Legal fees payable to foreign firm held taxable in India
In a recent judgment of the Mumbai Income Tax Appellate Tribunal (“ITAT”) in TATA Iron and Steel Co. Ltd. vs. Dy. DIT1, it has been held that in the absence of a Double Tax Avoidance Agreement with Hong Kong, payments towards legal services paid by a resident to a Hong Kong based law firm are in the nature of ‘fees for technical services’ (“FTS”) subject to tax in India.
Tata Iron and Steel Co. Ltd. (“Assessee”) brought out a Euro Issue of Bonds convertible into Global Depository Receipts (GDR). In connection with the same, the Assessee employed the services of a Lead Manager based in UK and a law firm based in Hong Kong (“HK Law Firm”), for consultancy and assisting it in all aspects of preparing documents connected with bringing out the issue, dealing with various regulatory authorities in India and abroad, due diligence certificate etc. For this purpose the Assessee had several meetings with the personnel of the Lead Managers and other legal advisors both in and outside India.
The Assessing Officer (“AO”) held that all these services were in the nature of FTS in terms of the Income Tax Act, 1961 (“ITA”). However, the Commissioner of Income Tax held that except for the payments made to the HK Law Firm for legal services rendered to the Assessee, none of the other amounts paid to the UK parties were liable to be considered as income u/s. 9 of the ITA. Aggrieved by this order, the parties approached the ITAT.
Arguments and Analysis
The ITAT considered the arguments of both the parties and held that a similar issue had came up for consideration before the Special Bench of the Tribunal in Mahindra & Mahindra Ltd. Vs. DCIT2where it had been held that since technical services were not made available to the Indian party though used by the non-resident for its benefit, the amounts paid to the Lead Manager could not be held to be taxable as per India-UK Tax Treaty (“Treaty”). Since the provisions of the Treaty are applicable with respect to the payments made to the UK entities, the ITAT held that these payments are not liable to tax in India since none of the technical services were ‘made available’ to the Assessee which is a requirement specifically in the Treaty but not under the ITA.
As regards the payments made to the HK Law firm, the ITAT relied heavily on the Mahindra case and held that these payments were in the nature of FTS. The ITAT held that since these legal services are very much a part and parcel of the GDR issue, they cannot be sliced off from other payments made by the Assessee for services which fall within the definition of FTS under ITA. Further, legal charges for the GDR issue were incurred by the Assessee in the UK also. Since all those payments are classified as FTS under the ITA, it is not possible to give a different treatment to similar payments made to the HK Law Firm. Further, since there is no Double Tax Avoidance Treaty with Hong Kong, one can only look into the provisions of the ITA for determining the deductibility of tax deducted at source and hence the ITAT held that payments made to HK Law Firm would certainly be regarded as FTS.
The Assessee in its arguments relied on Clifford Chance vs. DCIT3 wherein it was held that in order for an income payable by a non-resident to be taxed as FTS, the services should be rendered as well as utilized in India. The Assessee was of the view that since the services were not utilized in India, the same should not be subject to tax in India. However, the ITAT disagreed and held that the Clifford Chance case is not relevant in the present context as it squarely dealt with FTS payable by a non-resident covered under a separate sub-section. Since the payer in the current case, being the Assessee is a resident, the twin condition with respect to rendition and utilization of service within India is not a requirement.
Further, the ITAT also rejected the Assessee’s attempt to draw a distinction between legal services and other services as they are separately addressed in Section 44AA and Section 194J of the ITA (which deal with maintenance of accounts by professionals and fees for professional services). However, the ITAT stated that the expression FTS has been specifically defined in the ITA. When a specific meaning is assigned to a particular expression, its general meaning is ousted and any references to legal services in other sections of the ITA will not be relevant while interpreting FTS.
The court in this case has not gone into the principles of territorial nexus and has not discussed the landmark Supreme Court case of Ishikawajima Harima Heavy Industries Ltd. vs. DIT4 in detail which discusses the relevance of territorial nexus in relation to FTS. The Supreme Court held that both the conditions of rendition as well as utilization of services in India should be satisfied for the services to be classified as FTS. Following the Ishikawajima judgment, in Clifford Chance, it was held that for service fee payable by a resident to a non-resident to be taxable in India, such a payment must have sufficient territorial nexus with India. Only when a direct link between the services rendered in India can be established, can the same again be subject to any relief under the Double Tax Avoidance Treaty if any. However, the Worley Parsons5 case took a departure from this view and the Authority for Advance Ruling questioned the very basis of the doctrine of territorial nexus which had been laid down in Ishikawajima. The facts of the present case are not very clear to analyze the effect of these decisions in the given circumstances.
2 (2009) (Mum.) (SB) 30 SOT 374
3 2009 (111) Bom LR 428
4 (2007) 288 ITR 408 (SC)
5 Advance ruling given in WorleyParsons Services Pty. Ltd. dated March 30, 2009. However, it is pertinent to note here that this is an advance ruling and is specific to the facts of that particular case. It does not hold any binding effect on the courts although it may have a limited amount of persuasive value.