2003 (8) TMI 165 - AT - Income Tax

Deduction Of Tax At Source - Liability to withhold tax u/s 195 from payments made to a UK-based firm for legal advisory services - HELD THAT - In the present case, it is not in dispute that by the virtue of Article 30(1)(b) of the new DTAA and by the virtue of the fact that notification of both the countries of the completion of procedures required under their respective tax laws was completed on 26th October 1993, the provisions of this treaty were to come in force in respect of income arising in any fiscal year beginning on or after the first day of April, next following the calendar year in which the later of notification is given i.e., previous year beginning 1st April 1994. The fees for legal advisory services impugned in this appeal having admittedly arisen between the period 30th April 1993 to 26th January 1994, the amended provisions of the new DTAA are clearly not applicable on the facts of this case. The provisions of Article 15 of the applicable DTAA, as we have mentioned earlier in this order, will even apply to other entities as well, in addition to 'individuals', as the aforesaid article refers to income derived, by a 'resident of contracting state in respect of professional services' which has clearly much broader connotations than the 'individual who is resident of contracting state in respect of professional services' i.e., the expression used in the new India-UK DTAA. There is also no dispute about the factum of services rendered being in the nature of legal consultancy services. We may also mention that Hon'ble Supreme Court has, in the case of V. Sasidharan v. Peter Karunakar 1984 (8) TMI 353 - SUPREME COURT observed that ...Whatever may be the popular conception or misconception regarding the role of today's lawyers and the alleged narrowing of gap between a profession on one hand and a trade or business on the other, it is trite that, traditionally, lawyers do not carry on trade or business nor do they render services to the 'customers'. Keeping all these factors in mind, as also the observations of Hon'ble Supreme Court, we are of the considered view that the services rendered by Freshfields are distinctly in the nature of professional services. Once we come to a finding that the services in question constitute 'professional services', the natural corollary to this finding is that the provisions of Article 15 are to be applied in this case which specifically deal with 'professional services'. In this view of the matter, we are of the considered view that the provisions of Article 13 have to give way to more specific provisions of Article 15 which will hold field in the present case. In this view of the matter, we are unable to uphold the stand of the authorities below that Article 15 will govern the fact situation in this case. It is also not in dispute that in case Article 15 does not apply to this case, the payments to Freshfields will not be exigible to tax in India as, in view of the uncontroverted and unchallenged findings of the CIT(A), the condition of Article 15 regarding stay in India are not satisfied. We are, therefore, of the considered view that the payment of fees for legal consultancy services to the UK based firm of solicitors is taxable only in United Kingdom and is not exigible to tax in India. As we have earlier observed, provisions of the DTAA clearly override the provisions of the Act to the extent the provisions in such agreement are more favourable to the assessee. Therefore, in case a DTAA provides for lower rate, which includes 'Nil' rate, of taxes, such a rate will prevail over the rate given in the Act. As a natural corollary to this proposition, when, in terms of the provisions of a DTAA, an income is not exigible to income-tax in India, no tax is required to be deducted u/s 195 from the payment of such income to a non-resident. We are, therefore, of the considered view that the assessee tax deductor did not have any liability to deduct tax at source from the payments made to M/s Freshfields, the UK based firm of solicitors, on account of legal consultancy charges. Thus, we deem it fit and proper to vacate the orders of the authorities below and direct the Assessing Officer to refund the taxes already deposited by the assessee tax deductor. As we do so, we may mention that the assessee has vide letter dated 17th June 2003, clarified that the no TDS certificates, in respect of the aforesaid taxes, have been issued by the assessee to Freshfields. In the result, the appeal is allowed.

Summary

Issues Involved:
1. Liability to withhold tax u/s 195 from payments made to a UK-based firm for legal advisory services.
2. Applicability of Article 13 vs. Article 15 of the India-UK DTAA.
3. Interpretation of "professional services" under Article 15.
4. Calculation of days for determining tax liability under Article 15.
5. Relevance of the Supreme Court's judgment in Transmission Corpn. of A.P. Ltd. v. CIT.

Summary:

1. Liability to withhold tax u/s 195 from payments made to a UK-based firm for legal advisory services:
The assessee, Maharashtra State Electricity Board (MSEB), entered into an agreement with M/s. Freshfields, a UK-based firm, for legal advisory services related to the Enron Project. The Assessing Officer (AO) directed MSEB to deduct tax at source at 30% u/s 195A, treating the payments as fees for technical services under Article 13 of the India-UK DTAA. The CIT(A) upheld this decision, concluding that the services rendered were technical and consultancy in nature.

2. Applicability of Article 13 vs. Article 15 of the India-UK DTAA:
The Tribunal examined whether the payments to Freshfields should be classified under Article 13 (fees for technical services) or Article 15 (independent personal services) of the India-UK DTAA. Article 15 applies to "professional services" and is not limited to individuals but extends to entities like firms. The Tribunal concluded that the services rendered by Freshfields were "professional services" and thus fell under Article 15, not Article 13.

3. Interpretation of "professional services" under Article 15:
The Tribunal referred to the definition of "professional services" as involving intellectual skills and specialized education or expertise. It concluded that the legal advisory services provided by Freshfields constituted "professional services" under Article 15, which applies to both individuals and entities.

4. Calculation of days for determining tax liability under Article 15:
The Tribunal agreed with the CIT(A) that the calculation should be based on solar days, not man-days. This interpretation aligns with the objective of Article 15 to provide a criterion for substantial and permanent presence in a contracting state.

5. Relevance of the Supreme Court's judgment in Transmission Corpn. of A.P. Ltd. v. CIT:
The Tribunal distinguished the present case from the Supreme Court's judgment in Transmission Corpn. of A.P. Ltd., noting that the latter dealt with sums chargeable under the Act. In this case, the payments to Freshfields were not exigible to tax in India under the DTAA, making the Supreme Court's observations inapplicable.

Conclusion:
The Tribunal held that the payments made to Freshfields were not taxable in India under Article 15 of the India-UK DTAA. Consequently, MSEB was not required to deduct tax at source from these payments. The orders of the lower authorities were vacated, and the AO was directed to refund the taxes already deposited by MSEB. The appeal was allowed.