact ....
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.... and communicates with the foreign lawyers and law firms chosen by its clients. Before us assessee explained the utilization of patent that patents granted in India can be utilized in India alone because patents granted by the Republic of India has effect only in India and in no other country. Likewise, patents granted in other countries can only be utilized in such countries. A patent granted in the US or any other country does not create any legal right in India to claim monopoly or to license or otherwise benefit from the patent in India. It was also explained before us that foreign national is not entitled to practice as a patent attorney in India and also a person cannot claim to be a patent attorney/agent in India unless such person qualifies the prescribed examination and is registered by the Government of India. Therefore, an inventor in India or his employer or assignees in India cannot engage a foreign attorney for the purpose of obtaining a patent in India. Likewise an Indian practitioner cannot practice in another country. In view of this process ld. Counsel explained the role of the assessee that where clients of assessee express interest in protecting their IPR in for....
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....re availed and utilized wholly in Singapore and not in India, The Indian agent does not avail of the services or utilize such services and mere act of facilitation cannot be said to utilization of services only because the local agent charges his service charges. In the same way assessee has not utilized the services at all and has only merely acted as a liaising entity for a small amount of fees compared to the fees charged by the foreign attorney. In the facts and circumstances of the nature of the involvement of assessee it may be noted that it is not the beneficiary of the services of the foreign attorneys and neither does it make any payment through its own funds but only the funds of the client. The assessee charges a service charge from time to time to communication and forwarding documents. 4. But the AO arrived at the finding that the assessee was deriving professional fee for rendering services in India to Indian principals and for effective rendering of services in India, the assessee has availed professional services of expert who are non-residents. He had also arrived at the finding that though services are performed outside India they were for the benefit of the as....
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....een the rendition of services and territorial limits of India has been established. As such provisions of sec 195 were not applicable in case of the remittances made by the appellant to his foreign associates. The fundamental question to be answered is whether the recipients of the various amounts in different countries performed any part of the services in India, whether the payments were received in India and whether the recipients had permanent establishment or business in India. These factual aspects are important to determine, whether income was taxable in India and consequently whether liability for deduction or non-deduction of TDS under section 195 existed. I am unable to agree with the findings of the A.O. that simply because remittances have been made without deduction of tax at source provisions of sec 40(a)(i) are attracted. 12. As per Sec. 40(a)(i) any sum paid outside India or in India to a non-resident, on which tax is deductible at source under chapter XVII B and such tax has not been deducted or after deduction not been paid shall not be deducted in computing the income chargeable. Therefore, only those sums can be considered as inadmissible u/s. 40(a)(i) ....
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....x at source. This conclusion is also supported by the analogy that can be drawn from CBDT Circular No. 786, decision in the case of M/s. Clifford Chance and the certificate issued by the International Taxation Department, Kolkata permitting remittance without deduction of Tax at Source (albeit for another year). This ground of the assessee is allowed. The A.O. is directed to delete the addition made u/s.40(a)(i) of Rs. 5,38,36,097/-*" Aggrieved, now revenue is in second appeal before Tribunal. 6. Before us Ld. CIT-DR Sh. Sachidanand Srivastava argued on behalf of revenue. He first of all stated the facts that in this case the assessee has paid fees for obtaining technical information or consultancy services from foreign consultants in connection with profession carried out in India. He argued that the assessee is deriving fees for rendering services in India to its Indian principals and for rendering services in India, the assessee has availed technical services of experts who are non-residents. Though services are performed outside India they were for the benefit of the assessee's business/profession which was carried out in India and therefore payments made to non....
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....i)(b) of the Act and held that the fees paid to the non-resident attorneys were income deemed to accrue or arise in India since the services were utilized by the assessee in his profession in India. He thus held that the assessee should have deducted tax at source. According to Sh. Khaitan, the finding of the AO that the assessee obtained technical information or consultancy services from non-resident attorneys which were used by him for effective rendering of services in India to his clients is contrary to the factual position. The invoices of the non-resident attorneys and the assessee's corresponding debit notes on his clients would show that the non-resident attorneys were engaged merely for obtaining registration of patents/trademarks or for continuation/renewal of registration previously obtained. Such services were of procedural nature not having any iota of technical information or consultancy service. Further, such services were provided by the non-resident attorneys directly to the Indian clients, who had also granted them Powers of Attorney. No technical information or consultancy service was provided by the non-resident attorneys to the assessee and there was no que....
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....95 of the Act, both before and after the amendment made by the Finance Act 2010, upon the basis that the amount being remitted is for legal and professional services. The fourth aspect of the case, which is interconnected with the third aspect, as argued by Sh. Khaitan was that the amendment made by the Finance Act 2010 will impose an impossible task to perform because in any event and without prejudice to the aforesaid, no disallowance can be made under section 40(a)(i) where law relating to tax deduction at source is retrospectively amended or circular in that behalf is subsequently withdrawn. 10. Ld. Counsel also argued the factual aspect that the revenue sought to invoke section 9(1)(i) of the Act but having failed, shifted ground and sought to invoke Section 9(1)(vii)(b) of the Act. The order of the Tribunal dated November 4, 2009 with respect to section 9(1)(i) of the Act in ITA No. 491/KOL/2009 for the assessment year 2004-05 is enclosed at page 7 of the assessee paper book. According to him the amendment made in the Explanation below section 9 by the Finance Act 2010 with retrospective effect from June 1, 1976 is applicable only in respect of income accruing under clause....
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....correct perspective. It is sheer ignorance of the AO that he failed to realize that the client of the assessee in India had actually made the innovation in India and all technical developments took place in India. All technical information relating to the invention were communicated to the foreign practitioners/attorneys to enable them to file patent applications in their respective jurisdictions. Same was the case for trademark and design applications. Therefore the AO failed to appreciate that no technical information was received and there is nothing in the order passed by the AO to show what technical information or consultancy services were provided by the foreign attorneys. 12. Ld. Counsel further explained that in none of the transaction the foreign attorneys acted as consultants because no consultancy services were requested. All documents were made available to the AO but his findings does not contain reference to a single document or any transaction related thereto and also no evidence is on record before Tribunal which is placed or relied upon by the revenue in support of the finding that consultancy services were obtained from foreign consultants. Consultancy means g....
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....ailed to appreciate that the assessee is a IP law firm practicing in India under the various IPR laws in India and it does not require consultancy or other technical services from a foreign law firm to practice the Indian laws sitting in India. It did not even strike to the AO as to why an Indian lawyer should seek consultancy from a foreign lawyer so as to use such advice in India in its business. Not one single transaction has been cited which goes to show that the assessee utilized in India consultancy and technical services received from foreign law firm. No such evidence is placed in the proceedings before Tribunal. Insofar as the well settled law is concerned what was material to be determined by the AO from the facts of the case as to whether the services were technical or consultancy services and whether such services were utilized or was for utilization within India. The AO wholly ignored the fact that the foreign attorneys were given Power of Attorney by the clients of the assessee and all applications in the foreign countries were made in the name of the clients of the assesses. The assessee acted merely as a facilitator. 14. Ld. Counsel also stated that the revenue&#....
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....at the Central Board of Direct Taxes has statutory right to issue circulars under Section 119 of the Act to explain or tone down the rigours of law and to ensure fair enforcement of the provisions. Circulars issued have force of law and are binding of the Income Tax authorities though they cannot be enforced adversely against the assessee. Normally these circulars cannot be ignored. Thus a circular may not override or detract from the provisions of the Act but can seek to mitigate the rigour of a particular provision for the benefit of an assessee in specified circumstances. 9. First circular in question had been in force for a long time, from 1969. The Board may have withdrawn this circular and other circulars vide Circular No. 7, dated 22nd October, 2009 but the said withdrawal cannot be retrospective. Circular No. 7 of 2009 cannot be classified as explaining or clarifying the earlier circulars issued in 1969 and 2000. This assertion in the assessment order is far-fetched and does not merit acceptance. Circular No. 7 does not clarify the earlier circulars but withdraws them. This is obvious and apparent. Circulars in force in the relevant assessment year have to be taken into ....
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....ncome from any source of India'.' Reading the provision in its plain sense, as per the 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. In the above judgment, the apex Court observed that (p. 444) : 'Sec. 9(1)(vii) of the Act must be read with s. 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 DTAA. What is relevant is receipt or accrual of income, as would be evident from a plain reading of s. 5(2) of....
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....1 of the Constitution of India. The legal position thus was that unless the services are rendered in India, the same cannot be brought to tax as 'fees for technical services' under Section 9. However, this legal position did undergo a change when Finance Act 2010 received assent of the President of India on 8th May 2010. Explaining the scope of this amendment, a coordinate bench of this Tribunal, in the case of Ashapura Minichem Ltd. v. Addl. DIT (131 TTJ 291), has explained thus: . . . . . . .(this legal position) does no longer hold good in view of retrospective amendment w.e.f. 1st June, 1976 in s. 9 brought out by the Finance Act, 2010. Under the amended Explanation to s. 9(1), as it exists on the statute now, it is specifically stated that the income of the non-resident shall be deemed to accrue or arise in India under cl. (v) or cl. (vi) or cl. (vii) of s. 9(1), and shall be included in his total income, whether or not (a) the non-resident has a residence or place of business or business connection in India; or (b) the non-resident has rendered services in India. It is thus no longer necessary that, in order to attract taxability in India, the services must also be re....
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....ion as it stood at the point of time when payment was made or credited- whichever is earlier . Clearly, therefore, the disallowance under section 40(a)(i) can come into play only when the assessee had an obligation to deduct tax at source from payments to non-residents, and the assessee fails to comply with such an obligation. In view of these discussions, so far as payments made before 8th May, 2010 are concerned, the assessee did not have any tax withholding liabilities from foreign remittances for fees for technical services unless such services were rendered in India, and a fortiori no disallowance can be made under section 40(a)(i) for assessee's failure to deduct tax at source from such payments. 9. In the case before us, there is no material whatsoever to demonstrate and establish that the design and development services, for which impugned payments were made, were rendered in India. Therefore, the assessee did not have any liability under section 195 r.w.s. 9(1)(vii) to deduct tax at source from these payments. Once we come to the conclusion that the assessee did not have any obligation to deduct tax at source from these payments, in the light of the above disc....
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....ion 195 of the Act, require that the person making the payment "at the time of credit of such income to the account payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income tax thereon at the rates in force". When these obligations are to be charged at the point of time when payment is made or credited, whichever is earlier, such obligations can only be discharged in the light of the law as it stands that point of time. Section 40(a)(i) of the Act provides that inter alia, notwithstanding anything to the contrary in sections 30 to 38 of the Act, any amount payable outside India, or payable in India to a non-resident, shall not be deducted in computing the income chargeable under the head "profits and gains of business or profession" on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted. 18. In the present case ld. Counsel for the assessee argued that the assessee cannot be held to be liable to deduct tax at source relying on the subsequent amendments made in the Act with retrospective effect. In this case, Explanations to sec. 9(2) was inserted by the Fina....
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....that services rendered are for legal and professional services. Hence, you are hereby authorized to remit the said amount as legal fees without deduction of tax at source u/s. 195 of the I. T. Act, 1961". From the above it is clear that the revenue i.e. International Taxation after considering the representation and after application of mind arrived at a considered opinion and such opinion is of relevance for the purpose of the nature of the services which is relevant for the purpose of Section 9 (1) (vii) of the Act to determine under the unamended law before 08.05.2010. 20. From the above facts and circumstances of the case and also precedents cited above, we are of the view that till amendment in Explanation to sec. 9(2) of the Act, the prevailing legal position was that unless the technical services were rendered in India, the fees for such services could not be brought to tax under Section 9(1)(vii) of the Act. The law amended was undoubtedly retrospective in nature but so far as tax withholding liability is concerned, it depends on the law as it existed at the point of time when payments, from which taxes ought to have been withheld, were made. The tax deductor is not e....