2016 (11) TMI 730 - AT - Income Tax

TDS u/s 195 - whether Legal fees paid to non-resident Attorneys constitute royalty as per India-UK DTAA and also constitute Royalty / Fees for technical services FTS u/s. 9(1)((vi)/vii)? - PE in India - Held that - Payment in question do not get covered by Section 9(1)(i) due to the fact that the payee has neither business connection in India nor any permanent establishment in India. The assessee has obtained the legal services and such services find specific treatment as per Treaty Article 15 and therefore, not covered by Article 13 which deals with Royalty and Fees for Technical Services Moreover, Article 15 applies not only to individual but to firms also as upheld by Special Bench of the Tribunal in the case of M/s Clifford Chance Vs. Asstt. DIT (IT)(2013 (6) TMI 544 - ITAT MUMBAI ). Therefore, in the absence of any business connection in India or permanent establishment of India and considering the fact that services are rendered outside India and no employee of the attorneys were present in India for more than 90 days, we are of the considered view that impugned payments are not taxable in India as per Treaty provisions Hence, the assessee was not liable for tax deduction at source from impugned payment. - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the legal fees paid to non-resident attorneys constitute 'royalty' or 'fees for technical services' (FTS) under the India-UK Double Taxation Avoidance Agreement (Treaty) and Section 9(1)(vi)/(vii) of the Income Tax Act, 1961.
2. Whether the payments are taxable in India and liable for tax deduction at source under domestic laws and Treaty provisions.
3. Applicability of Section 9(1)(i) regarding business connection or permanent establishment in India.
4. Applicability of Article 13 vs. Article 15 of the Treaty.

Detailed Analysis:

1. Legal Fees as 'Royalty' or 'FTS':
The Commissioner of Income Tax (Appeals) [CIT(A)] concluded that the legal fees paid to non-resident attorneys constituted 'royalty' or 'fees for technical services' (FTS) under Section 9(1)(vi)/(vii) of the Income Tax Act, 1961. The CIT(A) reasoned that the services provided involved specialized knowledge, skill, and experience that could be utilized independently by the assessee. This interpretation was challenged by the assessee, who argued that the payments were for a market survey related to a possible acquisition of a bank in a foreign country and thus fell under exceptions provided in Section 9(1)(vi)(b) and Section 9(1)(vii)(b).

2. Taxability and Tax Deduction at Source:
The assessee contended that the payments were not taxable in India under the Treaty and domestic laws, as the services were utilized for creating or earning a source of income outside India. The CIT(A) dismissed this argument, stating that no new source of income was created by obtaining these legal services. However, the tribunal found that the payments were indeed made for creating/earning a new source of income outside India, thus falling within the exceptions of Section 9(1)(vi)/(vii) and not taxable under domestic law.

3. Applicability of Section 9(1)(i):
The tribunal examined a certificate from the legal attorneys, Reed Smith LLP, confirming that they had no business connection or permanent establishment in India. The certificate stated that Reed Smith LLP did not have any office or establishment in India, and no partner was present in India for more than 90 days during the year. Consequently, the tribunal concluded that the payments did not fall under Section 9(1)(i).

4. Article 13 vs. Article 15 of the Treaty:
The assessee argued that the services obtained were 'Independent Personal Services' covered under Article 15 of the Treaty, which is more specific and hence overrides Article 13. Article 15 deals with professional services or other independent activities performed by an individual or a partnership. The tribunal agreed, noting that the legal services provided by Reed Smith LLP fell under Article 15 and not Article 13, which deals with 'Royalty and Fees for Technical Services'. The tribunal cited previous judicial pronouncements supporting the precedence of specific provisions (Article 15) over general ones (Article 13).

Conclusion:
The tribunal allowed the appeal of the assessee, concluding that the legal fees paid to non-resident attorneys were not taxable in India under Section 9(1)(vi)/(vii) or Section 9(1)(i) of the Income Tax Act, 1961, and were covered by the exceptions provided therein. The tribunal also held that the payments were not taxable under the Treaty provisions, as they fell under Article 15, which deals with 'Independent Professional Services', and not Article 13. Consequently, the assessee was not liable for tax deduction at source from the impugned payment.

Order Pronouncement:
The order was pronounced in the open court on 25th August, 2016.