Section 195 read with Section 40(a)(i) of the Act – Section 40(a)(i) is applicable on failure to deduct tax on payments made for FTS and does not encompass fees for professional service

FACTS
The assessee was an advocate practicing in the field of Intellectual Property Laws. During the relevant year, the assessee had made payments to various persons/entities outside India towards professional/technical fees without deducting TDS. AO disallowed expenditure under Section 40(a)(i) of the Act. AO held that payments were chargeable to tax as they were made to persons from non DTAA countries, and in respect of DTAAs countries, the assessee had not furnished TRCs. CIT(A) affirmed AO’s order. Being aggrieved, the assessee appealed to ITAT.

HELD
Reimbursement of expenses
• The assessee had made foreign remittances in respect of (a) amounts recovered in a court proceeding on behalf of the client in litigation (b) official fee for international application (c) publication and trade fair services.

• Payments representing reimbursements for official purposes and trade fair services were not in the nature of income chargeable to tax. Accordingly, provisions of Section 195 were not applicable.

Fees for technical services vs. Professional fees
• Non-resident attorneys had rendered the following professional services outside India:

? Filing of application for grant/registration of IPRs.
??Filing of Form/responses/petitions in relation to activity leading to, or in the process of, grant/registration.

??Maintenance of such grant/registration or services in relation thereto, as required under law, such as, annuity payment, renewal fee, restoration of patent, etc.

??Undertaking compliances for effecting change in the ownership/address etc., of such intellectual property.

• Non-resident attorneys had rendered services outside India. Accordingly, income received in respect thereof could not be treated as income received in India, or deemed to be received in India, or as income accrued or arisen in India.

• The Act considers legal/professional services and FTS as two distinct and separate categories. A conjoint reading of Sections 40(a)(i) and 40(a)(ia) brings out a clear distinction between FTS and fees for professional services. Section 40(a)(ia) encompasses both FTS and fees for professional services. However, Section 40(a)(i) is applicable only in case of failure to deduct tax on payments made for FTS.
• This could be because, as per Section 5 and Section 9 of the Act, legal/professional fee payment to a non-resident does not accrue or arise in India, or is not deemed to accrue or arise in India.

• In reaching its conclusion, ITAT placed reliance on under noted decisions1 where similar view was expressed.

Source Rule exclusion
• Indian/overseas clients had engaged the assessee for availing certain services. In turn, the assessee had engaged foreign attorneys to perform certain services required to be performed in foreign jurisdictions. Clients were not concerned whether work was done by the assessee or someone else.

• Thus, the source of income of the assessee through services rendered by non-resident attorneys in foreign jurisdictions was located outside India.

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1    NQA Quality Systems Registrar Ltd. vs. DCIT: 92 TTJ 946; ONGC vs. DCIT, Dehradun: 117 taxmann.com 867 (Delhi-Trib.); Deloitte Haskins & Sells vs. ACIT: [2017] 184 TTJ 801 (Mumbai –Trib.)