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

Heard and perused the records. The case of these two assessee were heard together as similar question of facts and law were involved. However, for convenience the facts and relevant orders in case of Subramaniam Hariharan, are being discussed and findings arrived shall mutatis mutandi apply to case of Anand and Anand too. What comes up from the hearing is that the both assessee as lawyers are engaged in the practice of Intellectual Property Laws and in the ITAs No.600/Del/2020, 9832/Del/2019 & 2134/Del/2018

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 juri ictions 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. 10. 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 eju em 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 eju em 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

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%.

1 In addition to the above, attention was also invited to section 194M of the Act, inserted by Finance (No.2) Act, 2019, w.e.f. 01.09.2019, wherein the Legislature has mandated deduction of tax at source by individuals and HUFs on payments made in the nature of fees for professional services exceeding Rs.50 lakhs in a financial year, without introducing any such obligation in respect of payments made towards ‘fees for technical services’.

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",—

1 It was submitted that upon perusal of provisions of section 40(a)(i) and 40(a)(ia), reproduced above, it may be appreciated that rigours of section 40(a)(ia) apply in respect of any sum payable to a resident on which tax is deductible at source under Chapter XVII-B of the Act, encompassing section 194J within its scope, which specifically refers to payments in the nature of “Fee for technical services” and “Fee for professional services”. Accordingly, Explanation to section 40(a)(ia) defines both the expressions, “fee for technical services” as well as “professional services”, as reproduced above.

2 However, it is pertinent to note that section 40(a)(i) only provides for tax deduction in respect of payments made to non-resident of “fees for technical services or other sum chargeable under the Act” and accordingly, while the Explanation to that section provides the definition of “fees for technical services”, no mention is made about “fees for professional services”. It was submitted that the Legislature has deliberately not defined the expression “fees for professional services” in Explanation to section 40(a)(i) for the reason that payment of such nature being made to a non-resident does not accrue or arise in India or is not deemed to accrue or arise in India, in terms of section 5 or section ITAs No.600/Del/2020, 9832/Del/2019 & 2134/Del/2018

3 Aforesaid, establish unequivocally that the Legislature has notably and deliberately created two separate classes of income, viz., fee for technical services and fee for professional services. Whereas the former is defined in Explanation 2 to section 9(1)(vii), the latter draws its meaning from Explanation (a) to section 194J of the Act. Reliance in this regard is also placed on the decision in the case of NQA Quality Systems