TaxTMI 
TaxTMI 
TaxTMI 
2020 (11) TMI 520
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....me of Rs. 3,51,18,400/- The learned Assessing Officer passed an order under Section 143(3) of the Income Tax Act, 1961 (the Act) on 29.12.2017 at Rs. 7,33,37,010/-. 03. The learned Assessing Officer made disallowance under Section 40a(i) of the Act of Rs. 3,70,95,299/- for non-deduction of tax at source of payment made of professional charges and official fees to the foreign associates holding that under the provisions of the Income Tax Act Income Tax should have been deducted on these payments u/s 195 of The Act. 04. The second addition of Rs. 11,23,312/- was made on account of foreign travel expenditure being 10 per cent of the total expenditure amounting to Rs. 11,23,312/-. 05. Against this order, assessee preferred an appeal before the Ld CIT (A)-44, New Delhi, who passed an order on 23.08.2019 confirming the order of the Assessing Officer with respect to disallowance under Section 40a(ia) of the Act and further disallowance @ 10% out of foreign travel expenditure. Therefore, assessee is in appeal before us, raising the following grounds of appeal: "1. That the Commissioner of Income-tax (Appeals) ("CIT(A)"] erred on facts and in law in upholding the order of the assessin....
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....for filing of patent applications in such foreign countries. In respect of the aforesaid services, the Appellant made payments aggregating to Rs. 8,73,50,448 for availing legal services on behalf of its clients, to non-residents, including individual lawyers/ law firms/ companies. The assessing officer disallowed payments amounting to Rs. 3,62,45,557 made to the foreign law firms/ legal practitioners for the aforesaid professional services, invoking provisions of section 40(a)(i) of the Act, allegedly holding that the said payments were in the nature of Fees for Technical Services ("FTS") and therefore, were chargeable to tax in India. Details of such payment of fees specifying the name of the country and the status of the recipient is tabulated as Under:- S. No. Country Recipient of professional fee Legal status of recipient Amount (Rs.) 1 Australia Davies Collison Cave Partnership Firm 5,45,595 Griffith Hack Partnership Firm 6,79,205 Lesicar Murray Trento Partnership Firm 12,646 Lesicar Perrin Partnership Firm 29,615 Lesicarf Maynard Andrews Pty Ltd Company 62,158 Pizzeys Company 23,003 2 Brazil Martinez & Associados Partnership firm 12,66,391 3 Ch....
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....chargeable to tax in India. He stated that as the payments made by the appellant were for the availing of professional services and was not in the nature of fees for technical services, thus, not chargeable to tax u/s 4 read with Section 5 and Section 9 of the income tax act. He submitted that to fall those services within the chargeable ambit of the Indian income tax act, they should satisfy the definition of 'managerial, technical or consultancy services'. He referred to the many judicial precedents to support his contentions. He referred to the provisions of Section 194J of the act which requires deduction of tax in payment is made to a resident and submitted that 'professional services' is a separate category of services recognised as distinct from 'fees for technical services'. His argument was that if 'fees for technical services' were to include 'professional services' it would not have been necessary to refer to the later specifically in explanation (a) to Section 194J of the act and explanation (b) to that Section would have been sufficient. Thus it is stated that the services received by the appellant from the foreign attorneys/law firm/companies were purely in the nature....
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....all these jurisdictions are partnership firm, company etc the payment of Rs. 122,63,090 made by the assessee to those jurisdictions does not require any withholding tax as it was a payment made to the resident of that country and same is chargeable to tax in those countries. So tax is not required to be deducted at source in India. Similarly with respect to the payment made to Australia he submitted that "independent personal services" covers payment made to individuals or firm of individuals in those countries therefore the payment of Rs. 1,267,060 made in Australia to a partnership firm also does not require any withholding tax in India. He further submitted that with respect to payment of Rs. 20,518 made by the assessee to a proper ship concern in Republic of Korea tax is not required to be deducted at source as it relates to 'independent personal services" and payments made to individuals only and it is chargeable to tax in the other country. v. Therefore summarising his arguments he submitted that the learned assessing officer has disallowed the sum of Rs. 36,245,557 in respect of non-deduction of tax on professional fees paid by the assessee outside India to various foreign....
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....l representative submitted that the issue is squarely covered in favour of the revenue by the decision of the coordinate bench in case of ACIT V Subhatosh Majumdar (ITA number 2006 - KOL - 2017 dated 9/1/2020) wherein on identical facts and circumstances it has been held that the tax is required to be deducted. The learned departmental representative read the judgement of the coordinate bench to show that the facts and circumstances of the case are similar. 11. The learned authorised representative objected and stated that above decision does not cover the case of the assessee and there are certain basic differences. The learned authorised representative at that particular point submitted that he would like to distinguish the facts of this case with the case decided by the coordinate bench. The later on, he submitted a detailed note on this. 12. We have carefully considered the rival contentions and perused the orders of the lower authorities. We have also perused the various judicial pronouncements read before us by both the parties. The fact shows that the assessee is a lawyer by profession and derived income from business or profession and income from other sources. He filed h....
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....ernment of the other country, however, professional fees received by the foreign firms needs to be examined to ascertain whether this constitutes income in the hands of the foreign firms as fees for technical services and tax is required to be deducted thereon or not. The learned AO noted that these non-resident entities are working in a highly specialised field of legal services. These kind of legal services required not just comprehensive and precise knowledge of the law but also require experience with the procedural aspects and the rules in the respective countries. Therefore according to him it goes without saying that the rendering of the services entails constant interactions between the assessee and the foreign firm and especially regular feedback and advice to the assessee. He noted that when the firm is filing the application for initial registration of the patent with the government agency, it cannot be simple case of submitting a few documents or mere deposit of some fees as is being submitted by the assessee. The foreign firm will help to examine each case in the light of its special knowledge and experience of the relevant laws of the respective jurisdiction. It can....
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....s and held that assessee was not liable to withhold any tax on these payments. Further, he also considered the argument of the assessee that in case of payments made to parties in France, Israel, Hungary and Belgium, assessee is eligible to take the benefit of "Most- Favoured-Nation" clause by the protocols annexed to the Double Taxation Avoidance Agreements. Accordingly, the payment made to the above country residents was not subject to withholding tax in India. However, even after excluding the above countries, he found that assessee has not deducted the tax at source on payment made to foreign firms/ professionals in other countries. The assessee also submitted before the learned assessing officer that DTAA of many countries contains an article dealing with services of Independent Personal Services (IPS) clause and income from business profit respectively in Double Taxation Avoidance Agreement between India and the specified country and therefore same is chargeable to tax in those countries where the permanent establishment of the recipients exist. The learned assessing officer did not agree with the view of the assessee that the nature of the services provided is in the nature....
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....e under Section 195 of the Income Tax Act, which assessee has allegedly failed to, therefore, invoking the provisions of Section 40(a)(i) of the Act the above sum was disallowed. The claim of the assessee is that same is not chargeable to tax in India and, therefore, provisions of Section 195 of the Act do not apply. There is no dispute that tax is required to be deducted at source only on payments which are chargeable to tax in India. Same is the provision of law and direction of the Hon'ble Supreme Court in the case of G.E. Technology Centre Pvt. Ltd. Vs. CIT (2010) 327 ITR 456 (SC). According to the provisions of Section 4 of the Act the Income Tax shall be chargeable in respect of total income of the previous year of every person at the rate prescribed for assessment year. Section 5 (2) defines the scope of the total income and in respect of Non residents the total income includes all income from any source received or deemed to be received in India by or on behalf of such person and accrues or arises or deemed to accrue or arise to him in India during such year. The income deemed to accrue or arise in India is defined under Section 9 of the Income Tax Act. The claim of the l....
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....ping of relevant documents. 20. The claim of the assessee is that these services are not in the nature of "managerial, technical or consultancy services" but are purely "professional services". However, and the time of hearing the learned departmental representative submitted that the above services are "consultancy services" in nature and therefore they clearly fall within the definition of "fees for technical services". For this proposition he has relied upon the decision of the coordinate bench in ACIT, Circle 25, Kolkatta V Shri Subhatosh Majumder [ ITA no 2006/Kol/2007] dated 26/2/2020 wherein identical issue has been decided. The coordinate bench in paragraph number 17 - 19 has dealt with this issue as Under:- "17. In our considered view, the moot point to be adjudicated in the present appeal therefore is whether the legal services rendered by the foreign attorneys could be classified as 'consultancy services' so as to bring these payments within the ambit of Section 9(1)(vii) of the Act. In this regard, we note that the term 'consultancy' service is not defined in the Act. In the circumstances one must understand the term as understood in normal commercial parlan....
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....not have been able to obtain the Patents or IP registrations in the foreign countries. 18. We also find it relevant to hold that the Ld. CIT, DR rightly relied on the judgment of the Hon'ble Supreme Court in the case of GVK Industries Ltd Vs ITO (supra), wherein meaning of the term 'consultancy service' for the purposes of Section 9(1)(vii) after its amendment in 2010 was explained by the Hon'ble Supreme Court. In the said judgment the Hon'ble Court observed as follows:- "34. In the case at hand, we are concerned with the expression "consultancy services". In this regard, a reference to the decision by the Authority for Advance Ruling P. No. 28 of 1999, In re [2000] 242 ITR 208/[1999] 105 Taxman 218 (AAR - New Delhi), would be applicable. The observations therein read as follows: "By technical services, we mean in this context services requiring expertise in technology. By consultancy services, we mean in this context advisory services. The category of technical and consultancy services are to some extent overlapping because a consultancy service could also be technical service. However, the category of consultancy services also includes an advisory service, whether or not ex....
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.... judgment and order passed by the High Court are absolutely impregnable." 19. Applying the ratio laid down in the judgment (supra), we are of the view that the services which the foreign attorneys rendered to the assessee squarely came within the ambit of Section 9(1)(vii) of the Act. In his rebuttal, the ld. AR sought to distinguish the judgment of the Hon'ble Supreme Court stating that the facts of the assessee's case were distinguishable because unlike in the case before the Hon'ble Apex Court, the non-resident attorneys had merely performed executionary functions which were rendered abroad and also utilized outside India. We are however unable to persuade ourselves to agree with the contention put forth by the Ld. AR of the assessee. In the first instance, the Hon'ble Supreme Court in the case of GVK Industries Ltd (supra) defined the expression 'consultancy services' in the context of Section 9(1)(vii) and the services rendered by foreign attorneys squarely come within the ambit of such definition. This point has not been negated by the Ld. AR in his submissions. Instead the case made out by the Ld. AR is that the services were rendered abroad and utilized abroad and therefo....
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....n attorneys clearly falls into the definition of fees for technical services as defined in explanation 2 to Section 9 (1) (vii) of the act. Merely because there are no clerical and executionatiory tasks not mentioned, it does not change the nature of services rendered in its substance. Therefore, the above payment clearly falls as income chargeable to tax u/s 5 read with Section 9 (1) (vii) of the act as 'Fees for technical services so for the Income tax Act 1961 is concerned. Coming back to the decision cited before us by the learned authorised representative in NQA quality systems registrar's Ltd versus DCIT (2005) 92 TTJ 946 (Delhi), we find that the learned authorised representative relied upon the para number 17 of that decision where the coordinate bench in that case examines the applicability of article 15 of the Indo UK DTAA a relating to independent personal services where the professional services are specifically defined. However here we are supposed to examine The Income Tax Act, 1961 to examine the chargeability of the above sum under the Income Tax Act. Therefore, the reliance placed by the assessee on the decision of 92 TTJ 946 is misplaced. We hastened to add that w....
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....iding professional services, therefore, can earn income from such professional services only in his country, where he is registered to exercise his profession. In other words, a professional service provider by definition cannot earn income in any country other than where he is resident and is registered to practice. For the aforesaid reason, universally, under the domestic tax laws, e.g., under the Income-tax Act, 1961 and also under the respective DTAAs, professional services are subjected to taxation in the country of residence of such professional service provider. For that reason, it would be appreciated that under the Income-tax Act, 1961, while, payment made for professional services to residents is subjected to deduction of tax at source under section 194J of the Act, in case of non-residents, such payments are not regarded as income accruing or arising in India under section 9(1)(vii) of the Act and therefore, not subjected to tax withholding under section 195 of the Act. The aforesaid position is also in line with the position under the DTAAs. 24. We have given on careful thought to the above argument. However for the purpose of holding that professional services should....
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....a resident, to non-residents for the purposes of earning income from a Source Outside India, the same are excluded from the purview of FTS in terms of section 9(1)(vii)(b). The source of income, in the present case, is the filing of patent applications by the foreign law firms/ legal practitioners in the respective jurisdictions outside India. We have carefully considered this argument and find that source of the income is not the filing of the patent applications by the foreign law firms of the clients in India but the assessee himself who pays to the foreign law firms/professionals. This issue has also been discussed by the coordinate bench in case of Subhatosh Majumder ( supra) as under:- "24. The Ld. AR further sought to avail the benefit of the exception carved out in Section 9(1)(vii)(b) of the Act on the premise that by obtaining patents/IPR registrations abroad, the clients of the assessee created sources of income outside India and since the services were rendered by the foreign attorneys in connection with such foreign source, the income did not deem to accrue or arise in India warranting deduction of tax u/s 195 of the Act. As we observed in the preceding paragraph 20....
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....rsonal services and not fees for technical services. He also referred to the decision of the coordinate bench in Maharashtra state electricity board versus Deputy Commissioner Of Income Tax (90 ITD 793 (MUM)). The learned authorised representative also submitted that provisions relating to the taxability of independent personal services are not identical in all Double Taxation Avoidance Agreements as each Double Taxation Avoidance Agreement specifies the category of service provider who can avail the benefit provided therein. He submitted a table to show that agreement with some of the countries the relevant article dealing with the independent personal services covered payment being made to a resident on such payment for professional services are taxable only in the country where the service provider is resident. S. No. Country Foreign entity Status of foreign entity Amount 1. Brazil Martinez & Associados Partnership firm 12,66,391 2. China Kangxin Partners, P.C. Company 2,15,389 3. Lehman, Lee & Xu Partnership firm 77,976 4. Unitalen Partnership firm 18,41,572 5. Czech Republic Patentservis Company 40,983 6. Japan Seiwa Patent & Law Partnership fir....
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....oviding legal services to their clients in the course of their business. In absence of such non-resident legal practitioners having the permanent establishment in India in terms of article 5 of the respective Double Taxation Avoidance Agreement. It is submitted that no part of the business profits arising to a non-resident entity from the appellant would be taxable in India. He submitted that those parties do not have any permanent establishment or any fixed place of business in India and therefore same would also not be taxable in India in terms of article 7 read with article 5 of the respective Double Taxation Avoidance Agreement. He submitted the list of such payments as under :- S. No. Country Recipient of professional fee Legal status of recipient Amount (Rs.) IPS Article 1 Norway HamsoPatentbyra Partnership firm 2,11,339 Article 14 2 Denmark Zacco Denmark Partnership firm 15,25,359 Article 15 3 Sri Lanka Murugesu & Neel akandan Partnership firm 37,073 Article 14 Neelakandan & Neelakandan Partnership firm 83,363 4 Malaysia Advanz Fidelis SDN.BHD. Company 1,00,296 Article 15 Marks & Clerk LLP. Partnership firm 2,51,428 Ram Rais & Partne....
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....ose 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. If, the learned assessing officer finds that recipient of the income are resident according to article 4 (1) of the respective Double Taxation Avoidance Agreement and they do not fall into the exceptions of taxability of Independent Personal Services i.e. they do not have any fixed place of business in India, or of stay of number of days in India, then, it is to be held that no tax is required to be deducted at source on such payment made by the assessee to those parties. Accordingly after examination, the learned assessing officer may delete the disallowance if found in accordance with the law and the terms of the agreement. 33. With respect to payment of Rs. 1,267,061 made to partnership firm of reside....
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....ices rendered by them specifically falls under the services characterised under the clause of independent personal services of Double Taxation Avoidance Agreement with those countries. We do not agree with the argument of the learned authorised representative that they shall be taxable as business income under article 7 of the respective Double Taxation Avoidance Agreement. The reason being that there are two separate clauses of taxability of business income of non-specified activities which is covered as per article 7 of those Double Taxation Avoidance Agreement and if they're qualified as Independent Personal Services then Under article 14 or article 15 of the respective Double Taxation Avoidance Agreement. These are 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 art....