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Tax Publishers 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.

Tax Publishers

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.

(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.