[Opinion] Tribunal Analysis on Legal Fees and Taxability as FTS

D.C. Agrawal – [2025] 178 taxmann.com 160 (Article)

1. Introduction

In a recent judgement in ACIT v. Subramaniam Hariharan [2025] 177 taxmann.com 640 (Delhi – Trib.) the issue considered by the Tribunal was whether payments remitted by Indian law firms to non-resident foreign attorneys/law firms—towards filing, prosecution and maintenance of overseas intellectual property (IP) matters for Indian clients—are taxable in India as “fees for technical services” (FTS) under section 9(1)(vii) of the Income-tax Act, 1961 (the Act), thereby requiring tax deduction at source (TDS) under section 195 and inviting disallowance under section 40(a)(i) for non-deduction; or whether such payments are “professional services” outside the scope of section 9(1)(vii), hence not chargeable in India and not subject to TDS. In this Article, the decision of the Tribunal, the fine distinction between “technical services” and professional Services” and the views of the Indian Courts and Tribunal will be discussed in brief.

2. Facts of the case

Three connected matters were heard together by the Delhi Bench of the ITAT because they involved a common question of law and materially similar facts. Two assessees—Subramaniam & Associates and Anand & Anand—are well-known Indian law practices focused on IP rights. In the relevant previous years, they engaged foreign individual attorneys and overseas law firms to perform professional tasks in their respective jurisdictions: filing patent/trademark applications, reporting office actions, preparing and filing responses, conducting searches, paying renewal/annuity fees, arranging translations, and maintaining records at local IP offices.

The Indian firms remitted fees and reimbursements to these non-resident professionals without withholding tax under section 195, on the footing that no income accrued/arose (or was deemed to accrue/arise) in India. The Assessing Officers (AOs), 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. The first appellate authority (CIT(A)) partly sustained the disallowance in one case and sustained it in another; hence, the assessees appealed to the Tribunal, while in one matter the Revenue also filed a cross-appeal.

3. Arguments of the appellant(s)

(i) Assessee(s)

i) Separate Statutory Treatment of Professional v. Technical Services- 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 (lex specialis derogat legi generali).

ii) Residents- Section 40(a)(ia) (resident payees) expressly refers to both “fees for technical services” and “professional services,” 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).

iii) Chargeability as a Precondition for TDS under Section 195- Section 195 obliges TDS only where the sum is chargeable to tax in India. The Supreme Court in GE India and Engineering Analysis holds that “chargeability” is a sine qua non; mere remittance does not trigger TDS. 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.
iv. Nature of Legal Work as Regulated Professional Practice: The work undertaken is quintessential “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); it is regulated professional practice falling within the specific professional lane recognized by sections 44AA and 194J.

v) Precedents- The Tribunal in NQA Quality Systems, Deloitte Haskins & Sells, ONGC (Del ITAT), and Chander Mohan Lall (Del ITAT) recognize the distinction and hold that legal/professional services rendered outside India are not FTS under section 9(1)(vii).

(ii) Revenue

The AOs 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).

4. Arguments of the respondent(s).

(i) Assessee(s) as respondents to Revenue’s appeal and / Revenue as respondent to assessees’ appeals:

(i)  Services is purely professional (legal): The assessees reiterated that the nature of the services is purely professional (legal), not managerial/technical/consultancy; the clients’ IP is prosecuted and maintained abroad before statutory authorities, a field governed by local bar/registration requirements. The assessees are facilitators/engagers; the foreign professionals act in their own jurisdictions. There is no “make available” of technical knowledge nor any managerial advisory component in the sense of section 9(1)(vii).
(ii) Services fit within “consultancy: The Revenue, defending the disallowance, supported the AO’s interpretation that the services fit within “consultancy” element of FTS and hence are deemed to accrue in India.

5. The Tribunal allowed the assessees’ appeals and dismissed the Revenue’s appeal. Its core reasonings are:

(1) Distinct statutory compartments—professional vs technical services. The Act, read as a whole, draws a clear line between “fees for professional services” and “fees for technical services.” 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 be otiose.
(2) Section 40’s structure is telling. For resident payees, section 40(a)(ia) explicitly covers both professional fees and FTS; it even defines both in its Explanation. For non-resident payees, section 40(a)(i) mentions only “royalty, fees for technical services or other sum chargeable” and defines only FTS—not professional services. This statutory asymmetry indicates a deliberate legislative policy: professional fees to non-residents are not, solely by virtue of being professional services, deemed to accrue in India under section 9(1)(vii).
(3) Section 195 requires “chargeability”: TDS is mandated only if the remittance is chargeable to tax in India. The Supreme Court jurisprudence (GE India; Engineering Analysis) compels a threshold inquiry into chargeability. Here, the foreign attorneys rendered services wholly outside India; their fees neither accrued/arose in India nor are deemed to under section 9(1)(vii), because the services are professional, not FTS. Consequently, no TDS obligation arose; the section 40(a)(i) disallowance collapses.
(4) Nature of legal work is professional, not FTS. Legal practice is a regulated professional activity tied to jurisdictional licensure. The assessees engaged overseas lawyers precisely because Indian qualifications do not permit representation before foreign IP offices/courts. That professional 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).
(5) Lex specialis principle. 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. Adopting section 9(1)(vii) to capture legal professional work would ignore the carefully delineated statutory framework.
(6) Consistent tribunal authority. The Delhi Bench cited Chander Mohan Lall (infra) (payments to foreign attorneys held not FTS; no 40(a)(i) disallowance) and ONGC (infra) (legal services held outside section 9(1)(vii)), as well as NQA Quality Systems (infra) and Deloitte Haskins & Sells(infra) , each recognizing professional services as distinct from FTS. In the absence of contrary authority, the Tribunal followed this line.
On these reasonings, the Tribunal (a) deleted the disallowances under section 40(a)(i) in the assessees’ appeals, and (b) dismissed the Revenue’s appeal as infructuous.

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