SUBRAMANIAM HARIHARAN,DELHI vs. ACIT, CIRCLE-63(1), NEW DELHI

It comes up that the assessee were providing legal services in the field of IP laws and these assessee had availed the services of foreign legal practitioners who are individual lawyers or law firms and the services were taken on behalf of the assessee’s clients who were located in India. These services were primarily taken for patent applications in respective foreign countries. The assessee had made payments for availing legal services on behalf of its clients including reimbursements of official fee and miscellaneous expenditure, to non- residents, who were individual lawyers or law firms or companies. The assessing officer disallowed payments amounting to these law firms or individuals invoking provisions of section 40(a)(i) of the Act, allegedly holding that the said payments were in the nature of Fees for Technical Services (FTS)

Ld. Sr. Counsel has submitted that the services received by the Appellant are not in the nature of managerial, technical or consultancy services but are purely professional services. The payment of professional fee has been made by the Appellant to the foreign legal practitioners, for the following specific services rendered by them or the actual expenses incurred: (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 report issued by the local Patent Office to the Appellant along with due date for filing a response. (iii) Receiving instructions from the Appellant and preparing and filing responses to the Examination Report issued by the local Patent Office (iv) Undertaking trademark searches in the records of the Intellectual Property offices in respective jurisdictions to ascertain availability of trademarks in question;

Ld. Sr. Counsel has submitted that while making such payments, the Appellant remitted the amount without withholding taxes under section 195 of the Act as the income of the legal practitioners/ law firms located abroad did not accrue or arise in India. Referring to section 195 of the Act it was submitted an obligation is cast on a person making payment to a non-resident of any sum, which is chargeable under the provisions of the Act, to deduct tax at the rates in force at the time of payment of such sum or at the time of credit thereof to the account of the payee, whichever is earlier. Thus, as per the aforesaid provision, tax is required to be withheld in respect of payments made to a non-resident only if such payment is chargeable to tax in India. Reliance in this regard is placed on the decision of the Supreme Court in the case of GE India Technology Centre (P) Ltd vs CIT: 327 ITR 456 (SC) and Engineering Analysis Centre of Excellence (P) Ltd vs CIT: 432 ITR 471 (SC); Van Oord ACZ India (P) Ltd vs CIT: 323 ITR 130 (Del); Estel Communications (P) Ltd: 217 CTR 102 (Del); CIT vs ICL Shipping Ltd: 315 ITR 195 (Mad); Jindal Thermal

In this regard here itself we find it relevant to reproduce Section 195 of the Act which reads as under: “Section 195 (1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest referred to in section 194LB or section 194LC) or any other sum chargeable under the provisions of this Act (not being income chargeable under the head "Salaries") shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force”

Referring to various aspects of taxability of income earned by professionals, like lawyers, the Ld. Sr. Counsel has submitted that the payments made by the Appellant were for availing professional services and were not in the nature of “Fees for Technical Services”, thus, not chargeable to tax under section 4 read with sections 5 and 9 of the Act. Ld. DR on the contrary relied the impugned orders.

Appreciating the material on record it can be seen that the assessing officer himself, in the impugned assessment order, has referred to the payments being made to non-residents as professional fee. However, the assessing officer has held the impugned payments for legal and professional services as being covered within the meaning of Fees for Technical Services (FTS) and therefore, chargeable to tax in India in terms of section 9(1)(vii) of the Act.

We observe that in terms of the scheme of the Act, section 4 of the Act provides that income-tax shall be charged on the ‘total income’ of an assessee. The scope of total income is defined in section 5 of the Act. What comes up from the arguments of ld. Sr. Counsel is that in the case of a non-resident, it is provided that (i) income received in India, (ii) deemed to be received in India, (iii) income which accrues or arises in India, or (iv) income which is deemed to accrue or arise in India, shall be included in the total income. It is indisputable that the income of the non-resident lawyers/ law firms for services rendered entirely outside India, does not fall under category (i), (ii) or (iii) above. In respect of (iv), it is submitted that an income is deemed to accrue or arise in India only if it is included in the various clauses provided under section 9 of the Act, and as per ld. Sr. Counsel, wherein, payment of professional fee is conspicuously absent.

In this context we find that Explanation 2 to section 9(1)(vii) of the Act defines FTS to mean payments of any kind to any person in consideration for services of a managerial, technical or consultancy nature, including the provision of services of technical or other personnel and the plain reading of section 9(i)(vii) of the Act does not cover payments of fees for professional services.

Elaborating it further, our attention was invited to section 194J of the Act which provides for tax deduction at source in respect of “Fees for professional

In this context we are of considered view that the controversy can be best resolved by reference to provision of law u/s 44AA of the Act, which mandates for maintenance of accounts by certain persons carrying on profession or business. The relevant sub-section (1) is reproduced below; “44AA. (1) Every person carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or any other profession as is notified by the Board in the Official Gazette shall keep and maintain such books of account and other documents as may enable the Assessing Officer to compute his total income in accordance with the provisions of this Act.”

Very apparently term ‘technical consultancy’ used in section 44AA of the Act has to be read ejusdem generis along with the words ‘professional’ activities based on certain skills acquired by study of particular domain of studies and which have some regulatory bodies to oversee the conduct of practitioner of the those skills and the same, very much distinguishes it, with generic term ‘technical services’, read ejusdem generis with managerial or consultancy services (including the provision of services of technical or other personnel), falling in category of FTS. Thus these afore-reproduced provisions of the Act, make it crystal clear 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 ITAs No.600/Del/2020, 9832/Del/2019 & 2134/Del/2018 refer to the latter specifically in Explanation (a) to section 194J of the Act, and Explanation (b) to that section would have been sufficient.

Further, ld. Sr. Counsel has drawn our attention to the fact that Finance Act, 2020, w.e.f. 01.04.2020, has amended section 194J of the Act to provide that payment in the nature of ‘fees for technical services (not being professional services)’ shall be liable to tax deduction at source @ 2% whereas in respect of payment(s) being in the nature of ‘fees for professional services’, liability to deduct tax at source shall remain constant, i.e., 10%.

Ld. Sr. Counsel has also drawn attention to the provisions of section 40(a)(i) and 40(a)(ia) of the Act, which read as under: “40. Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession",— (a) in the case of any assessee— (i) any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable,— 10

As contended by ld. Sr. counsel, it will not be out of place to consider that section 28 of the Act refers to the income head “profits and gains of business or profession”, which, too, demonstrates that profession is distinct from business. Even under the Double Taxation Avoidance Agreements which India has entered into with various countries, there are separate Articles/provisions relating to taxation of “Fee for Technical Services” and “Independent Personal Services” (“IPS”), like that of lawyer, doctors and other professionals and the special provisions relating to taxation of professionals, it is submitted, override the general provision relating to taxation of FTS.

The reason for the aforesaid is also not far to seek. A professional’s services have geographical limitations regulated by certain statues, as in case of ITAs No.600/Del/2020, 9832/Del/2019 & 2134/Del/2018 Lawyers, the Bar Council of India. Lawyer, registered as an Advocate can practice in Indian courts, but for representing Indian clients his qualifications as an Advocate may not be sufficient to represent the Indian client in courts or proceedings abroad. Thus here in the case in hand the recipients of the income were individual lawyers or law firms. They were only competent to practice in respective jurisdiction of which they were residents. Their services were vital for Indian clients for protecting their IPRs in foreign jurisdictions. The role of assesse was to engage with these non-resident lawyers and law firm and to work with them, in ensuring necessary compliances and following regulatory framework in those jurisdictions for protection of IPRs of Indian customers. The services so rendered may be technical in sense that it needs expertise but expertise alone is not sufficient to deliver these services before statutory and regulatory authorities or courts in foreign jurisdictions, the professional status these lawyers and law firms hold to represent clients, is the most vital element and make them only eligible to deliver the professional services, but that does not give rise to FTS.

In this regard, ld. Sr. Counsel has relied co-ordinate bench of the Tribunal decision dated 09.12.2021 passed in the case of Chander Mohan Lall vs ACIT: 134 taxmann.com 292 (Del Trib.), where identical issue has been considered and determined in favour of the assessee by deleting the disallowance made by the assessing officer under section 40(a)(i) in respect of legal and professional fee paid to foreign attorneys without deduction of tax at source holding that there is a clear distinction between FTS and fee for professional services; the latter not being covered under the scope of section 9(1)(vii) of the Act. The relevant findings of the are reproduced hereunder: “19. Factually, the payments made to non-resident attorneys are neither in the nature of interest, nor in the nature of royalty. This is not even the case of the Revenue as well. Therefore, it has to be seen, whether the payment made comes within the ambit of FTS. Explanation 2 to Section 9(1)(vii) defines FTS to mean any consideration received for any managerial, technical or consultancy services, including provision of services by technical or other personnel. In the facts of the present case, undisputedly, the payments to non-resident attorneys are purely for providing legal/professional services. On careful examination of various provisions of the Act brought to our notice by learned counsel for the assessee, we are convinced that the domestic law provisions recognize legal/professional services and FTS as two distinct and separate categories.

To the same effect is the decision of the Delhi bench in the case of ONGC vs DCIT: 117 taxmann.com 867 (Del Trib.) wherein the co-ordinate bench held as under: “20……………Even otherwise also under section 9(1)(vii) legal services cannot be reckoned as FTS albeit it is professional services outside the scope of section 9(1)(vii). It has also been brought on record that in assessee’s own case for the Assessment Year 2009-10, the tribunal in the context of legal services rendered by the same party with regard to litigation between ONGC and Amur Shipbuilding Yard was held not taxable as FTS u/s 9(1)(vii). Accordingly, we hold that such payment cannot be brought to tax u/s 9(1)(vii). Hence, the appeal of the assessee is allowed.” (emphasis supplied) 20. It is a settled legal position that, “Lex specialis derogat legi generali”, which means that special legislation overrides general legislation. (Refer, Britannia Industries Ltd v. CIT: 278 ITR 546 (SC) and New Okhla Industrial Development Authority vs CCIT: [2018] 95 taxmann.com 58 (SC)]. Taxation of income on basis of deemed to accrue or arising out of such cross-border transaction, require adhering to the rule “Lex specialis derogat legi generali” and thus nature of source of income has to relate to specific definitions in the ACt and not general context. In that view of the matter, since there is specific definition of professional services provided under section 194J of the Act, the same needs to be adopted and the action of the assessing officer in classifying such professional services received from foreign attorneys/ law firms as FTS is erroneous. The discussion of the language of sections 194J, 9(1)(vii), 40(a)(i) and 194M of the Act, make it clear and unambiguous, the same are required to ITAs No.600/Del/2020, 9832/Del/2019 & 2134/Del/2018 be interpreted strictly and it is impermissible to resort to any interpretative process to unfold the legislative intent. [Refer: CIT vs Tara Agencies: 292 ITR 444 (SC), CIT vs T.V. Sundaram Iyyengar: [1975] 101 ITR 764 (SC), CIT vs Elphinstone Spg&Wvg Mills Co Ltd: 40 ITR 142 (SC), CIT vs Motors & General Stores Ltd: 66 ITR 692 (SC) and KeshavjiRavji& Co. vs CIT: [1990] 49 Taxman 87 (SC). In that view of the matter, it is concluded that since the payments made by the Appellants to non-resident foreign attorneys/ law firms were purely for professional services, which do not partake the character of FTS under section 9(1)(vii), the same are therefore, not chargeable to tax in India under the provisions of the Act. That being the case all other contentions and grounds become otiose and need no further discussion.