India: Payment For Technical Services Made For Earning Future Source Of Income Outside India Is Covered By The Source Rule Exclusion Under The Act

Mumbai Income Tax Appellate Tribunal (ITAT) in the case of Kotak Mahindra Bank Ltd. ('the Assessee'), dealt with the issue of whether fees paid by the Assessee to a UK LLP for legal services in relation to acquisition of a banking company and setting up of a US branch is covered by the source rule exclusion applicable to royalty and fee for technical services ('FTS') under the Income-tax Act, 1961 ('the Act'). Furthermore, ITAT also dwelled upon the issue of whether payment for such services would be governed by Article 15 of Double Taxation Avoidance Agreement between India and UK ('the Tax Treaty') dealing with Independent Personnel Service ('IPS') or Article 13 dealing with royalty and FTS.

The Tribunal held that the source rule exclusion under the Act is not restricted to a case where FTS is incurred for the purpose of earning overseas income only when there is an existing source of income, but even if the payment is for creation of a new source of income it is covered by the source rule exclusion. Since the payments to UK LLP were made for earning a new source of income or earning income from business outside India, by way of acquisition of a banking company or setting up of a branch outside India, such payments would be covered by the source rule exclusion under the Act.

Further, it was held that Article 15 of the Tax Treaty, being a specific provision dealing with legal services, overrides the general provisions of Article 13 of the Tax Treaty dealing with technical and consultancy services. However, in absence of satisfaction of the conditions specified in Article 15 of the Tax Treaty, such income is not liable to tax in India. 

Nangia's Take

Tax landscape is evolving and ruling of this kind re-enforce taxpayer's confidence that enigma of India's adversarial tax regime is close to its end. This is a welcome ruling by the ITAT which clarifies that any payment by a resident which is in the nature of royalty or FTS for the purpose of earning a potential future source of income outside India would also be covered by the source rule exclusion under the Act.

Source: [TS-528-ITAT-2016(Mum)]

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