Section 9(1)(vii), 195 of the Act – Withholding obligation needs to be discharged based on the law that existed at the time of making payments from which taxes were to be withheld.

Facts

Taxpayer, a resident of India and a patent law practitioner specialised in Intellectual Property Laws. Taxpayer facilitated filing of Patents outside India for its clients. For this purpose, Taxpayer acted as an interface between the client and foreign lawyers and law firms and communicated and co-ordinated with them. Taxpayer also made payments to foreign lawyers on behalf of its clients after receiving payment instruction from its clients. For these facilitation services, taxpayer charged a nominal fee.

Taxpayer contended that it only acted as an interface between the client and foreign law firms and it does not have the right or capability or the need to utilise services of the overseas lawyers. In fact, the services were rendered by the foreign lawyers to the Taxpayer’s clients and not to the Taxpayer. Further, even from the view of Taxpayer’s clients, the patents in foreign country could be utilised only in that country in which such patent is granted as the patent protection provided by a country would be valid only in that country. As the services were rendered outside India as well as utilised outside India, income from such services did not accrue or arise in India. Consequently, taxes were not required to be withheld u/s 195 of the Act. In any case, Explanation 5 to section 9(1) inserted by Finance Act, 2010 (inserted retrospectively) provides that FTS would be deemed to accrue or arise in India irrespective of whether such services are rendered in India cannot make the Taxpayer liable to withhold taxes.

However, the Tax Authority held that the Taxpayer availed technical and consultancy services from non-residents and such services, although performed outside India, was for the benefit of Taxpayer’s profession carried on in India and hence, income from services accrued in India in the hands of the foreign lawyers u/s. 9(1)(vii) of the Act. Accordingly, tax was required to be withheld on payments made by Taxpayer to foreign lawyers u/s. 195 of the Act.

Held

Before the insertion of Explanation 5 to section 9(1)(i), the legal position was that unless services are rendered in India, FTS would not be deemed to accrue or arise in India. Although Explanation 5 was inserted retrospectively, so far as withholding liability is concerned, it depends on the law as it existed at the point of time when payments are made. A Taxpayer is not expected to know how the law will change in future. While retrospective amendment in law does change the tax liability in respect of income with retrospective effect, it cannot change tax withholding liability, with retrospective effect.

When withholding obligations are to be discharged at the point of time when payment is made or credited, such obligations can only be discharged in light of the law as it then stands. Accordingly, taxpayer cannot be faulted for not withholding taxes. Thus, the primary issue whether services are in the nature of FTS and whether services are utilised in India was not discussed by the Tribunal.

P.S: Reason why the taxpayer was not seeking protection under the treaty is not clear.