2020 (2) TMI 1368 - AT - Income Tax

TDS u/s 195 - disallowance u/s 40(a)(i) - Non deduction of tds on foreign associate fees - as per AO payments made by the assessee to the foreign attorneys were in connection with profession carried on by him in India - Scope of amendment to Section 9(2) - HELD THAT - In the present case the assessee is a Patent Attorney who renders legal services in his capacity as an Advocate in India. The clients of the assessee hold valuable IPRs which need registrations with the Patent or IP authorities so that IPRs are protected from unauthorized use by others. Since the clients of the assessee have markets beyond the boundaries of India, they seek assessee s assistance for obtaining registrations under the patent laws of the foreign countries where products of the customers are marketed under their IPRs. For the services rendered by the foreign patent attorneys, the fees are paid by the assessee because their services are engaged by him. It is the assessee s primary contention that the fees charged by the foreign attorneys were reimbursed by his clients along with his own fees. It was therefore his contention that since the amounts paid by the assessee were in the nature of pure reimbursements, no income element was involved in the remittances made to foreign attorneys and therefore no disallowance u/s 40(a)(i) read with Section 195 of the Act was warranted in his case. On examination of the provisions of Section 9(1)(vii) of the Act read with Explanation to Section 9(2) which was substituted by the Finance Act, 2010, we note that prior to the amendment in order to attract the rigors of Section 195 requiring tax deduction at source from fees for technical services , it was necessary for the Revenue to show that the technical services as defined in Section 9(1)(vii) of the Act were rendered as well as consumed in India. Since in the earlier years, the Tribunal found as a matter of fact that no services were rendered by the foreign attorneys in India, it was held that as per the law, which existed at the time when the assessee made payments to foreign attorneys, he had no obligation to deduct tax under Section 195 - Consequently therefore no disallowance was warranted u/s 40(a)(i) - at the time when the matter was heard by the Tribunal, amendment to Section 9(2) of the Act, was already in force. As rightly pointed out by the Ld. CIT, DR, the amended provisions were brought in the statute on 08.05.2010 and therefore it was applicable to the payments made by the assessee to foreign attorneys during the previous year relevant to AY 2011-12. Assessee could not avail benefit of the order of this Tribunal which was rendered in the context of pre- amended provisions of Section 9(1)(vii) read with Section 9(2) of the Act. We therefore find that the Ld. CIT(A) was legally not justified in following the order of his predecessor for AY 2006-07 when the legal position was materially different. Payments made to foreign patent attorneys - Whether it not come within the ambit of the term fees for technical services ? - 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)? - HELD THAT - The assessee as well as the foreign associates appointed by him enjoyed expertise and specialized knowledge in the field of IP laws and procedures associated with obtaining legal protections or registrations under the relevant laws governing IP rights in the respective countries. It is with the use and aid of the advice given by the foreign patent attorneys that the assessee and/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. As relying on GVK INDUSTRIES LTD. 2015 (2) TMI 730 - SUPREME COURT 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). Services of the foreign attorneys were engaged solely at the behest of the assessee for fulfilling his own commitments to his clients while carrying on his professional work in India. The source of income in the assessee s hands was solely located in India and for the purpose of earning income from the Indian source, the assessee had called upon his foreign associates to render certain services for which payments were made by him. We therefore find that the payments made to the foreign attorneys were used by the assessee while discharging his professional commitments in India and therefore the conditions prescribed in Section 9(1)(vii) were satisfied. Foreign attorneys performed the services at the behest of the assessee for which the requisite invoices were raised on the assessee and these were paid by him. It is for this reason that the invoiced amounts were debited by way of assessee s own expenditure in his personal Profit Loss Account. We also note that prior to making the remittances to the foreign attorneys, the assessee had filed certificates with his banker in prescribed Form 15CB certified by Chartered Accountant. In the said certificate, these payments were characterized as fees for professional services. In the Form A2 accompanying the remittance instruction, the purpose of payment was described as Associate Fee - plea of the assessee that these payments were in the nature of pure reimbursements and hence did not require tax deduction u/s 195 of the Act due to absence of income element stands disproved by the contemporaneous documents which the assessee himself produced before us. Payments which the assessee made to his foreign associates or foreign attorneys came within the ambit of Section 9(1)(vii) of the Act in terms of which the income by way of fees for technical services deemed to accrue or arise in India and consequently therefore the assessee had obligation to deduct tax at source under the provisions of the domestic tax . Assessee's alternate contention that if under the domestic tax provisions, the payments are held to in the nature of fees for technical services , even then the assessee did not have obligation to deduct tax source since these payments did not come within charging provisions of the DTAAs with the respective countries of which the foreign attorneys were residents - Having considered the said alternate plea of the ld. AR, we find merit in the same. We however note that before the Ld. CIT(A)/AO this aspect was neither raised by the assessee nor considered and adjudicated by the Ld. CIT(A)/AO. In the circumstances therefore, to meet the ends of justice, we deem it fit and proper to restore this alternate plea raised for the first time before us to the file of the AO. He is directed to examine the assessee s plea that payments were non-taxable in India because of the beneficial provisions of the DTAAs with respective countries. Appeal of the Revenue is allowed for statistical purpose.

Summary

Issues Involved:
1. Deletion of disallowance of ?8,28,66,038/- made by the AO under Section 40(a)(i) of the Income-tax Act, 1961.
2. Non-deduction of tax at source under Section 195 of the Income-tax Act, 1961 on payments made to foreign attorneys.
3. Applicability of Section 9(1)(vii)(b) of the Income-tax Act, 1961 to the payments made to foreign attorneys.
4. Nature of services rendered by foreign attorneys and whether they qualify as 'fees for technical services'.
5. Applicability of Double Taxation Avoidance Agreements (DTAAs).

Analysis:

1. Deletion of Disallowance under Section 40(a)(i):
The Revenue's primary grievance is against the deletion of disallowance of ?8,28,66,038/- made by the AO under Section 40(a)(i) due to non-deduction of tax at source on payments made to foreign attorneys. The Ld. CIT(A) had deleted the disallowance by following the order of his predecessor for AY 2009-10. The Tribunal noted that the principle of judicial consistency is applicable provided there is no change in the factual matrix or legal provisions. However, the Tribunal observed that the provisions of Section 9(1)(vii)(b) were amended by the Finance Act, 2010, which was applicable in the year under appeal, making the previous order not applicable.

2. Non-deduction of Tax at Source under Section 195:
The AO had disallowed the payments made to foreign attorneys on the grounds that they were in connection with the profession carried on by the assessee in India and were chargeable to tax in India as fees for technical services. Since the assessee did not deduct tax at source under Section 195, the AO invoked Section 40(a)(i). The Tribunal noted that the amended provisions of Section 9(1)(vii)(b) were applicable during the year under appeal, and therefore, the assessee was required to deduct tax at source.

3. Applicability of Section 9(1)(vii)(b):
The Tribunal examined whether the services rendered by foreign attorneys fell within the ambit of 'fees for technical services' under Section 9(1)(vii)(b). The Tribunal noted that the services rendered by foreign attorneys involved specialized knowledge and advisory services, which qualified as consultancy services. Therefore, the payments made to foreign attorneys were deemed to accrue or arise in India under Section 9(1)(vii)(b).

4. Nature of Services Rendered by Foreign Attorneys:
The Tribunal analyzed whether the services rendered by foreign attorneys were in the nature of consultancy services. It referred to the definitions provided in the Oxford Dictionary and Wikipedia, concluding that the services rendered by foreign attorneys involved specialized knowledge and advisory services. The Tribunal also relied on the judgment of the Hon'ble Supreme Court in the case of GVK Industries Ltd Vs ITO, which defined consultancy services for the purposes of Section 9(1)(vii).

5. Applicability of DTAAs:
The Tribunal acknowledged the alternate contention raised by the assessee that even if the payments were held to be fees for technical services under domestic tax provisions, they might not be taxable in India under the beneficial provisions of the DTAAs. The Tribunal remanded this issue to the AO for examination, directing the AO to consider the assessee's plea that the payments were non-taxable in India due to the DTAAs with respective countries.

Conclusion:
The Tribunal concluded that the payments made to foreign attorneys fell within the ambit of Section 9(1)(vii) and were chargeable to tax in India, requiring deduction of tax at source under Section 195. However, the Tribunal remanded the issue of the applicability of DTAAs to the AO for examination. The appeal of the Revenue was allowed for statistical purposes.