Hariharan Subramaniam v. Asstt. CIT [ITA No.
7418/Del/2019, dt. 6-11-2020] : 2020 TaxPub(DT) 4564 (Del-Trib)
Payments to overseas attorneys for IP professional
consultancy -- Applicability of TDS obligations thereof under IT Act and under
various country DTAA's
Facts:
Assessee a lawyer had paid to various country attorneys for
registration and consultancy of Intellectual property laws where in a host of
professional consultancy services were performed sans deduction of TDS under
section 195. The contention of the revenue was that the same was Fee for
technical consultancy under section 9(1)(vii) read with Explanation 2 and thus
TDS ought to have been deducted and in the absence of which the said expenses
were disallowed in the hands of the assessee under section 40(a)(i).
Assessee's counters were --
(a) The fee to attorneys were
not fee for technical services and were professional services.
(b) Reference to section 194J
makes a distinction between technical fees and professional consultancy proving
that the same were not on same plane.
(c) The various country DTAA's
confirm that such legal/professional fees fall in the scope of Independent
Personal Services (IPS) where in it is taxed only in the state of residency
unless the said services are provided for more than 183 days in the source
state in which case the source state also gets a right to tax the same.
(d) The individual DTAA have
specific clauses which are not uniform some providing relief for taxing it in
the state of residence based on the entity structure of the service recipient.
(e) The absence of these clauses
in IPS would mean the same will fall into business income thus taxable under
article 7 only if there is a PE.
(f) The exclusion clause in IPS
that IPS would not fall into FTS (fee for technical services).
(g) On the alternative since
these were incurred for earning a source of income outside India they fell in
the meaning of section 9(1)(vii)(b) thus no TDS obligation was fastened as the
incomes do not accrue or arise in India.
(h) Benefit of "make
available" or "most favoured nation" clause application to fit
in if read as FTS.
The decision of DLF Ltd. v. ITO, ITA No. 3253/Delhi/2012
: 2019 TaxPub(DT) 7105 (Del-Trib) and NQA Quality Systems Registrar's
Ltd. v. DCIT (2005) 92 TTJ 946 (Delhi) : 2005 TaxPub(DT) 1117 (Del-Trib)
were cited.
Revenue's counters were --
These were FTS under section 9(1)(vii) and since no TDS
obligation was met deserved disallowance. The decision of ACIT v. Subhatosh
Majumdar (ITA No. 2006/Kol/2017, dated 9-1-2020) : 2020 TaxPub(DT) 1481
(Kol-Trib) was cited.
Since lower authorities did not provide relief to assessee
they knocked the doors of the ITAT -
Held partly in favour of the assessee that --
(a) The lawyer's fees will fall
in the scope of IPS and not FTS.
(b) They cannot fall into FTS
once DTAA's become applicable.
(c) If DTAA's are not applied
they can fit into section 9(1)(vii) FTS clause held in the Subhatosh
Majumdar case.
(d) They cannot fall into the
exclusion under section 9(1)(vii)(b) on premise that these were incurred for
earning a source of income outside India -- this spend was not a source of
income outside India. They were incurred to protect the overseas IP rights of
Indian clients hence cannot come in the exclusion clause of section
9(1)(vii)(b).
(e) The ITAT went over country
by country grouping of similar DTAA and gave relief for the IPS clause for
those countries who exempted the recipient based on tax residential status as
per the DTAA and/or on the nature of the entity exemption as well as per country
specific IPS clause in the DTAA.
(f) In respect of certain DTAA
countries the ITAT held that those country DTAA's do not have specific
exemption clause under IPS would not mean they will fall into business income
clause article 7. In such countries there was a default for non-deduction of
TDS and hence the disallowance under section 40(a)(i) was upheld.
(g) All the country specific
payments were remanded for a check on the residential status and documentary
verification as per the DTAA's.
Editorial Note: In
respect of countries where there is no IPS clause or IPS clause is silent on
certain points of IPS reference will need to be made to Article 7/business
profits. The scheme of IPS taxation empowering a source state to tax IPS income
is only when the services exceed 183 days in the source state. The principle is
more or less in sink with project PE clause. So reference ought to have been
made to Article 7 certainly in such cases. This is also confirmed in the OECD
and in the DTAA treatise of Dr. Klaus Vogel. To that extent the ITAT probably
did not look beyond the IPS clause into Article 7 business profits clause in
the DTAA's. In fact there was also a discussion paper from OECD to do away the
IPS clause as it had outlived its purpose to make it fall into PE/Business
profits clause.
Reference also be made to the various decisions of Linklaters
100 TTJ 514/195 TTJ 686/2017 TaxPub(DT) 1138 (Mum ITAT)/185 TTJ 525/65 SOT 266 and
Clifford chance 143 ITD 001/318 ITR 237/76 TTJ 725 both relevant under
Indo-UK DTAA.