TMI Blog2020 (11) TMI 520X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 article 4 of those agreements. He shall be liable to be taxed in those country of residence. Therefore, assessee is directed to produce necessary evidences before the learned assessing officer that those residents are liable to tax in those respective countries of the residence. Therefore, the learned assessing officer is directed to examine the evidence produced by the assessee that recipient of the above payment are resident of those countries and liable to be taxed in those countries. Payment made to partnership firm of resident of Australia where independent personal services according to article 14 of the Double Taxation Avoidance Agreement, an individual or a firm of individuals (other than a company) who is a resident of Australia subject to c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er DTAA. But because of some reason it fails to qualify for exemption from taxation in source country. Therefore same becomes income taxable in the sources country, Source country gets right to tax such income of non residents. We hold that assessee should have deducted tax at source on the above payment u/s 195 as the recipient of the income are not entitled to avail benefit of article 14 or article 15 of the respective Double Taxation Avoidance Agreements. The disallowance made by the learned assessing officer cannot be found fault with. Accordingly disallowance u/s 40(a) (i) of the act to that extent of ₹ 2,26,94,888/- is upheld for non-deduction of tax at source u/s 195 of the act. Disallowance of travelling expenditure - HELD THAT:- In the present case undoubtedly the assessee has incurred foreign travel expenditure and the learned assessing officer has disallowed an ad hoc amount applying the ratio of 10% to prevent any leakage as assessee could not produce the relevant evidences holding that those expenditures have not been incurred for the purposes of the business. We do not subscribe to the view of the learned lower authorities. AO should have disallowed only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore us, raising the following grounds of appeal: 1. That the Commissioner of Income-tax (Appeals) ( CIT(A) ] erred on facts and in law in upholding the order of the assessing officer assessing the income of the Appellant at ₹ 7,33,37,010 against ₹ 3,51,18,400 returned by the Appellant. 2. That the CIT(A) erred on facts and in law in upholding disallowance of expenditure of ₹ 3,62,45,557, being payments made to non-resident entities towards legal services, invoking section 40(a)(i) of the Income-tax Act, 1961 ( the Act ) for the alleged failure of the Appellant to deduct tax at source therefrom under section 195 of the Act. 2.1. That the CIT(A) erred on facts and in law in upholding the allegation of the assessing officer that payments made by the Appellant to the foreign law firms were towards legal services involving special knowledge and experience of the relevant laws of the respective countries which partake the nature of consultancy and, therefore, were to be regarded as Fees for Technical Services ( FTS ). 2.2. That the CIT(A) grossly erred on facts and in law in not appreciating that the said payments were in the nature of professional ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Lesicarf Maynard Andrews Pty Ltd Company 62,158 Pizzeys Company 23,003 2 Brazil Martinez Associados Partnership firm 12,66,391 3 China Kangxin Partners, P.C. Company 2,15,389 Lehman, Lee Xu Partnership firm 77,976 Unitalen Partnership firm 18,41,572 4 Colombia Clarke, Modet Co Company 99,682 5 Czech Repub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6,81,006 16 Russia Gorodisskey Partners Partnership firm 30,99,452 17 Sebia Ristic Malesevic of Patent Bureau Government organization 51,511 18 South Africa D.M. Kisch. INC. Company 46,99,667 Edward Nathan Sonnenbergs Inc. Company 8,762 Von Seidels Partnership firm 1,09,423 19 Sri Lanka Murugesu Neelakandan Partnership firm 37,073 Neelakandan Neelakandan Partnership firm 83,363 20 Thailand Tilleke Gibbins International Limited Company 2,82,736 21 UAE United Trademark Patent Services Partnership firm 36,32,983 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fees for technical services in terms of Section 9 (1) (vii) (b) of the Act. He submitted that the source of income in this case is the filing of patent application by the foreign law firms, legal practitioners in the respective jurisdictions outside India. iii. Without prejudice to the above proposition, he submitted that the professional services received by the assessee are in the nature of independent personal services not liable to tax in India. He submitted that even under the Double Taxation Avoidance Agreement the services in the nature of legal services are covered within the scope of professional services and not as fees for technical services . He referred to article 14 of Double Taxation Avoidance Agreement and also stated that similar definitions of professional services are also provided in many other Double Taxation Avoidance Agreements. He further referred to the decision of the coordinate bench dated 10 October 2019 case of DLF Ltd versus ITO ITA number 3253 Delhi 2012 wherein it has been 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... als Or Firm of individuals and therefore same is also not chargeable to tax in India and hence no tax is required to be made, therefore, no disallowance can be made. vii. He submitted that sum of ₹ 20,518 relates to the payment to the countries having Double Taxation Avoidance with Independent Personal Services article covering payments to Individuals and therefore on this sum no tax is required to be deducted as it is chargeable to tax in those countries and not in India and therefore the disallowance for non-deduction of tax at source cannot be made. viii. He further stated that a sum of ₹ 22,694,889 relates to the payments to the countries having Double Taxation Avoidance Agreement having independent personal services article covering payments to individuals but the status of foreign associates is non-individual but the income to be characterised as business profits and not chargeable to tax in India in absence of permanent establishment in India. ix. Therefore in nutshell his argument is that no tax is required to be deducted at source on payment made by the assessee and therefore the disallowance requires to be deleted 09. In response to this the lear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Thus out of net professional fees of ₹ 87,350,448/ , he submitted that professional fees of ₹ 77,360,542 are not taxable in India. Thus ₹ 99,89, 905/ was professional fees taxable in India out of which assessee has deducted tax at source on professional fees paid of ₹ 9,140,163/ . Thus ₹ 849,742/ was submitted by the assessee is taxable professional fees in India on which tax is not deducted at source and same is to be disallowed u/s 40 (a) (i) of the act. The above amount is agreed by the assessee for disallowance due to non-deduction of tax at source on payment made to foreign entities in Taipei. 13. During the course of assessment proceedings, assessee submitted a note on the nature of payment made to foreign associates for professional charges and fees and its taxability under The Income Tax Act and Double Taxation Avoidance Agreement which India has entered into with various countries. The main contention of the assessee is that services were rendered by the foreign attorneys/law firms and the payment made do not fall within the scope of Fees For Technical Services [ FTS] as defined under explanation 2 to Section 9 (1) (vi) of the act. It wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o again apply itself to the case and this would engender further advising the assessee as to in what manner the case is to be presented before the respective government so that there are none of the impediments to the application filing process. According to AO, all these require providing advisory / consultation by the foreign firm to the Indian assessee utilising it specialised knowledge and skill sets that they possess. Similar sequence of the process would again be carried out while opposing IPR/Patent application by competitors except that in that scenario the element of the two-way communication and specialised advice from the foreign firm to the assessee would be in a higher proportion then when an application is being filed. Therefore, he noted that it is clear that this definitely involves foreign firms advising the assessee about the feasibility of success in litigation and advising it about the manner in which the litigation is to be carried out. The proportion of advice and consultancy services can only become more acute during pleading and representing in the court of law. Therefore, he held that the services provided by the overseas firms/entities partakes the char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the services in India is enough to attract its taxability in India. 16. Therefore, he determined sum of ₹ 36,245,557 over and above a sum of ₹ 849,742/ (which is tendered by the assessee) as taxable as Fees for Technical Services in terms of Section 9 (1) (vii) of the act. As assessee has failed to deduct tax at source u/s 195 of the act, he disallowed it u/s 40 (a) (i) of the act a sum of ₹ 37,095,299/ . 17. On appeal before the learned CIT A, he confirmed the above disallowance holding that the learned assessing officer has considered the nature of services correctly as well as the provisions of Double Taxation Avoidance Agreement to hold that the sum is chargeable to tax as Fees For Technical Services and tax should have been deducted thereon u/s 195 of the act and therefore the disallowance of ₹ 36,245,557/ was correctly made. 18. The first issue that arises before us that the disallowance made by the learned Assessing Officer under Section 40(a)(i) of the Act is sustainable in law with respect to 22 countries where there is no Make Available Clause and Most favoured nation Clause does not apply. The facts show that the assessee is an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s as Under:- Explanation 77 [2].-For the purposes of this clause, fees for 78 technical services means any consideration (including any lump sum consi-deration) for the rendering of any managerial, technical or consultancy 78 services (including the provision of services of technical or other personnel) but does not include consideration for any construction 78 , assembly, mining or like project undertaken by the recipient 78 or consideration which would be income of the recipient chargeable under the head Salaries ;] Therefore, rendering of any managerial, technical or consultancy services subject to certain exceptions would fall into the compass of fees for technical services. 19. To understand whether the nature of the services rendered by the recipient of the professional fees to the assessee whether is in nature of fees for technical services , it is necessary to understand that what the specific services are rendered by them to the assessee. The nature of services so rendered are:- (i) For receiving instructions from the Appellant and filing application at the local Patent Office and reporting the filing to the Appellant. (ii) Reporting Examination re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance, engineering, science or any of many other specialised fields. Applying these definitions, we note that the assessee s services were engaged by his clients having regard to his specialized knowledge and experience dealing with IP laws as well as procedures involved in obtaining IPR registrations. The IP laws of each country contain special provisions and the regulations there under prescribe detailed technical and bureaucratic procedures which need to be complied with before Patent or IPR registrations are granted. It is a well-established fact that the Patents or IP registrations once granted by the authority, confer on the holder very valuable intangible rights which substantially add to the value of the business carried on by the holder. Since the laws conferring IP rights on the parties are complex in nature, rendering of services in the field of IP laws, constitutes specialized branch in the field of legal service. We therefore find 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ionary as the work or position of a consultant; a department of consultants. Consultant itself has been defined, inter alia, as a person who gives professional advice or services in a specialized field. It is obvious that the word consultant is a derivative of the word consult which entails deliberations, consideration, conferring with someone, conferring about or upon a matter. Consult has also been defined in the said Dictionary as ask advice for, seek counsel or a professional opinion from; refer to (a source of information); seek permission or approval from for a proposed action . It is obvious that the service of consultancy also necessarily entails human intervention. The consultant, who provides the consultancy service, has to be a human being. A machine cannot be regarded as a consultant.' 36. In this context, we may fruitfully refer to the dictionary meaning of 'consultation' in Black's Law Dictionary, Eighth Edition. The word 'consultation' has been defined as an act of asking the advice or opinion of someone (such as a lawyer). It means a meeting in which a party consults or confers and eventually it results in human interacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l services and not fees for technical services and further as this was not argued before that bench, the coordinate bench had to consider the same. It is submitted that the services rendered by the service providers is not fees for technical services but are purely professional services of a lawyer. It was further stated that as in the case before the coordinate bench in that case, the foreign attorneys did not render any clerical and execution services. According to him, services rendered in the present case by the foreign attorneys are highly specialised legal services which partakes the character of fees for professional services . He further stated that the coordinate bench in case of NQA quality systems registrar s Ltd versus DCIT (2005) 92 TTJ 946 (Delhi) has clearly make a difference between fees for technical services and fees for professional services . He further put to our attention that the provisions of Section 194J clearly carved out the difference between fees for technical services and fees for professional services . He therefore submitted that, if the distinction between the two kinds of the payments i.e. fees for technical services and fees for profe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted that the distinction between Fee for professional services and FTS is statutorily recognised, in as much as, under the aforesaid section, Legislature in its wisdom has created two separate classes of income, viz., Fees for professional services and Fees for technical services . The said expressions have also been separately defined in Explanation to section 194J of the act, Referring to that provisions it is submitted that it is clear as crystal that professional services , which includes legal services, is a separate category of services, recognized as distinct from FTS, which is primarily managerial, technical or consultancy services as referred to in section 9(1)(vii) of the Act, by the Legislature itself. If FTS as defined in Explanation 2 to section 9(1)(vii) were to include professional services as referred to in section 44AA, it would not have been necessary to refer to the latter specifically in Explanation (a) to section 194J of the Act, and Explanation (b) to that section would have been sufficient. It was also submitted that It may not be out of place to mention that section 28 of the Act refers to the income head profits and gains of business or prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tinctions made between the fees for technical services and professional services u/s 194J does not have any implication to decide whether same is subject to tax as per the income tax act 1961 when the payment is made to a non-resident. If that be the case then Legislature would also have given a thought to include professional fees separately u/s 9 (1) (vii) of the act. That is not the intention of the law so far as the payments are made to non residents. In fact the provisions of Section 9 include certain income which shall be deemed to accrue or arise in India though in fact it neither accrues nor arises in India. It is a deeming fiction specifically made in the income tax act for the purpose of non residents. It in fact enlarges the scope of taxability of certain income of non-resident. Even otherwise the language of the provisions of Section 9 (1) is clear and therefore it is also not necessary to look into any other provisions of the income tax act which does not apply to non residents. Therefore drawing the distinction made u/s 194J between professional fees and fees for technical services does not help the case of the assessee and is unwarranted. Even otherwise, whole scheme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ys were used, was located in India. We also note that the mere fact that the Patents or IPs registrations in foreign countries granted protection to the Indian clients within the foreign territories, did not create any 'source of income' for such clients outside India. The protection under the foreign IP laws did not by itself ITA No. 2006/Kol/2017 A.Y 2011-12 Sri Subhatosh Majumder constitute source of any income in a foreign country. Nothing has been brought on record by the assessee to show that the clients on whose behalf this Patents/IP were registered had established PEs/branch etc. in such foreign countries so as to hold that the payments were made in relation to source of income located outside India. Viewed from any angle therefore we are unable to agree with the Ld. AR's submissions that the payment made to foreign attorneys fell within the exception carved out Section 9(1)(vii)(b) of the Act. Hence, we reject this argument of the assessee. 27. Alternatively, the learned authorised representative argued that it is a settled principle of law that where the Government of India has entered into DTAAs with foreign countries for granting relief in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Company 40,983 6. Japan Seiwa Patent Law Partnership firm 10,24,465 7. Shiga International Patent Office Partnership firm 20,56,746 8. Shimizu Patent Office Proprietorship/Individual 9,84,308 9. Philippines Angara Abello Concepcion Regala Cruz Partnership firm 4,64,877 10. Thailand Tilleke Gibbins International Limited Company 2,82,736 11. UAE United Trademark Patent Services Partnership firm 36,32,983 12. Vietnam Tran H. N. Associates Company 3,74,665 Total 1,22,63,090 28. It is further submitte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Agreement. It is submitted that no part of the business profits arising to a non-resident entity from the appellant would be taxable in India. He submitted that those parties do not have any permanent establishment or any fixed place of business in India and therefore same would also not be taxable in India in terms of article 7 read with article 5 of the respective Double Taxation Avoidance Agreement. He submitted the list of such payments as under :- S. No. Country Recipient of professional fee Legal status of recipient Amount (Rs.) IPS Article 1 Norway HamsoPatentbyra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11 Mexico Baudelio Cia Company 21,00,913 Article 14 12 Indonesia Amr Partnership Partnership firm 23,426 Article 14 George Widjojo Partners Partnership firm 1,33,421 13 Colombia Clarke, Modet Co Company 99,682 Article 14 14 Serbia Ristic Malesevic of Patent Bureau Government organization 51,511 Article 14 Total 2,26,94,888 31. On careful consideration of the arguments of the ld AR, we 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... covered therein shall be taxable only in Australia. The only condition is to be seen that according to article 4 (1) such individuals or form of individuals are resident of that country, liable to tax therein. The assessee is directed to produce before the assessing officer necessary details with respect to their residential status. If same is found that those parties are resident of Australia according to article 4 (1) of the Double Taxation Avoidance Agreement and the necessary conditions of article 14 are satisfied, then assessee is not required to deduct tax at source on such payment. Accordingly, after examination, the learned assessing officer may delete the disallowance, if found in accordance with the law in terms of the agreement. 34. Similarly assessee has made payment of ₹ 20,518/- to an individual of Republic of Korea. According to article 14 of The Double Taxation Avoidance Agreement if the payment is made to an individual 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of some reason it fails to qualify for exemption from taxation in source country. Therefore same becomes income taxable in the sources country, Source country gets right to tax such income of non residents. Therefore, we hold that assessee should have deducted tax at source on the above payment of ₹ 22,694,888 u/s 195 of The Income Tax Act as the recipient of the income are not entitled to avail benefit of article 14 or article 15 of the respective Double Taxation Avoidance Agreements. To this extent, the disallowance made by the learned assessing officer cannot be found fault with. Accordingly disallowance u/s 40(a) (i) of the act to that extent of ₹ 2,26,94,888/- is upheld for non-deduction of tax at source u/s 195 of the act. 36. Thus ground number two of the appeal is partly allowed with above directions. 37. The next ground is with respect to of ₹ 1,123,312 out of travelling expenditure. The assessee has incurred a sum of ₹ 1,12,33,121/ on account of foreign travelling expenses. The assessee was asked to produce evidences and supporting documents to justify that the all the foreign travels were for the business purposes. The ld AR of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X
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