Issues Involved

Whether payments remitted by Indian law firms to an NR foreign attorney towards filing, prosecution and maintenance of overseas intellectual property (IP) matters for Indian clients—are taxable in India as “fees for technical services” (FTS) or “professional services” (FPS)?

Facts of the Case

• The assessee engaged foreign individual attorneys and overseas law firms to perform professional tasks and remitted fees to these NR professionals without withholding tax u/s. 195, on the footing that no income accrued/arose (or was deemed to accrue/arise) in India.
• The Assessing Officers however, treated the outgoings as FTS “chargeable to tax in India” by virtue of section 9(1)(vii), and disallowed the expenditure under section 40(a)(i) for failure to deduct TDS.

Arguments of the Appellant (Assessee)

1. Statutory scheme separates “professional services” and “technical services.” Section 194J defines “professional services” (including “legal”) distinctly from “fees for technical services,” which in turn borrows its meaning from Explanation 2 to section 9(1)(vii). If Parliament had intended professional services to be swept into FTS, there was no need to define them separately in 194J; the specific prevails over the general.
2. Section 40(a)(ia) (resident payees) expressly refers to both “FTS” and “FPS,” and defines both. By contrast, Section 40(a)(i) (non-resident payees) mentions only “royalty, fees for technical services, or other sum chargeable,” and defines only FTS—not professional services. This deliberate legislative carving indicates that professional fees paid to non-residents are not per se within “sum chargeable” via section 9(1)(vii).
3. Section 195 obliges TDS only where the sum is chargeable to tax in India. Since the services were rendered outside India by non-residents and are professional in nature, they are not covered by section 9(1)(vii) and so are not chargeable in India.
4. The work undertaken is quint essential “legal/professional” practice—representation before foreign IP offices/courts, compliance with jurisdiction-specific regulations—requiring local professional standing. While such work involves expertise, it is not “managerial, technical or consultancy” in the sense contemplated by section 9(1)(vii).

Arguments of the Respondent (Revenue)

The Respondents characterized the foreign services as “managerial/technical/ consultancy,” hence as FTS under Explanation 2 to section 9(1)(vii), attracting deeming accrual in India. On that premise, TDS under section 195 should have been deducted; failure attracts disallowance under section 40(a)(i).

Decision of the Court

The Act, read as a whole, draws a clear line between “FPS” and “FTS.” Section 194J’s Explanation defines professional services (including legal) separately from FTS. Section 44AA likewise lists “legal” and “technical consultancy” as professions, reinforcing that Parliament treats “profession” as a distinct category. If “professional” were intended to be subsumed within FTS, separate definitions would serve no purpose.

Legal practice is a regulated professional activity tied towards providing jurisdictional and regulatory services. Thus, the said services are professional in character—not a managerial/technical/consultancy service in the statutory sense—determines the tax outcome. The Tribunal emphasized that professional know-how/expertise alone does not transform legal services into FTS under section 9(1)(vii). Where the Act provides specific definitions and treatment for “professional services,” those provisions prevail over broader, general concepts like “consultancy” embedded within the FTS definition.

Significant Takeaways from Judgement

• Professional Services are not Technical Services: Legal/professional services are a separate, specifically recognized category in the Act; they are not to be auto-classified as “managerial, technical or consultancy” merely because they involve expertise.
• Section-by-section coherence matters: The interplay of sections 9(1)(vii), 40(a)(i)/(ia), 44AA, 194J and 195 shows deliberate legislative architecture. Courts must respect this structure and not read professional services into the FTS basket.
• Chargeability first, TDS next: Under section 195, TDS liability arises only if the sum is chargeable in India. The chargeability test precedes withholding; its failure ends the inquiry, along with any section 40(a)(i) disallowance.
• Specific over general: When a special, precise provision (e.g., the definition of “professional services” in 194J read with 44AA) exists, it overrides any broader, general conceptualizations (e.g., “consultancy” in the FTS definition).