An Indian company engaged a UK-based firm of solicitors; the services were to be performed by the solicitors in London. The issue for consideration before the tribunal was whether the Indian company had any liability to withhold tax from the payment made to the UK-based firm of solicitors? 
 
The first legal problem to be resolved was as to whether the services offered by the solicitors were covered under Article 15 of the tax treaty between India and the UK which deals with tax on independent personal services. If Article 15 of the treaty is applicable, then tax could be charged in India only if the solicitors or its partners were present in India for an aggregate period of 90 days in the relevant financial year, or the solicitors had a fixed base regularly available to them in India. But if Article 15 did not apply and instead Article 13 which deals with fees for technical services was applicable, then the position of tax could be different.The ITAT, as reported in 90 ITD 793, held that the services in question constituted professional services and, therefore, provisions of Article 15 are to be applied. In another case of IMP Power Ltd 107 TTJ 522, it was held that the fee payable to the UK solicitor is not taxable in India because the same will be covered under Article 15 of Indo-UK Tax Treaty. 
 
The assessee had contended that legal fees was not taxable u/s 9 of I-T Act because the cause of action has arisen outside India; the services have been rendered outside India; the payee is a non-resident and does not have any office/agent in India; the amount has been paid/remitted directly through bank; the amount has not been paid/recovered by any agent of the non-resident in India; that no income, therefore, is deemed to have arisen in India. 
 
It will be relevant to mention here that Section 9, dealing with accrual of income to non-residents, is proposed to be amended by Finance Bill 2007 with retrospective effect from June 1, 1976. Prior to the proposed amendment, the present situation in law is that there must be sufficient territorial nexus between such income and the territory of India. The fees for technical services etc can be taxed in India not only when the services are to be utilised in a business in India but also when the services are rendered in India. 
 
This position is sought to be amended retrospectively by inserting an explanation to the effect that it is no longer necessary to establish territorial nexus between the income and the territory of India; and further that income will be taxed in India whether the non-resident has a residence or a place of business or business connection in India or not. 
 
A strict interpretation of the proposed amendment of Section 9 of I-T Act will certainly bring the fees paid to the UK solicitors firm in the tax net in India. However, in view of the treaty between India and the UK, such fees will still not be liable to tax in India because the legal position that the tax treaty over-rides the Indian Income Tax Act remains unchanged.

H P Aggarwal