Article 13,15 of India-UK
DTAA, S. 9(1)(vii) of the act – Fees
paid to UK LLP for legal services in relation to acquisition of banking company
and setting up of USA branch qualifies as payment made for the purpose of
earning income from a source outside india. article 15, being a specific
provision dealing with legal services, overrides the general provisions of
article 13 dealing with technical and consultancy services – fees paid to UK
LLP is not taxable in india under the act
as also DTAA
Facts
The
taxpayer, an indian company, was engaged in the business of banking. The
taxpayer was contemplating the option of
acquiring banking company and/or setting up of a branch in US. For this purpose, the taxpayer entered into
an agreement with a UK LLP to obtain certain legal services.
During
the relevant year, the employees of the taxpayer travelled to the USA. During their visit, UK LLP made presentations
and discussed various legal or regulatory requirements in the USA in relation
to setting up of branch and acquisition of banking company in the USA.
The taxpayer
contended that the
services rendered by the UK LLP
were utilised for the purpose of earning income from a source outside india.
Hence, it cannot be deemed to accrue or arise in india by virtue of the source
rule exclusion u/s 9(1)(vii) of the act. Further, under the India-UK DTAA (DTAA), such income is covered under
article 15 on independent Personal Services (IPS) and in absence of
satisfaction of conditions specified therein, the payment made to UK LLP is not
taxable in india even in terms of DTAA.
However,
ao contended that in absence of actual creation of a new source of income, the
source rule exclusion under the act is not applicable in respect of payments
made to UK LLP which is taxable as royalty/FTS under the act. Further, as
services rendered by the UK LLP had made available technical knowledge, skill
and experience to the employees of the taxpayer, the payment made to the UK LLP
qualifies as FTS under the DTAA.
Held
Taxability under the Act
–
The payment was made by the taxpayer to the UK LLP on account of the first
phase of the agreement. Under the first phase, the UK LLP was required to
educate the Taxpayer’s officials on various legal/regulatory requirements of
USA in relation to setting up of a bank branch and acquisition of banking
company.
–
The nature of services indicated that
the payments were made with a view to carry on business and to create a new
source of income outside india, by way of establishment of new branch or
acquisition of a banking company.
–
The source rule exclusion is not restricted only to a case where there is an
existing source of income. As long as the payment is made for creation of a new
source of income, it is covered by the source rule exclusion.
Taxability under DTAA
– Article 15, being a specific provision
dealing with independent professional services of lawyers, overrides the general provisions
of article 13 dealing with a broader category of technical or consultancy
services1.
–
As Held by the Special bench of the tribunal
in the case of Clifford Chance2, article 15 applies not only to
individuals but also to firms3. As the services were rendered outside india and
none of the employee of the UK LLP was present in india for more than 90 days,
such income is not taxable in india under article 15 of the DTAA.
