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
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.
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.
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