TaxTMI 
TaxTMI 
2020 (11) TMI 520
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....urn of income on 30.09.2015 declaring an income 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)"] erre....
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....legal practitioners being individual lawyers/ law firms, on behalf of its clients located in India 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 Lesica....
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.... 3,62,45,558 08. Contesting the above disallowance learned Authorised Representative referred to the facts of the case and made broad proposition as under: i. That the services received by the appellant are not in the nature of managerial, technical or consultancy services but are purely professional services. He referred to the nature of the services and submitted that tax is required to be deducted at source only on payments which are 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 recognise....
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....e to tax in India and thus withholding tax was not required to be deducted on such payment u/s 195 of the act and consequently no disallowance u/s 40 (a) (i) of the act can be made. iv. He further submitted that in the present case there are payments made in 12 different jurisdictions. He submitted that for this entire jurisdiction the "independent personal services" covers payments made to a resident. He submitted that though the status of the foreign entity for 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....
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....ional fees paid by the assessee is chargeable to tax in India in terms of the provisions of Section 4, 5 and Section 9 of the act. Therefore the tax is required to be deducted thereon u/s 195 of the act. He submitted that the learned CIT - A has correctly dealt with whole issue in its completeness. He further extensively read the assessment order as well as the appellate order on this issue. 10. Subsequently, the matter was fixed for clarification on 7/8/2020, at that particular time, the learned departmental 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....
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....ion 194J of the act. 14. The learned assessing officer noted that the payments made to overseas firms can be bifurcated into two segments i. the component that reimburses the forms for any official/statutory payments that needs to be paid to the patent offices or other authority/agencies of the government, ii. The component for compensating the firm for the services rendered by them. He noted that the first category of the fees are in the nature of the reimbursement which is to be passed on by the firm to the government 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....
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....d double Taxation Avoidance Agreements. Thereafter he examined the relevant DTAA and the provisions of the act and agreed with the assessee that the payments made by the assessee to foreign attorneys/law firms in United Kingdom, USA, Canada and Singapore are eliminated from the ambit of taxability in India due to the presence of "make available" clause {Though we do not agree with this finding of the ld AO, further that is not the issue before us now}. Hence the services rendered were considered outside the scope of fees for technical services 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 ....
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.... obtained services of certain foreign legal professionals, such as individuals, law firms/companies for filing of various patent applications in various foreign countries. The assessee made payment to such foreign associates amounting to Rs. 8,73,50,448/-. The Assessing Officer held that in case of 22 countries where the aggregate payment made by the assessee to such countries amounting to Rs. 3,62,45,557/- is in the nature of Fees for Technical Services. Such sum is chargeable to tax in India and, therefore, assessee should have deducted tax at source 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 ....
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....ses to the Examination Report issued by the local Patent Office (iv) Undertaking trademark searches in the records of the Intellectual Property offices in respective jurisdictions to ascertain availability of trademarks in question; (v) Maintenance of grant/ registration of Intellectual Property or services in relation thereto, as required under law, like towards annuity payment, renewal fee, restoration of patent, etc.; (vi) Maintaining records and forwarding documents of grant or refusal received from the Intellectual Property offices; (vii) Facilitating translation, processing and typing 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 n....
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....d/or his clients were able to prepare technically intricate documentation, necessary for filing Patents and other IP rights applications in the foreign countries in compliance with their respective IP laws. The foreign attorneys not only advised the assessee in preparing the documentation necessary for submission of applications but also represented the applicants before the Patent/IP authorities and provided clarifications and explanations necessary for grant of registration. We therefore note that on the given facts of the case, but for the consultancy or advisory services rendered by foreign attorneys, the assessee or his clients would 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 express....
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....d as a consultant. It had the skill, acumen and knowledge in the specialized field i.e. preparation of a scheme for required finances and to tieup required loans. The nature of activities undertaken by the NRC has earlier been referred to by us. The nature of service referred by the NRC, can be said with certainty would come within the ambit and sweep of the term 'consultancy service' and, therefore, it has been rightly held that the tax at source should have been deducted as the amount paid as fee could be taxable under the head 'fee for technical service'. Once the tax is payable/paid the grant of 'No Objection Certificate' was not legally permissible. Ergo, the 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....
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....btaining legal opinion from an advocate/law firm would constitute fees for technical services being advisory in nature, whereas payment for litigation services by the same advocate/law firm would constitute fees for professional services, requiring deduction of tax at source u/s 194J of the act at different rates, even though both of the above services would undoubtedly be rendered by the advocate/law firm "in the course of carrying on legal profession". 22. We have carefully given our considered thoughts to the above argument. Firstly the reliance upon the decision cited by the learned departmental representative clearly clinches issue in favour of the revenue that services rendered by the foreign 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 ba....
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.... Agreements which India has entered into with various countries, there are separate Articles/ provisions relating to taxation of "Fee for Technical Services" and "Independent Personal Services" ("IPS"), like that of lawyer, doctors and other professionals and the special provisions relating to taxation of professionals, it is submitted, override the general provision relating to taxation of FTS. He submitted that the reason for the aforesaid is also not far to seek. A professional service provider is registered with the respective regulatory body or institutions and is permitted to render professional services in the jurisdiction of his respective country. A person registered as a professional for providing 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 su....
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....istinctions made between the characterisation of two different income in the Double Taxation Avoidance Agreement also cannot be incorporated or interpreted in the income tax act for the reason that Double Taxation Avoidance Agreement is basically an agreement negotiated between the two countries country of source of income and country of residence of recipient, for sharing of the revenue of taxes out of one stream of income. That would be certainly applicable when the case of the assessee would be considered regarding applicability of the Double Taxation Avoidance Agreement and various articles therein. 26. Next argument of the ld AR is that even otherwise since the payments are made by the Appellant, who is 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 ....
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....eficial to the assessee. It is submitted that even under the DTAAs, the services in the nature of legal services are covered within the scope of "professional services" and not FTS, taxation whereof is dealt with separately under a different Article specifically governing taxability of such professional services, viz., Independent Personal Services. He referred to article 14 of the India Russia Double Taxation Avoidance Agreement and also the decision of the coordinate bench dated 10 October 2019 in the case of DLF Ltd versus ITO (ITA number 3253/del/2012) wherein it was held that the payment made to a non-resident law firm for professional services rendered as international counsel shall partake the nature of independent personal 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 categor....
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....nly. Such payment was of Rs. 20,518/- as under :- Treaties wherein Article relating to IPS covers payments made to 'individuals' only S. No. Country Recipient of professional fee Legal status of recipient Amount (Rs.) IPS Article 1 Republic of Korea Y.S. Chang & Associates Proprietorship/ Individual 20,518 Article 14 Total 20,518 30. It is also submitted that in following cases the payments have been made to non-individuals of different countries amounting to Rs. 2,26,94,889/-, though it is not covered by the provisions of the Double Taxation Avoidance Agreement relating to the Independent Personal Services, it does not automatically become and falls into the article of Fees For Technical Services. He submitted that income derived from professional services in such cases shall be covered under the article governing "business profit" as that provider of services providing 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 A....
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....e are of the view 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. 32. Assessee has made payment of Rs. 1,22,63,091 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 articl....
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....dividual 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. Accordingly the learned assessing officer may delete the disallowance. 35. Further assessee has made payment of Rs. 22,694,888/- 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. The recipients of the above payment do not qualify for the benefit of taxation in the country of their resident of the above sum as per article 14 or 15 as the case may be of Independent personal services because of either that are not individuals.....