JANET CHRISTINE DEPENNING,CHENNAI vs. ITO, INTERNATIONAL TAXATION WARD-1(1),, CHENNAI

We have heard the rival submissions & perused the written Notes on Arguments furnished by both the parties. We have also carefully gone through the judicial decisions on which reliance was placed by the parties in support of their respective pleadings. We have also examined the orders of the coordinate bench of this Tribunal in assessee’s own case for the earlier years in which similar issue was decided in his favour. Having considered these documents, we shall now deal with respective contentions put forth by the parties.

In the present case the assessee is a Patent Attorney who renders legal services in his capacity as an Advocate in India. The assessee has a wide client base which inter alia includes multi- national corporations as well as reputed corporate houses of the country. The clients of the assessee hold valuable IPRs which need registrations with the Patent or IP authorities so that IPRs are protected from unauthorized use by others. Since the clients of the assessee have markets beyond the boundaries of India, they seek assessee’s assistance for obtaining registrations under the patent laws of the foreign countries where products of the customers are marketed under their IPRs. In order to comply with the legal formalities associated with registration of IPRs with the patent authorities of the respective countries, the assessee seeks assistance of IP attorneys carrying on similar professional activities in the respective countries where the IP registrations are sought to be obtained. For the services rendered by the foreign patent attorneys, the fees are paid by the assessee because their services are engaged by him. It is the assessee’s primary contention that the fees charged by the foreign attorneys were reimbursed by his clients along with his own fees. It was therefore his contention that since the amounts paid by the assessee were in the nature of pure reimbursements, no income element was involved in the remittances made to foreign attorneys and therefore no disallowance under Section 40(a)(i) read with Section 195 of the Act was warranted in his case.

While supporting the order of the Ld. CIT(A), the Ld. AR of the assessee put much emphasis on the fact that in the assessee’s own case for the AYs 2006-07, 2008-09 & 2009- 10, the disallowance u/s 40(a)(i) was made but the same was deleted by this Tribunal in its order dated 27.11.2015. The Ld. AR therefore vehemently claimed on the principle of judicial consistency alone, the order of the Ld. CIT(A) deserved to be upheld since he had granted the relief to the assessee by following the order of his predecessor which was upheld by the Tribunal. After due consideration of the submissions and perusing the order of this Tribunal for AYs 2006-07, 2008-09 & 2009-10, we are unable to agree with the contention put forth by the assessee. It is to 1323/Chny/2024 :- 7 -:

On these reasonings in the absence of any material change justifying the revenue to take a different view of the matter—and if there was no change it was in support of the assessee—we do not think the question should have been reopened and contrary to what had been decided by the Commissioner in the earlier proceedings, a different and contradictory stand should have been taken.” (emphasis supplied)

On examination of the provisions of Section 9(1)(vii) of the Act read with Explanation to Section 9(2) which was substituted by the Finance Act, 2010, we note that prior to the amendment in order to attract the rigors of Section 195 requiring tax deduction at source from ‘fees for technical services’, it was necessary for the Revenue to show that the technical services as defined in Section 9(1)(vii) of the Act were rendered as well as consumed in India. Since in the earlier years, the Tribunal found as a matter of fact that no services were rendered by the foreign attorneys in India, it was held that as per the law, which existed at the time when the assessee made payments to foreign attorneys, he had no obligation to deduct tax under Section 195 of the Act. Consequently therefore no disallowance was warranted u/s 40(a)(i) of the Act. We however find that at the time when the matter was heard by the Tribunal, amendment to Section 9(2) of the Act, was already in force. Taking judicial note of the amendment which, widened the scope of TDS provisions qua the payments made to foreign attorneys, the Tribunal had observed as follows:

The second limb of the ld. AR’s argument was that the payments which the assessee made to foreign patent attorneys did not come within the ambit of the term ‘fees for technical services’. According to Ld. AR, the services performed by the foreign attorneys were mere clerical or executionary in nature which did not involve to 1323/Chny/2024 :- 9 -:

From the foregoing definition, it is noted that any payment which is made for rendering of technical, consultancy or managerial services, such payment is regarded as ‘fees for technical services’ and the income embedded therein is deemed to accrue or arise in India. In the present case, admittedly payments were made to foreign attorneys who were professionally qualified to render legal services. It is also well known fact that under the relevant Patent / IP laws, the applicant or attorney representing him is required to comply with the technical formalities as well as legal procedures contained in relevant laws, rules and regulations of the countries where the patent/IPR is sought to be registered. As such, having knowledge, experience and expertise in the specialized field of IP laws is an essential pre-requisite for rendering the services. In fact practicing IP laws is one of the specialized branch of legal practice and only few attorneys are well versed with the intricacies of the IP laws as also with regulations and technicalities of the procedures governing registrations to such rights. The bone of contention however in the present case is whether the services rendered were in the nature of ‘consultancy’. It was vehemently argued by the Ld. AR that the services rendered by the foreign attorneys were not even ‘consultancy’ in nature but purely clerical or executionary in nature and therefore did not come within the ambit of Section 9(1)(vii) of the Act. On the other hand, it was the Ld. CIT, DR’s contention that having regard to the nature of services, the foreign attorney did render not only ‘consultancy’ services but also involved a technical element which enabled the assessee and his clients to comply with the IP laws of the relevant country and obtain IPR registrations in conformity with the relevant rules and regulations of that country. But for provision of advisory and execution services by the foreign attorneys, the assessee could not have successfully provided to his clients IP registrations in the respective countries where patents/IPRs were registered.

In our considered view, the moot point to be adjudicated in the present appeal therefore is whether the legal services rendered by the foreign attorneys could be classified as 'consultancy services' so as to bring these payments within the ambit of Section 9(1)(vii) of the Act. In this regard, we note that the term ‘consultancy’ service is not defined in the Act. In the circumstances one must understand the term as understood in normal commercial parlance. As per Oxford Dictionary, the meaning of the word 'consultancy' is “a professional practice that gives expert advice within a particular field”. Further, Wikipedia defines 'consultant' as a professional who provides expert advice in a particular area such as security (electronic or physical), management, education, accountancy, law, human resources, marketing (and public relation), finance, 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 governing IP rights in the respective countries. It is with the use and aid of the advice given by the foreign patent attorneys that the assessee and/or his clients were able to prepare technically intricate documentation, necessary for filing Patents and other IP rights applications in the foreign countries in compliance with their respective IP laws. The foreign attorneys not only advised the assessee in preparing the documentation necessary for submission of applications but also represented the applicants before the Patent/IP authorities and provided clarifications and explanations necessary for grant of registration. We therefore note that on the given facts of the case, but for the consultancy or advisory services rendered by foreign attorneys, the assessee or his clients would not have been able to obtain the Patents or IP registrations in the foreign countries.

We also find it relevant to hold that the Ld. CIT, DR rightly relied on the judgment of the Hon’ble Supreme Court in the case of GVK Industries Ltd Vs ITO (supra), wherein meaning of the term ‘consultancy service’ for the purposes of Section 9(1)(vii) after its amendment in 2010 was explained by the Hon’ble Supreme Court. In the said judgment the Hon’ble Court observed as follows:-

In this context, a reference to the decision in CIT v. Bharti Cellular Ltd. [2009] 319 ITR 139/[2008] 175 Taxman 573 (Delhi), would be apposite. In the said case, while dealing with the concept of "consultancy services", the High Court of Delhi has observed thus:

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 interaction that leads to rendering of advice.

As the factual matrix in the case at hand, would exposit the NRC had acted as a consultant. It had the skill, acumen and knowledge in the specialized field i.e. preparation of a scheme for required finances and to tie-up required loans. The nature of activities undertaken by the NRC has earlier been referred to by us. The nature of service referred by the NRC, can be said with certainty would come within the ambit and sweep of the term 'consultancy service' and, to 1323/Chny/2024 :- 12 -:

Applying the ratio laid down in the judgment (supra), we are of the view that the services which the foreign attorneys rendered to the assessee squarely came within the ambit of Section 9(1)(vii) of the Act. In his rebuttal, the ld. AR sought to distinguish the judgment of the Hon’ble Supreme Court stating that the facts of the assessee’s case were distinguishable because unlike in the case before the Hon’ble Apex Court, the non-resident attorneys had merely performed executionary functions which were rendered abroad and also utilized outside India. We are however unable to persuade ourselves to agree with the contention put forth by the Ld. AR of the assessee. In the first instance, the Hon’ble Supreme Court in the case of GVK Industries Ltd (supra) defined the expression ‘consultancy services’ in the context of Section 9(1)(vii) and the services rendered by foreign attorneys squarely come within the ambit of such definition. This point has not been negated by the Ld. AR in his submissions. Instead the case made out by the Ld. AR is that the services were rendered abroad and utilized abroad and therefore fell within the exception carved out within Section 9(1)(vii)(b) of the Act.We therefore hold that the ratio laid down in the said judgment is very much relevant in deciding the present appeal.

We note in assessee’s case his services were engaged by the Indian clients for obtaining registration of patents and IPRs owned by them in foreign jurisdictions. Having obtained the mandate from his clients for obtaining the patent registrations in foreign jurisdictions, it was entirely at the discretion of the assessee to find ways and means to complete the job entrusted by the clients. Instead of providing services on his own, the assessee appointed foreign associates for services such as filing of patent applications, making representations before IP authorities, obtaining registrations from statutory authorities of the respective foreign countries etc. The fact however remains that the services of the foreign attorneys were engaged solely at the behest of the assessee for fulfilling his own commitments to his clients while carrying on his professional work in India. The source of income in the assessee’s hands was solely located in India and for the purpose of earning income from the Indian source, the assessee had called upon his foreign associates to render certain services for which payments were made by him. We therefore find that the payments made to the foreign attorneys were used by the assessee while discharging his professional commitments in India and therefore the conditions prescribed in Section 9(1)(vii) were satisfied.

As regards the Ld. AR’s contention that the assessee had acted only as a facilitator or pass through entity while making payments to the foreign attorney and on that ground the payment made were in the nature of pure reimbursement. In support of this averment the Ld. AR referred to the Pages 499 to 1121 of Paperbook – 3 & 4, which contained appointment letters issued by the clients to the assessee, assessee’s letters of engagement issued to the foreign associates, correspondences between the assessee and his clients as also between the assessee and the foreign associates. The assessee also furnished copies of the invoices raised by him on his clients in India as also the copies of the invoices which the assessee received from foreign associates, copies of the payment instructions etc. On scrutiny of the documents furnished it however appeared that there was no tangible material available in these documents which substantiated the Ld. AR’s contention that the payments which the assessee made to the foreign associates was in the nature of pure reimbursement. In fact it appeared that most of the documents furnished in the paper book did not pertain to the tansactions of the relevant year. In view of these facts, the assessee’s case was re- fixed for clarification on 07.02.2020 and the assessee was specifically requested to furnish documents for the relevant year inter alia including the audited financial statements for the FY 2010-11, letters of appointment issued by clients for the work performed during the relevant year, letters of engagement issued to foreign associates in the relation to the payments made to them during the relevant year, corresponding copies of communications between the assessee and clients as also between the assessee and foreign associates and other relevant documents which would substantiate that the payments made were in the nature of pure reimbursement which would prove that there was existed privity of contract between the client and the foreign associates. In response the Ld. AR of the assessee furnished Paper Book – 5 consisting of Pages 1122 to 1185 and a convenience compilation comprising of 113 pages. On scrutiny of the documents so furnished it was however noted that although the assessee has furnished copies of communications between the assessee and clients as also between the assessee and foreign associates along with supporting invoices, there is nothing discernible in these documents on the basis of which it can be held that there existed direct and proximate nexus between the clients and the foreign associates for rendering services and the assessee was to act only as an intermediary. We did not find any letters of appointment issued by the clients in relation to the scope of work to be performed on the basis of which we could hold that the appointment of foreign associates was made by the assessee on the specific instructions or request of the assessee and for which the assessee could be held to be a mere agent requiring him only to facilitate payment. We also note from the copies of the invoices raised by the foreign associates that the privity of work was between the assessee and the foreign associates and the work was to 1323/Chny/2024 :- 14 -:

From the above engagement letter, it is evident that M/s ITC Limited had engaged the services of the assessee for filing application for registration of trade marks ‘Checkers’ and ‘Ace’ in several foreign countries. From the terms of appointment, it is evident that nowhere the assessee’s client had even suggested that for executing the said work, the assessee should engage services of any particular foreign attorney or that the Indian client had identified any particular foreign attorney with whom the assessee was required to coordinate with for fulfilling his professional commitment. In what manner the assessee was to perform and fulfill the assigned tasks was left to the sole discretion of the assessee. We therefore find that the contractual terms between the assessee and his client nowhere prescribed that the client would be reimbursing the costs and expenses incurred by the assessee while discharging his obligations under the terms of engagement. We therefore do not find any material available in the records from to 1323/Chny/2024 :- 15 -:

The Ld. AR further sought to avail the benefit of the exception carved out in Section 9(1)(vii)(b) of the Act on the premise that by obtaining patents/IPR registrations abroad, the clients of the assessee created sources of income outside India and since the services were rendered by the foreign attorneys in connection with such foreign source, the income did not deem to accrue or arise in India warranting deduction of tax u/s 195 of the Act. As we observed in the preceding paragraph 20, the services of the foreign attorneys were not engaged by the assessee’s clients in whose favour the patents or IPRs were registered in foreign countries. Instead the services were engaged by the assessee while in discharge of his professional obligations in India. As such, the source of income in connection with which the services of foreign attorneys 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 connstitute “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 these 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 to 1323/Chny/2024 :- 16 -:

The Ld. AR placed heavy reliance on the fact that the ADIT(IT)- 2(1), Kolkata had granted a certificate u/s 195 of the Act authorizing the assessee to pay legal & professional fees to Merchant & Gould, United Trademark & Patent Services, Saba& Co., Elisabet Berbery & Wuesthoff & Wueshoff without deduction of tax on 09.09.2010. Since the said certificate was issued after the amendment in Section 9(2) of the Act by the Finance Act, 2010 came in force, the Ld. AR claimed that the Revenue had in principle accepted the assessee’s contention that he had no obligation to deduct tax u/s 195 before remitting the foreign attorney fees. The Ld. AR therefore argued that by the principle of estoppel, the AO was precluded from making disallowance u/s 40(a)(i) because the alleged default of non- deduction of the tax u/s 195 was not attributable to the assessee. The Ld. CIT, DR placed before us the submissions filed by the assessee in the course of proceedings u/s 195 of the Act wherein the assessee had inter alia claimed that the payment was in the nature of pure reimbursement having no income element. In the said letter, the assessee had compared himself with an airline agent who issues air tickets in favour of his customers. The Ld. CIT, DR therefore submitted that since the assessee did not fairly and correctly set out the true and correct facts the certificate u/s 195 was erroneously granted. He submitted that while adjudicating the appeal, the Tribunal should decide the issue taking into consideration true and correct facts and applicable legal provisions of the Act. Having considered the material facts and evidences before us, we note that assessee’s contention that the payments made by him to foreign attorneys were in the nature of ‘pure reimbursements’ is found to be factually incorrect. We note that the certificate u/s 195 was issued by the ADIT(IT)-2(1), Kolkata only in respect of payments of USD 3722.28, USD 3815.00, USD 380.00, USD 3793.85&Euro 10217.00 to Merchant & Gould, United Trademark & Patent Services, Saba& Co., Elisabet Berbery and Wuesthoff & Wueshoff respectively. In our considered opinion, no disallowance under Section 40(a)(i) was warranted in respect of the aforesaid three payments for which the assessee had obtained NIL certificates u/s 195 of the Act from the ADIT(IT)-2(1), Kolkata. However the mere fact that the assessee obtained certificates u/s 195 of the Act in relation to three specific payments by itself did not grant blanket immunity to the assessee in respect of other remittances made to the foreign attorneys. In adjudicating the question of allowability of the expenditure, where tax was admittedly not deducted u/s 195 nor certificate u/s 195 was obtained, we need to take into consideration the relevant facts and applicable legal provisions. As rightly stated by the Ld. CIT, DR; there is no estoppel to 1323/Chny/2024 :- 17 -:

In this regard, useful reference can be made to the decision of the Hon’ble Karnataka High Court in the case of CIT Vs Bovis Lend Lease (I) Ltd (208 Taxman 168) wherein the Hon’ble High Court while holding that the certificate granted u/s 195/197 in only applicable to the consideration payable for which such certificate is obtained also held that such certificate does not preclude the Assessing Officer to re-examine the chargeability of income in a regular assessment proceedings. The relevant observations are extracted below:

Same view is expressed by the Hon’ble Delhi High Court in the case of National Petroleum Construction Company Vs Dy. CIT (W.P. 8527/2019) dated 20.12.2019.

As far as the Ld. AR’s reliance on the decision of Hon’ble Delhi High Court in the case of DIT Vs Panalfa Auto electrik Ltd (49 taxmann.com 412) and the coordinate Bench of this Tribunal in the case of Credit Lyonnais Vs ADIT(IT) (80 TTJ 191) is concerned, it is noted that in the decided cases the issue before the judicial forums was whether commission or fee paid to marketing agents fall within the scope of ‘fees for technical services’ as defined in Section 9(1)(vii) of the Act which is not the issue involved in the assessee’s case. Accordingly the judgments relied upon by the Ld. AR are found to be factually distinguishable.

We have also gone through the decisions of the coordinate Benches of the Tribunal in the cases of Wipro Ltd Vs ACIT reported in 80 TTJ 191, Ajappa Integrated Project Management Consultants (P.) Ltd. Vs ACIT reported in 52 SOT 612 and Aqua Omega Services (P.) Ltd Vs ACIT reported in 141 ITD 134; relied upon by the Ld. AR of the assessee. It is noted that the nature of services and facts involved in these cases are not similar with that of the assessee’s case. Moreover these decisions have been rendered in the context of the pre-amended Section 9(1)(vii) of the Act as it stood prior to the insertion of Explanation (2) by the Finance Act, 2010 and therefore the ratio laid down therein are not applicable in the relevant year in consideration.

For the reasons set out in the foregoing paragraphs therefore, we hold that the payments which the assessee made to his foreign associates or foreign attorneys came within the ambit of Section 9(1)(vii) of the Act in terms of which the income by way of fees for technical services deemed to accrue or arise in India and consequently therefore the assessee had obligation to deduct tax at source under the provisions of the domestic tax laws. The Ld. AR of the assessee however raised an alternate contention that if under the domestic tax provisions, the payments are held to in the nature of ‘fees for technical services’, even then the assessee did not have obligation to deduct tax source since payments did not come within charging provisions of the DTAAs with the respective countries of which the foreign attorneys were residents. The Ld. AR submitted that the relevant DTAAs contained specific provisions defining the terms such as ‘fees for technical services’, ‘fees for included services’, ‘independent personal services’ etc. and the payments made by the assessee could fall under different categories defined in DTAAs and consequently therefore payments made did not include element of income chargeable to tax in India, requiring deduction of tax u/s 195 of the Act. The Ld. AR submitted that in accordance with the provisions of these DTAAs, the payments made by the assessee to foreign attorneys were liable to be assessed only in the Country of Residence and therefore India being source country did not have right to tax such payments under the respective DTAAs. Having considered the said alternate plea of the ld. AR, we find merit in the same. We however note that before the Ld. CIT(A)/AO this aspect was neither raised by the assessee nor considered and adjudicated by the Ld. CIT(A)/AO. In the circumstances therefore, to meet the ends of justice, we deem it fit and proper to restore this alternate plea raised for the first time before us to the file of the AO. He is directed to examine the assessee’s plea that payments were non-taxable in India because of the beneficial provisions of the DTAAs with respective countries. While doing so, the AO shall grant adequate opportunity of being heard to the assessee and will also permit him to to 1323/Chny/2024 :- 19 -: