2015 (4) TMI 724 - AT - Income Tax

Disallowance of Payment made to Saba & Co. on account of non deduction of Tax at Source towards legal & professional fees - income not chargeable to tax India - Held that - We have perused the material on record alongwith the order of the tax authorities below. It is a settled law that the provisions of Sec. 195 of the Income Tax Act will apply only if the payment made to the non-resident has an element of income chargeable to tax in India. If there is a conflict between the provisions of the Income Tax Act and the DTAA entered by India with the other country, the provisions of the DTAA, if beneficial to the Assessee, shall prevail. In this case, it is not disputed that the legal consultancy services has been provided by the non-resident to which Article 14 of the DTAA between India and Portugal are applicable. Article 14 clearly lays down that income derived by a person who is an individual or a firm of individuals (other than a company) who is resident of a Contracting State from the performance in other Contracting State of professional services or other independent activities of similar character shall be taxable only in the first mentioned State. It further states that such income may also be taxed in the other Contracting State under the specific circumstances The non-resident to whom the Assessee has made the payment does not have any fixed base regularly available to him for performing his duty. Even he does not have any permanent establishment. That is not the case of the Revenue. Admittedly, in the present case Saba and Co. is not having any fixed base in India and hence, as the condition of Article 14 is not fulfilled and Saba and Co. which is a resident of Morocco cannot be taxed in India in respect of fees paid by the assessee company for initiating and prosecuting the legal proceedings in the Morocco. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance under Section 14A.
2. Disallowance of payment made to Saba & Co. on account of non-deduction of Tax at Source under Section 40(a)(i).

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A:
The assessee did not press Ground No. 1 regarding the disallowance made under Section 14A due to the small quantum involved. This ground was dismissed as not pressed.

2. Disallowance of Payment Made to Saba & Co. on Account of Non-Deduction of Tax at Source:
The primary issue for adjudication was the disallowance of Rs. 22,31,018/- paid to Saba & Co. for legal and professional fees, which was upheld by the CIT(A) due to non-deduction of Tax at Source under Section 40(a)(i) of the Income-tax Act.

Facts and Arguments:
- The assessee is engaged in licensing, protection, and defense of trademarks and had claimed the expenses paid to Saba & Co. for legal consultancy fees.
- The Assessing Officer (AO) held that the assessee was required to deduct tax at source under Section 195, as the payment was considered fees for technical services.
- The AO referred to Article 12 of the DTAA between India and Morocco, which deals with royalty and fees for technical services, and disallowed the payment under Section 40(a)(i).

Contentions of the Assessee:
- Saba & Co. provided legal services for anti-counterfeiting proceedings in Morocco and had no permanent establishment in India.
- As per the DTAA between India and Morocco, the payment is not taxable in India, and hence, there was no requirement to deduct tax at source.
- The services rendered were legal services, not technical services, and should be covered under Article 14 of the DTAA, which pertains to independent personal services.

Findings and Judgment:
- The Tribunal examined the nature of services rendered by Saba & Co., which included initiating legal proceedings against a company using a similar trademark.
- The Tribunal concluded that the services rendered were indeed legal services and not technical services.
- Article 14 of the DTAA between India and Morocco covers professional services, including those provided by lawyers, and stipulates that such income is taxable only in the state of residence unless the service provider has a fixed base in the other contracting state or stays for an aggregate period exceeding 183 days.
- Saba & Co. did not have a permanent establishment in India, and thus, as per Article 14, the income derived from their services was not taxable in India.
- The Tribunal referenced similar precedents, such as Cedrick Jordan Da Silva Vs. ITO, where legal consultancy services provided by a non-resident were not taxable in India under the DTAA provisions.

Conclusion:
The Tribunal allowed Ground No. 2 in favor of the assessee, holding that the payment made to Saba & Co. for legal services was not taxable in India under the DTAA with Morocco, and thus, there was no requirement to deduct tax at source. The appeal was partly allowed.

Result:
The assessee's appeal was partly allowed, with the specific disallowance under Section 40(a)(i) being overturned.

Pronouncement:
The judgment was pronounced in the open Court on 06-01-2015.