Section 9(1)(vii) FTS Addition Set Aside; Taxability Must Be Examined Under Relevant DTAA: ITAT Delhi

Herbert Smith Freehills LLP Vs CIT (ITAT Delhi)

The appeals concerned the taxability of income earned by a UK-based partnership firm providing legal services in relation to Indian engagements for Assessment Years (AYs) 2015-16, 2018-19 and 2021-22. Since identical issues arose in all three appeals, the Tribunal treated AY 2015-16 as the lead case and applied its findings to the remaining years.

The assessee was a firm of solicitors registered in the United Kingdom, engaged in providing legal services worldwide. The firm was a fiscally transparent entity under UK tax law, with its income distributed among partners according to their respective profit-sharing ratios. The partners were tax residents of the UK, Australia, France, Belgium, China, Japan and Germany. The assessee filed its return claiming exemption under the India-UK DTAA for the income attributable to UK-resident partners and also claimed that income attributable to non-UK resident partners was not taxable in India under the DTAAs between India and the respective countries of residence of those partners. However, income attributable to German partners was voluntarily offered to tax under the India-Germany DTAA.

The Assessing Officer accepted that the share of income attributable to UK-resident partners was exempt under the India-UK DTAA and also accepted the income offered to tax relating to German partners. However, the Assessing Officer held that the income attributable to partners resident in Australia, France, Belgium, China and Japan was taxable in India as Fees for Technical Services (FTS) under Section 9(1)(vii) of the Income-tax Act, 1961, on the ground that the assessee could not claim DTAA benefits under the India-UK treaty for non-UK resident partners. Accordingly, an addition of ₹3.59 crore representing the share attributable to those non-UK partners was made. The CIT(A) upheld the assessment, leading to the present appeals.

The assessee argued that the authorities had incorrectly restricted treaty relief only to UK-resident partners. It submitted that the India-UK DTAA did not prohibit non-UK resident partners from claiming benefits under the DTAAs entered into between India and their respective countries of residence. According to the assessee, each applicable DTAA had to be interpreted in light of its object of avoiding double taxation. It contended that the expression “to the extent” in Article 4 of the India-UK DTAA merely limited the operation of that treaty to UK residents and did not prevent non-UK resident partners from seeking relief under their own applicable tax treaties. The assessee further submitted that the various DTAAs with Australia, France, Belgium, China, Japan and Germany defined the term “person” in language similar to the India-UK DTAA, covering entities treated as taxable units under domestic tax laws.

The assessee also explained that under UK domestic law, partnerships file tax returns while the tax liability is ultimately discharged by the individual partners. It argued that treaty eligibility depended on the liability to tax in the relevant jurisdiction rather than the mode through which tax was collected. It relied upon earlier judicial decisions to contend that where the income of a fiscally transparent partnership is taxed either in the hands of the partnership or its partners, treaty benefits should not be denied. The assessee further submitted that professional legal services rendered by it did not satisfy the conditions for taxation under the Independent Personal Services provisions of the applicable DTAAs, as it neither maintained a fixed base in India nor exceeded the prescribed period of stay in India. It also contended that the legal services did not “make available” technical knowledge or know-how and, therefore, could not qualify as FTS under the relevant treaties. In the absence of a permanent establishment in India, the income was asserted to be non-taxable as business profits under the respective DTAAs.

Without prejudice to its treaty arguments, the assessee submitted that payments received by foreign lawyers and law firms for rendering legal services could not be characterised as Fees for Technical Services under Section 9(1)(vii). It relied on Tribunal decisions holding that legal services constitute professional services distinct from managerial, technical or consultancy services and therefore fall outside the statutory definition of FTS.

The Revenue argued that the India-UK DTAA extended treaty benefits only to the extent that the partnership income was taxed in the hands of UK residents. Since the assessee itself had offered the German partners’ share to tax, the Revenue contended that the shares attributable to other non-UK resident partners should similarly be taxed in India. It relied upon Article 4(1)(b) of the India-UK DTAA and the CBDT Circular dated 25 February 2016 to support its interpretation.

The Tribunal examined the nature of UK partnerships and observed that UK partnership firms are tax transparent. The partnership itself files tax returns, but tax liability is borne by the partners according to their residence. The Tribunal held that non-UK resident partners could not derive treaty protection under the India-UK DTAA solely on account of their membership in a UK partnership. Instead, the taxability of each partner’s share had to be examined under the DTAA applicable to that partner’s country of residence. It also noted that the Assessing Officer had already accepted this principle while granting treaty relief to UK partners and accepting taxation of the German partners under the India-Germany DTAA.

The Tribunal then considered whether the receipts attributable to partners resident in Australia, France, Belgium, China and Japan could be taxed as Fees for Technical Services under Section 9(1)(vii). Referring extensively to earlier Tribunal decisions, it observed that the Income-tax Act distinguishes between “professional services” and “fees for technical services.” Legal services constitute professional services and form a category distinct from managerial, technical or consultancy services. The Tribunal referred to Section 194J, Section 44AA and earlier judicial precedents to conclude that professional legal services rendered by lawyers and law firms are not covered by the definition of FTS under Section 9(1)(vii).

The Tribunal further observed that Article 13 of the India-UK DTAA specifically excludes payments to individuals or partnership firms for professional services covered under Article 15 from the scope of Fees for Technical Services. Similar exclusions were found in DTAAs with other countries such as Belgium, Japan and Australia. Consequently, the professional legal services rendered by the assessee could not be characterised as FTS under the Act or the relevant treaties.

Accordingly, the Tribunal held that the Assessing Officer’s addition under Section 9(1)(vii) was unsustainable and deleted it. However, since the taxability of each non-UK resident partner had to be examined separately under the DTAA applicable to the partner’s country of residence, the Tribunal restored the matter to the Assessing Officer for that limited examination. The appeals for AYs 2018-19 and 2021-22 involved identical facts and grounds, and the Tribunal applied the same reasoning, deleting the additions and restoring the matters to the Assessing Officer with identical directions. All the appeals were accordingly allowed for statistical purposes.

FULL TEXT OF THE ORDER OF ITAT DELHI

These three appeals by the assessee for A.Ys. 2015-16, 2018-19 and 2021-22 are taken up together as identical issues are involved in all these appeals. For the sake of convenience, the appeals are decided in seriatim of the assessment years. Appeal of the assessee in ITA No. 2281/Del/2019 for A.Y. 2015-16 is taken up as a lead case, hence, facts are narrated from said appeal.

ITA No.2281/Del/2019 AY 2015-16

2. This appeal by the assessee is directed against the order of Commissioner of Income Tax (Appeals)-43, New Delhi (hereinafter referred to as ‘the CIT(A)’) dated 17.12.2018, for AY 2015-16.

3. The assessee assailing impugned order has raised following grounds of appeal:-

“1. The order passed by the learned CIT(A) confirming the additions to the Appellant’s taxable income made by the learned AO is erroneous and bad in law and liable to be quashed.

2. The learned CIT(A) erred in confirming the learned AO’s position that the Appellant is not eligible to avail benefit of the Double Tax Avoidance Agreement between India and the following countries (being the country of tax residence of the partners of the Appellant):

• • Australia;
  • France;
  • Belgium;
  • China;
  • Japan; and
  • Germany

3. The learned CIT(A) has also erred in affirming learned AO’s allegation that the income received by the Appellant from Indian engagements (amounting to INR 4,50,40,292) as relatable to the profit share of partners who are tax resident in Australia, France, Belgium, China, Japan and Germany, is taxable as “Fess for Technical Services’ under the provisions of section 9(1)(vii) of the Act for the subject AY.

4. The learned CIT(A) erred is not quashing the penalty proceedings initiated by the learned AO under section 271(1)(c) of the Act.”

Facts of the Case

4. Facts of the case, in brief as emanating from records are: The assessee is a firm of solicitors engaged in providing legal services to its clients worldwide. The assessee has its registered office in the United Kingdom (UK). The assessee renders services through its members and employees primarily from outside India with intermittent visits to India. The assessee is a fiscally transparent entity. For the purpose of payment of tax, its income/losses are distributed to its partners in their respective profit-sharing ratio. The taxability of income received by the assessee for the impugned assessment year has been determined based on profit-sharing ratio (PSR) of the partners as tabulated below:-

5. The assessee filed its return of income for the impugned assessment year declaring total income of Rs.91,37,540/- and claimed refund of Rs.9,12,40,740/-. The assessee has received total revenue from provision of legal services on Indian engagement at GBP 27,49,936/-. In the return of income, the assessee claimed revenue received from provision of legal services on engagements in India as exempt under the provisions of the India-UK Double Taxation Avoidance Agreement (DTAA), as amended by Notification No. 10/2014 dated 10.02.2014. Further, in respect of income received in India relatable to the profit share of non-UK resident partners, the same was claimed as not taxable in India under the tax treaties between India and the respective countries of tax residence of non-UK partners. Thus, apart from India-UK DTAA, the tax treaties between India and Australia, France, Belgium, China and Japan were also relied upon. In so far as the partners from Germany are concerned, the assessee offered to tax receipts to the extent of profit share of partners based in Germany i.e. 3.627%.

6. The Assessing Officer (AO) accepted that in so far as share of profit of the partners resident of the UK are concerned, i.e., profit share to the extent of 82.121%, the same is not taxable in India. With regard to share of profit of non-UK resident partners, i.e., to the extent of 14.253%, the AO held that the profits attributable to such partners are taxable in India as Fees for Technical Services (FTS) under the provisions of section 9(1)(vii) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) as the benefit of DTAA is not available to the assessee firm in respect of such non-UK resident partners. As regards the partners from Germany having share of 3.627% in the revenue of the firm, the same was offered to tax by the assessee in terms of the India-Germany DTAA. The same was accepted by the AO. The AO made addition of Rs.3,59,02,752/- in respect of profits attributable to the non-UK resident partners of the assessee firm. Aggrieved by the assessment order dated 26.12.2017 passed u/s.143(3) of the Act, the assessee filed appeal before the CIT(A). The First Appellate Authority after considering submissions of the assessee dismissed the appeal and upheld the addition. Hence, the present appeal by the assessee.

Submissions of the Assessee

7. Shri Porus Kaka, Senior Advocate, appearing on behalf of the assessee submits that the AO and the CIT(A) have erred in taxing the revenue attributable to the non-UK partners. The ld. Counsel submits that as per the UK tax laws, a partnership firm is fiscally transparent entity. Though a partnership firm is liable to file return, the profits of the partnership firm are ultimately assessable in hands of the individual partners. Referring to Article 3 of the India-UK DTAA, he submits that the definition of ‘person’ was amended vide Notification No. 10/2014 (supra) and partnership firms were included in the definition of the term ‘person’. He further referred to Article 4 of the India-UK DTAA which deals with fiscal domicile. He submits that as per Article 4(1)(b), the income derived by a partnership firm is subject to tax in that State as the income of a resident, either in its own hands or in the hands of its partners or beneficiaries. Admittedly, the India-UK Treaty limits the benefit of Treaty only to residents of UK, but it does not bar non-UK residents from claiming treaty benefits under Treaty with the counties of their residence. Non-UK partners can avail exemption under the DTAAs entered into between India and their respective countries of residence. To further augment his submissions, the ld. Counsel filed written submissions, the relevant extracts of the same are reproduced herein under:-

“6. The revenue authorities have used the wording of Article 4(1)(b) as per India-UK DTAA to limit the DTAA relief only ‘to the extent’ of UK resident partners and bar the non-UK countries partners. It is submitted that this argument is wholly contrary to the international tax treaty law. All the DTAAs have their object to prevent double taxation qua residents of the respective contracting states. Article 1 of the DTAA with the UK provides that “This Convention shall apply to persons who are residents of one or both of the Contracting States.” Partners of the Appellant (partnership) who are ‘resident’ of non-UK countries will be entitled to relief from double taxation depending upon the language/ provisions of their respective country DTAA with India. Hence, India-UK DTAA only gives relief ‘to the extent’ of income assessed in the hands of the UK resident partners. To interpret the words ‘to the extent’ as barring relief available to the residents under the DTAAs with non-UK countries would be contrary to the international tax treaty law and the interpretation rule requires DTAAs to be interpreted holistically as laid down in the ruling of the Hon’ble Supreme Court of India in the case of Azadi Bachao Andolan (263 ITR 706). The relevant extracts of the ruling are as follows:

“120. xxxx
121. xxxx

7. Provisions of a treaty should be interpreted having regard to object of the treaty as a whole. Any interpretation which is made without considering the object of the treaty, will defeat the purpose of the treaty. Reference can be made to Article 31 of the Vienna Convention of the Law of Treaties which provides that “treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in light of its object and purpose ”. A treaty between 2 contracting states can never bar relief or grant relief to residents of other states is a basic principle of International treaty law

8. Mumbai Tribunal in the case of Hindalco Industries Ltd v CIT (2005) 94 ITD 242 (Mumbai) observed that a literal or legalistic meaning must be avoided when the basic object ot the treaty might be defeated or frustrated in so far as particular items under consideration are connected. Even departure from plain meaning of the language is permissible whenever context so require. Similar support can also be drawn from the Canada Supreme court decision in case of Queen v. Crown Forest Industries Limited [1995] (2 SCR 802) Case No. 23940 in which the SC states that “literalism has no role to play in the interpretation of treaties”.

9. It is important to consider the object of avoiding double taxation, while interpreting the expression “liable to tax” envisaged under the definition of “resident of a contracting state”. Reference can be made to Linklaters LLP (40 SOT 51) (Mumbai) decision in this regard.

10. In the case of Linklaters, the Tribunal has observed that “principles of literal interpretation do not apply to the interpretation of tax treaties. To find the meaning of words employed in the tax treaties, we has to primarily look at the ordinary meanings given to those words in that context and in the light of its objects and purpose. Literal meanings of these terms are not really conclusive factors in the context of interpreting a tax treaty which ought to be interpreted in good faith and as per the Latin maxim “ut res magis valeat quampereat’’, i.e., to make it workable rather than redundant. ’’

11. Thus, India-UK DTAA does not and cannot bar and/ or the operations of other DTAAs and benefit under those DTAAs to respective residents of those contracting states. The phrase ‘to the extent’ must be interpreted as meaning to limit India-UK DTAA to its residents and nothing beyond that. Any other interpretation which bars DTAA relief to residents of non-UK countries is not only unjustified but also contrary to the object and purpose of India-UK DTAA and wholly contrary to the provisions of India’s tax treaties with non-UK countries and international treaty law.

The Appellant (qua its partners) resident in China, Belgium, Australia, France, Germany and Japan are eligible for relief under their respective treaties.

12. The DTAA entered into between India and non-UK countries provides that the DTAA shall apply to a ‘person’ who is a ‘resident’ of one or both of the contracting states (i.e., India and the respective non-UK countries). These provisions are similar to those outlined in Article 1 of .the India-UK DTAA i.e., “This Convention shall apply to persons who are residents of one or both of the Contracting States.’.

13. India’s DTAA with each of the above countries cover a ‘company’, or a ‘body of persons’ within the meaning of the term’ person’, and therefore, the Appellant, qua the partners, shall be covered as a ‘person’ as provided under the respective DTAAs. Relevant extracts of the respective DTAAs between India and the following jurisdictions have been tabulated as below:

All of India’s DTAAs with the non-UK countries as mentioned above, are worded similarly to define the term “person” as including an individual, a company and any other entity which is treated as a taxable unit under the taxation laws in force in the respective Contracting States, and such definition is similarly worded to the amended India-UK DTAA.

14. In the context of partnership taxation in the UK, domestic tax laws provides that partnerships file their tax returns in the UK. The tax liability of partners, based on their share in the partnership, is determined at the partnership level, and thereafter the taxes are collected from individual partners. Therefore, even under UK domestic tax laws, a partnership is treated as a taxable unit and recovery of the tax liability from the partners is merely a modus for tax levy on the taxable unit. The profits of the Appellant are assessed and liable to tax in UK in the hands of the Appellant and appropriated among the partners. As per the provisions of Article 4 of the India-UK tax DTAA, what is relevant is the tax liability in the UK, and it is not necessarily that the tax liability should be imposed and discharged by the same entity.

15. In this regard, the Hon’ble Mumbai Tribunal, in the case of Linklaters LLP (40 SOT 51) (Mumbai), held that as long as the income of the entity is taxed in the concerned jurisdiction, either in the hands of partners or the partnership firm, the relevant tax treaty benefits should be available. Further, it was held that the determining factor is the taxability of the entire income instead of the mode of taxability (i.e., whether the income is taxed in the hands of the partnership or partner), and concluded that if income, whether received directly or indirectly, is subject to taxation in a particular jurisdiction, it will meet the criteria of taxability. The relevant extracts of the decision are reproduced below:

“56. xxxx
71. xxxx
75. xxxx”

16. The decision has been upheld in subsequent judgements, including Linklaters LLP (150 com 222). The decision of Linklaters LLP (40 SOT 51) has also been followed in the Appellant’s own case for AY 2012-13, 2013-14 and 2014-15.

17. Where the partnership is treated as fiscally transparent, such partnership (quo the partners resident in that country) is entitled to the provisions of the DTAA. In this regard, in the case of P & O Nedlloyd Ltd & Ors. (TS-682-HC-2014-CAL), involving a UK partnership firm having two partners being entities tax resident of UK and Netherlands respectively, the Hon’ble Calcutta High Court considered section 2(31) of the Act, which defines a ‘person’ to include a ‘firm’. As the UK partnership was a firm, it would qualify as a ‘person’ under Article 3 of the treaty. Accordingly, a UK firm is eligible for DTAA benefits. The relevant parts of the decision are reproduced below:

“The effect of the relevant provisions of the India-UK Treaty as reproduced above is the convention applies to persons who are residents of one or both of the Contracting States by operation of clauses 1(f) and 2 of Article 3 of the convention Under section 2(31) (iv) of the Income Tax Act, 1961, person includes a firm ”

Such conclusion is inescapable as the Revenue must bring a charge of income tax against a person under section 4 of the Income Tax Act, 1961. The Revenue in treating the said partnership as an assessee and seeking to assess income of it which had escaped assessment is for the purpose of charging tax on the income of the said partnership, treating it as a person liable to be charged with the levy of income tax under the said section. In doing so the revenue has to treat the said partnership as a person within the definition provided of person under section 2(31)(iv) of the said Act. Thus, the Revenue’s case the said partnership is not covered by the said convention fails. In as much as in the facts and circumstances aforesaid it would be unjust to compel the said partnership or the petitioners to submit themselves to the assessment sought by the impugned notice, the writ petition succeeds.

(Emphasis supplied)

Further, we would also like to highlight that in the case of P & O Nedlloyd Ltd, the special leave petition filed by the revenue authorities against the above ruling of Hon’ble Calcutta High Court has been dismissed by the Hon’ble Supreme Court and declared infructuous on ground of a resolution under Mutual Agreement Procedure (“MAP”) order (Petition No. 17456/2015). Hence, the non-taxability of the share of the firms income and the decision of the Calcutta High Court has been acknowledged at the highest level by both the UK and Netherlands Competent Authorities for Mutual Agreement Procedure (MAP). The MAP Agreements, in fact, are in the hands of the respective partners and the Governments of the UK and Netherlands, respectively. Hence, where the CBDT has accepted a non-resident partner of a UK partnership that is non-taxable in India at the highest level, then the principle of law must apply to all.

18.For the determination the Appellant’s income taxable in India for the previous year, the following provisions of respective DTAAs need to be carefully considered:

-The Appellant does not have a fixed base in India or presence of its personnel is under/ within the threshold limit as specified in the Article on Independent Personal Services (“IPS”) in the DTAAs of India with respective non-UK countries; and

-Services provided by the Appellant do not make available inter-alia any technical knowledge, experience, skills, know-how or processes or consist of the development and transfer of a technical plan or technical design and accordingly, not taxable as fees for technical services (‘FTS”); and

-The Appellant does not have any form of Permanent Establishment (‘PE’) in India, and thereby, the business income of the Appellant is not taxable in India as per DTAAs of India with respective non-UK countries.

For instance, the Article 14 of the India-Australia DTAA, which governs taxability of income from IPS, has been reproduced below:

1) Income derived by an individual or a firm of individuals (other than a company) who is a resident of one of the Contracting States in respect of professional services or other independent activities of a similar character shall be taxable only in that State unless:

(a) the individual or firm has a fixed base regularly available to the individual or firm in the other Contracting State for the purpose of performing the individual’s or the firm’s activities, in which case the income may be taxed in that other State but only so much of it as is attributable to activities exercised from that fixed base; or

(b) the stay by the individual or, in the case of a firm, by one or more members of the firm (alone or together) in the other Contracting State is for a period or periods amounting to or exceeding 183 days in a year of income, in which case only so much of the income as is derived from the activities of the individual, that member or those members, as the case may be, in that other State may be taxed in that other State.

2) The term “professional services” includes services performed in the exercise of independent scientific, literary, artistic, educational or teaching activities as well as in the exercise of the independent activities of physicians, surgeons, lawyers, engineers, architects, dentists and accountants. ”

(Emphasis supplied)

On perusal of the aforesaid provisions of Article 14 of the India-Australia DTAA, it can be inferred that income of the finn of individuals providing professional services (which have been specifically defined to include services of lawyers, as provided by the assessee in the instant case), shall become taxable in India only in the event the following cumulative conditions are complied with:

(i) Income derived by a firm of individuals should fall under the purview of “professional services” or “other independent activities of similar nature”; and

(ii) The firm has a fixed base regularly available for the purpose of performing above services; or the stay of the individual or member(s) of the firm equals or exceeds 183 days in the relevant year.

For the income to be taxable under the above IPS Article of the respective DTAAs of India with non UK countries, the firm of individuals must either have a fixed base regularly available to it in the other Contracting State for the purpose of professional services and the stay of its personnel in the other Contracting State is for a period or periods exceeding a specified threshold limit.

In line with the above, in the instant case, the Appellant does not satisfy any of the cumulative conditions required for the purpose of taxability of income under the IPS clause i.e., it does not have a fixed base regularly available in India for the purpose of its professional services and the stay of its personnel in India during both the AYs (AY 2015-16 & AY 2018-19) is under/ within the specified threshold limit of the IPS clause of respective DTAAs of India with non-UK countries being Australia, China, Japan, France. Accordingly, the income of the Appellant is not taxable in India as per the IPS Article of respective DTAAs. Without prejudice and in addition to the above, the services provided by the Appellant also do not satisfy the condition/ test of ‘make available’ as required for the purpose of the service fee to qualify as FTS (as may be applicable).

In view of the above, the income earned by the Appellant being in the nature of business income, shall not be liable to tax in India under the provisions of Article 5 read with Article 7 of the respective DTAAs of India with non-UK countries, in the absence of a PE of the Appellant in India.

Under Indian domestic law, both the partnership and its partners are jointly and severally liable for taxation. Further, DTAA and India domestic law avoids double/ asymmetrical taxation

19. Even under Indian domestic law, the firm and/ or its partners are jointly and severally liable to tax. As per India-UK DTAA, Article 3(l)(f) captures person as ‘any other entity which is treated as a taxable unit under the taxation laws in force in the respective Contracting States’. In line with the same as per section 2(31) of the Act in India (i.e., one of the contracting states), a person includes a ‘firm’ and a ‘firm’ is considered a taxable unit in India. Further, as per provision of section 188A of the Act, a partner of the firm is jointly and severally liable along with the firm for any amount of tax, penalty or any other such sum payable by the firm and all the provisions of this Act, so far as may be, shall apply to the assessment of such tax or imposition or levy of such penalty or other sum.

20. Further to the above, section 10(2A) of the Act provides exemption for income only in case of a person being a partner of a firm which is separately assessed as such, his share in the total income of the firm. Accordingly, one can construe that the partners of the Applicant are assessed along with the firm itself.

21. CBDT Circular No. 6 of 1944 (dated 17 March 1944) accepts income of partners and partnership is same irrespective of mode of assessment in different countries, double taxation relief ought to be granted on the same income in India. The relevant parts of the circular are reproduced below: –

“On reconsideration, the board has decided that relief should not be refused on the score of failure to secure registration, as ultimately it is the individual partner who suffers the tax, and in equity, relief should be given if the same income has been taxed in two places-at one place in the hands of the firm and at the other in the hands of the partners. “

xxxx

xxxx

25. Basis the above arguments, it is pertinent to note that the situation of the asymmetrical taxation in the case of Appellant needs to be resolved by grant of the DTAA benefit to the Appellant and eliminating the double taxation of same income in the Appellant’s case. In the situation of this kind of an asymmetrical taxation, as is the legal position set out by the coordinate bench’s decision in the case of Linklaters (supra), as long as the said income is liable to tax in the treaty partner jurisdiction, whether in the hands of the assessee or in the hands of its constituents when it’s a tax transparent entity in the treaty partner jurisdiction, the said income cannot be declined treaty protection in India.

26. Accordingly, in the case of the Appellant, the same income should not be taxed twice in the hands of the partnership/firm or the hands of the partner. Therefore, the Appellant should be granted relief from double taxation of income.”

7.1. Without prejudice to the aforesaid submissions, the ld. Counsel for the assessee submits that the payments received by non-resident attorneys/law firms for rendering professional services in India are not taxable as FTS u/s 9(1)(vii) of the Act. In support of his submissions, the ld. Counsel placed reliance on the decisions in the cases of Chander Mohan Lall vs. ACIT reported in 134 taxmann.com 292 (Delhi-Trib.) and ACIT vs. Subramanium Hariharan in ITA No. 600/Del/2020 for A.Y. 2013-14 decided on 20.08.2025. The ld. Counsel submits that professional services, i.e., legal services, constitute a separate category of services distinct from managerial, technical or consultancy services. Hence, the payments received by non-UK resident partners cannot be taxed as FTS u/s 9(1)(vii) of the Act.

Submissions of the Department

8. Per contra, Shri Vikram Singh Sharma, representing the department strongly defending the impugned order submits that it is an undisputed fact that the assessee law firm is based in UK and is having partners based in UK as well as from other countries. It is not in dispute that the share of profit attributable to UK resident partners is to the extent of 82%. The remaining share of profit of the firm is attributable to the non-UK partners. The assessee has itself offered profits of the partnership firm to the extent of 3.62% i.e. the share of the partners from Germany. Likewise, the share in profit of firm of other non-UK resident partners is taxable in India. The assessee has itself categorized and segregated partners on the basis of place of residence. The dispute is only to the extent of share of non-UK resident partners not offered to tax. The ld. DR submits that a bare perusal of Article 4(1)(b) of India-UK DTAA would make it clear that the benefit of the India-UK treaty can be extended only to the extent that the income derived by partnership is subject to tax in that state as the income of a resident either in its hands or hands of its partners or beneficiaries. Thus, the benefit of India-UK DTAA cannot be extended to non-UK resident partners. The ld. DR further referred to Board Circular dated 25.02.2016 extracted in the impugned order to contend that the benefit of India-UK DTAA would be applicable to a partnership i.e. a resident of either India or UK, to the extent that the income derived by such partnership is subject to tax in that state as the income of a resident, either in its own hands or in the hands of partners. He pointed that the language of the Board Notification is in sync with India-UK DTAA. He further contended that the nature of services rendered by partners resident in Germany and other non-UK resident partners are identical. Since, the assessee had offered to tax the share of Germany partners, likewise for other country partners, the assessee should have offered profits to tax to the extent of share of other partners not based in UK.

Rebuttals

9. Rebutting arguments made by the ld. DR, the ld. Counsel submits that, in India-Germany DTAA is concerned, the “make available” clause is absent, therefore, the share of profit of partners from Germany was offered to tax. Whereas, the DTAAs between India with countries such as Australia, China, Japan and Belgium contain “make available” clause.

10. The ld. Counsel further submits that in the factual matrix of the case it is important to refer to Article 15 of India-UK DTAA which provides for Independent Personal Services. As per Article 15 income derived by individual whether in his own capacity or as member of partnership who is resident of Contracting State in respect of professional services would not be taxable in India unless mandatory conditions as stated in Article 15(1) are satisfied i.e. presence in India for a period aggregating to 90 days in the relevant fiscal year or having a fixed base regularly for the partnership or the individual partner in India for the purpose of performing his activities. In the instant case, both the conditions are not satisfied, neither any partner or any employee of the partnership firm was present in India for a period of 90 days nor there is any fixed base regularly available to the partner or the partnership firm for the purpose of performing his activities. He asserted that the provisions of Article 4 and Article 15 have to be read together to come to a logical and constructive conclusion.

Decision

11. We have heard the submissions made by the rival sides and have examined the orders of the lower authorities. We have also considered the decisions referred to by the ld. Counsel for the assessee during the course of his submissions. The issue for consideration in the instant appeal is with respect to taxability of receipts in hands of the assessee to the extent attributable to non-UK based partners of the assessee firm. Undisputedly, the assessee partnership firm engaged in providing legal services is based in the UK. The assessee has partners from the UK and other countries, namely, Australia, France, Belgium, China, Japan and Germany. The firm has partners from the UK and other countries. The percentage of profit-sharing of the partners from various countries has already been tabulated in para 4 of this order. The partners of the firm based in the UK have share in profit to the extent of 82.121%, whereas non-UK partners have share in profit of 17.88% of the revenue earned by the assessee from Indian engagements. In so far as partners based in Germany having 3.627% share in the profits is concerned, the assessee has offered the same to tax in accordance with India-Germany DTAA and the same has been accepted by the AO. Further, the AO has accepted that the share of profit of partners based in the UK is also not liable to tax in India in accordance with the India-UK DTAA. The dispute is only with respect to the share of profit of the partners of the assessee firm from Australia, France, Belgium, China and Japan, which aggregates to 14.25% of the total receipts. During the period relevant to the assessment year under appeal, the assessee received revenue from provision of legal services on Indian engagements amounting to GBP 27,49,936. The AO made addition of Rs.3,59,02,752/- i.e to the extent of 14.25% of the said receipts attributable to non-UK based partners (excluding Germany). According to the AO, the amount attributable to non-UK resident partners of the assessee firm is in the nature of FTS u/s 9(1)(vii) of the Act.

12. Before, we proceed to decide the issue in the instant appeal, it would be imperative to understand the taxability of income of partnership firms or Limited Liability Partnerships (LLPs) in the UK. Partnership firms or LLPs in the UK are “tax transparent”, which means that each member of the partnership firm is assessed to tax on his share of the partnership income or gains. Though there is an obligation on partners firm to file tax return but there is no tax liability on the partnership firm. Any non-UK source profits or gains made by a partnership firm are subject to tax in the UK in hands of the partners resident in the UK. There is no restriction on non-residents of the UK or nationals of other countries becoming partners in a partnership firm based in the UK. The share of profit of non-UK partners in the partnership firm is not subject to taxation in the UK. UK based partnership firm being tax transparent, non-UK resident partners cannot avail benefit of the India-UK DTAA.

13. The India-UK DTAA, as amended by Notification No. 10/2014 (supra), defines the term “person”, which, inter alia, includes a “body of persons”. Thus, a partnership firm is included within the meaning of the term “person”. Further, Article 4 of the DTAA defines ‘resident of a contracting state. The relevant extract thereof is reproduced herein below:-

“1. For the purposes of this Convention, the term “resident of a Contracting State” means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management, place of incorporation, or any other criterion of a similar nature, provided, however, that:

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(b) in the case of income derived or paid by a partnership, estate, or trust, this term applies only to the extent that the income derived by such partnership, estate, or trust is subject to tax in that State as the income of a resident, either in its hands or in the hands of its partners or beneficiaries.”

A bare perusal of Article 4(1)(b) would show that any person who is a resident of the UK is liable to tax in the UK by reason of his domicile, residence, place of management, place of incorporation or any other criteria of a similar nature. Since, partnership firms are tax transparent the treaty benefit is extended to partnership firm to the extent of income of partnership firm is attributable to its partners in the UK. Thus, it is evident that the income of a partnership firm is taxable in the State of residence only to the extent of income derived by the partners in proportion to their share in the profits of the firm. To put it differently, the income of a partnership firm based in UK is taxed in the hands of the individual partners depending upon the residential status of each partner of the firm. Therefore, in our considered view that partners of the UK partnership firm who are not residents of UK would be subject to tax on their respective share of profits from partnership firm in the state of their residence. Accordingly, DTAA of each partners country of resident will have to be examined.

14. As pointed earlier, the AO has accepted that the share of profit of partners based in the UK is not taxable in India in light of the India-UK DTAA. The AO has also accepted the income offered by the assessee to tax with regard to the partners of the firm based in Germany in light of the India-Germany DTAA. Thus, the AO has himself accepted that taxability of each partner of the partnership firm has to be determined on the basis of partners State of residence.

15. The AO has taxed the share of profit attributable to the partners based in Australia, France, Belgium, China and Japan, aggregating to 14.25%, by treating such receipts as FTS under the provisions of section 9(1)(vii) of the Act. The Tribunal in the case of ACIT vs. Subramanium Hariharan (supra), where the AO held that payments made to foreign legal professionals for services rendered to Indian clients is in the nature of FTS, and on account of non-deduction of tax at source the AO made disallowance u/s 40(a)(ia) of the Act, the Tribunal held that payments to non-resident foreign law firms for professional services do not fall within the meaning of FTS under section 9(1)(vii) of the Act. For the sake of completeness, the relevant findings of the Tribunal are extracted herein under:

“11. Elaborating it further, our attention was invited to section 194J of the Act which provides for tax deduction at source in respect of “Fees for professional or technical services”. It is submitted that the distinction between “Fee for professional services” and “FTS” is statutorily recognised, in as much as, under the aforesaid section, Legislature in its wisdom has created two separate classes of income, viz., “Fees for professional services” and “Fees for technical services”. The said expressions have also been separately defined in Explanation to section 194J. Relevant extracts of section 194J along with Explanation thereof, are reproduced as under:

“194J. Fees for professional or technical services.

(1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any sum by way of—

(a) fees for professional services, or

(b) fees for technical services, or

……………….

shall, at the time of credit of such sum to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to ten per cent of such sum as income-tax on income comprised therein: ………………………

Explanation.—For the purposes of this section,—

(a) “professional services” means services rendered by a person in the course of carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or advertising or such other profession as is notified by the Board for the purposes of section 44AA or of this section;

(b) “fees for technical services” shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9.”

(emphasis supplied)

12. ITAs No.600/Del/2020, 9832/Del/2019 & 2134/Del/2018 In this context we are of considered view that the controversy can be best resolved by reference to provision of law u/s 44AA of the Act, which mandates for maintenance of accounts by certain persons carrying on profession or business. The relevant sub-section (1) is reproduced below;

“44AA. (1) Every person carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or any other profession as is notified by the Board in the Official Gazette shall keep and maintain such books of account and other documents as may enable the Assessing Officer to compute his total income in accordance with the provisions of this Act.”

13. Very apparently term ‘technical consultancy’ used in section 44AA of the Act has to be read ejusdem generis along with the words ‘professional’ activities based on certain skills acquired by study of particular domain of studies and which have some regulatory bodies to oversee the conduct of practitioner of the those skills and the same, very much distinguishes it, with generic term ‘technical services’, read ejusdem generis with managerial or consultancy services (including the provision of services of technical or other personnel), falling in category of FTS. Thus these afore-reproduced provisions of the Act, make it crystal clear that “professional services”, which includes legal services, is a separate category of services, recognized as distinct from FTS, which is primarily “managerial, technical or consultancy” services as referred to in section 9(1)(vii) of the Act, by the Legislature itself. If “FTS” as defined in Explanation 2 to section 9(1)(vii) were to include “professional services” as referred to in section 44AA, it would not have been necessary to refer to the latter specifically in Explanation (a) to section 194J of the Act, and Explanation (b) to that section would have been sufficient.

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15.2 However, it is pertinent to note that section 40(a)(i) only provides for tax deduction in respect of payments made to non-resident of “fees for technical services or other sum chargeable under the Act” and accordingly, while the Explanation to that section provides the definition of “fees for technical services”, no mention is made about “fees for professional services”. It was submitted that the Legislature has deliberately not defined the expression “fees for professional services” in Explanation to section 40(a)(i) for the reason that payment of such nature being made to a non-resident does not accrue or arise in India or is not deemed to accrue or arise in India, in terms of section 5 or section 9 of the Act and therefore, the same is not covered within the expression “other sum chargeable under this Act” and no tax is required to be deducted on such payments being made to non-residents.

15.3 Aforesaid, establish unequivocally that the Legislature has notably and deliberately created two separate classes of income, viz., fee for technical services and fee for professional services. Whereas the former is defined in Explanation 2 to section 9(1)(vii), the latter draws its meaning from Explanation (a) to section 194J of the Act. Reliance in this regard is also placed on the decision in the case of NQA Quality Systems Registrar Ltd vs DCIT: 92 TTJ 946 (Del Trib.), wherein it was held as under:

“17………… There is a marked difference between fees for technical services and fees for professional services. Professional services are a category distinct from technical services. Even under the provisions of section 194J of the Act requiring deduction of tax at source, the definition of professional services includes the legal, medical, engineering, accountancy, technical consultancy and interior decoration, whereas the expression ‘fees for technical services as given in Expln. 2 to section 9(1)(vii) of the Act do not include within its fold the professional services as explained in section 194J of the Act…………… ”

(emphasis supplied)

15.4 Similarly, the Mumbai bench of the Tribunal in the case of Deloitte Haskins & Sells v. ACIT:[2017] 184 TTJ 801 (Mum Trib.) observed as under:

“19………………………………… …………….

Separate definitions of “professional services” and “technical services” under the Act inter alia indicates that the Statute makes clear distinction between these two terms. The term “profession” alludes to some kind of vocation or occupation which requires special, advanced education, knowledge or skill etc. A person professing any kind of profession requires extensive training and study and mastery of specialized knowledge. A professional person has to conduct himself within specified code of conduct or ethical conduct which is required from his field of profession like legal, medical, accountancy etc. In the case of rendering of technical services, the emphasis is more on giving services which are technical in nature and alludes to some kind of giving advice or consultancy in the field of technology or imparting of technical skills, knowledge, experience, know- how etc. Here ‘consultancy’ also means some kind of technical consultancy because it is preceded by the word ‘technical’. The term ‘managerial’ is indicative of management of business or something like which is distinct from profession or rendering of professional services. Here in this case, professional services were rendered by DTT Canada in respect of providing information of the Global environment in dairy sector in respect of the markets, competition, regulations and other best practices followed by global players. Thus, the impugned payment cannot be reckoned as fees for rendering of technical services in terms of Section 9(1)(vii).”

16. As contended by ld. Sr. counsel, it will not be out of place to consider that section 28 of the Act refers to the income head “profits and gains of business or profession”, which, too, demonstrates that profession is distinct from business. Even under the Double Taxation Avoidance Agreements which India has entered into with various countries, there are separate Articles/provisions relating to taxation of “Fee for Technical Services” and “Independent Personal Services” (“IPS”), like that of lawyer, doctors and other professionals and the special provisions relating to taxation of professionals, it is submitted, override the general provision relating to taxation of FTS.

17. The reason for the aforesaid is also not far to seek. A professional’s services have geographical limitations regulated by certain statues, as in case of Lawyers, the Bar Council of India. Lawyer, registered as an Advocate can practice in Indian courts, but for representing Indian clients his qualifications as an Advocate may not be sufficient to represent the Indian client in courts or proceedings abroad. Thus here in the case in hand the recipients of the income were individual lawyers or law firms. They were only competent to practice in respective jurisdiction of which they were residents. Their services were vital for Indian clients for protecting their IPRs in foreign jurisdictions. The role of assesse was to engage with these non-resident lawyers and law firm and to work with them, in ensuring necessary compliances and following regulatory framework in those jurisdictions for protection of IPRs of Indian customers. The services so rendered may be technical in sense that it needs expertise but expertise alone is not sufficient to deliver these services before statutory and regulatory authorities or courts in foreign jurisdictions, the professional status these lawyers and law firms hold to represent clients, is the most vital element and make them only eligible to deliver the professional services, but that does not give rise to FTS.

17.1 Thus that justifies that under the domestic tax laws, e.g., under the Income-tax Act, 1961 and also under the respective DTAAs, professional services, as lawyers, are subjected to taxation in the country of residence of such professional service provider. It is supported by the contention of ld. Sr. Counsel that it is for that reason, under the Income-tax Act, 1961, while, payment made for professional services to residents is subjected to deduction of tax at source under section 194J of the Act, in case of non-residents, such payments are not regarded as income accruing or arising in India under section 9(1)(vii) of the Act and therefore, not subjected to tax withholding under section 195 of the Act.”

16. The Tribunal after examining the provision of the Act with specific reference to section 194J of the Act, came to the conclusion that professional services and technical consultancy services are distinct. Similar view has been taken in the case of Chander Mohan Lall vs. ACIT (supra). In the said case the Tribunal held that payments for providing legal/professional services to non-residence are distinct from FTS as defined u/s.9(1)(vii) of the Act and the payments made to non-resident attorneys are not in the nature of FTS, hence, there was no obligation on the assessee to deduct tax at source on payment of legal professional service charges.

17. Here it would be relevant to refer to the provisions of Article 13 of the India-UK DTAA, that deals with royalties and FTS. Clause 5 of said Article defines FTS. The definition of FTS specifically excludes payments to individuals or partnership firms for professional services covered under Article 15 such as services rendered by teachers, physicians, surgeons, layers, engineers, architects, dentists and accountants. The professional services rendered by above category of specialized professionals are distinct from services that form part of FTS. Similar professional services have been excluded from the preview of FTS/Royalty in the DTAAs with other countries viz. Belgium, Japan, Australia, etc. Hence, the services which are in the nature of professional services have been excluded from FTS. Ergo, the professional/legal services rendered by law, firms do not fall within the meaning of FTS. From perusal of Article 13 of India-UK DTAA and the aforesaid decisions of the Tribunal it is unambiguous that the payments made to the assessee for Indian engagements by no stretch can be brought under the definition of FTS u/s.9(1)(vii) of the Act. Since, UK partnership firm are tax transparent, the tax liability in the hand of each partner has to be examined. Accordingly, tax liability of each partner of the assessee firm has to be examined with reference to DTAA with country of their respective residence. In light of above findings, we deem it appropriate to restore this issue back to the AO to examine tax liability of non UK resident partners of the assessee firm with reference to the DTAA of the country of which they are resident. The addition made by AO u/s.9(1)(vii) of the Act is unsustainable, hence, the same is deleted.

18. In the result, appeal of the assessee is allowed for statistical purpose in the terms aforesaid.

ITA No 2352/Del/2022 and ITA No. 3209/Del/2023

19. Both sides are unanimous in stating that the facts germane to the issues in present set of appeals are identical to the one explained in ITA No.2281/Del/2019 for AY 2015-16. Therefore, the submissions made for said appeal would equally hold good for these two appeals for the subsequent assessment years.

20. A perusal of grounds of appeal for AY 2018-19 and 2021-22 show that the grounds of appeal are identical to the grounds raised by the assessee in AY 2015-16. Even, the written submissions filed by the ld. Counsel for the assessee for subsequent assessment years are identical. Thus, findings given by us while adjudicating the appeal of the assessee for AY 2015-16 would mutatis mutandis apply to appeal of the assessee for AY 2018-19 and AY 2021-22. For parity of reasons, the addition made by the AO in the respective appeals are deleted and appeal are restored back to AO with similar directions.

21. To sum up, appeals of the assessee are allowed for statistical purpose. Order pronounced in the open court on Monday the 22^nd of June, 2026.