By Dhishat B. Mehta | Bhaumik Goda
Chartered Accountants
8. [2020] 121 taxmann.com 189 (Del.)(Trib.) Hariharan Subramaniam vs. ACIT ITA No.: 7418/Del/2018 A.Y: 2015-16 Date of order: 6th
November, 2020
Section
9(1)(vii) – Scope of FTS service includes professional service – Independent
Personal Service (IPS) Article of DTAA – Professional services are taxable in
resident state if service provider is person specified in IPS Article of DTAA
and satisfies exemption conditions – Services are taxable in source state if
service provider is not person specified in IPS Article – Benefit of non-taxation
in absence of PE under Article 7 is not available
FACTS
The
assessee is an advocate practising in the field of intellectual properties law.
It obtained the services of foreign legal professionals who were individuals,
law firms and companies for filing of various patent applications in foreign
countries. Payment was made without deduction of taxes. Therefore, the A.O.
disallowed payment u/s 40(a)(ia). On appeal, the CIT(A) upheld the order of the
A.O.
Before the
Tribunal the assessee contended that (a) services are professional in nature
and are not in the nature of managerial, technical or consultancy services to
fall within section 9(1)(vii); reliance was placed on section 194J to contend
that the Act consciously differentiates professional services and FTS; and (b)
under the DTAA, services falls within the Independent Personal Services (IPS)
article and unless the specified conditions are satisfied, exclusive taxing
right is with the resident state.
HELD
Scope
of FTS u/s 9(1)(vii)
- Professional services fall
within the ambit of FTS.
- Section 194J is applicable
to payments made to a resident. The distinction between professional services
and FTS in section 194J has no relevance to determination of taxability of a
non-resident.
- Section 9 includes income
which is deemed to accrue or arise in India. It enlarges the scope for
taxability of non-resident income.
Scope
of IPS article under DTAA
- Services falls within the
IPS article of the DTAA. Payment will not be taxable in India if (a) the NR
does not have fixed base in India, and (b) NR is not present in India for a
specified number of days (exemption conditions).
Service
provider is specified person as per IPS Article1
- Services will not be
taxable in India if the service provider satisfies exemption condition and he
is a specified person as provided under the IPS article of the respective treaty.
The treaties vary in terms of scope and applicability of persons to whom the
IPS articles apply.
- Matter remanded to A.O. for
verification of treaty residence and satisfaction of exemption conditions.
Service
provider is not specified person as per IPS Article2
- Service provider will not
be entitled to benefit of the IPS Article under the DTAA.
- The Tribunal rejected the assessee’s argument
of non-taxation of business profit in the absence of PE as in the view of the
Tribunal, the DTAA has classified service recipient in two separate categories,
viz., Article 7 and Article 15, for taxability of two types of income streams.
- Income continues to be professional service
but does not satisfy the exemption condition of the IPS Article resulting in
taxation in the source state.
Note: The decision has not dealt with the interplay of the FTS Article
with the IPS Article.
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1 DTAA with countries Brazil, China, Czech
Republic, Japan, Philippines, Thailand and Vietnam covers within its scope
individual, company, partnership firm; DTAA with Australia covers individual,
partnership firm (other than company); DTAA with Korea covers only individuals
2 Norway, Denmark, Sri Lanka, Malaysia, Russia,
Luxembourg, Australia, Republic of Korea, South Africa, New Zealand, Mexico,
Indonesia, Colombia and Serbia cover only individuals. Other categories of taxpayers are not covered
