Facts:
a) The assessee was engaged in the banking business and paid certain legal fees to one legal firm situated in UK. The assessee had deducted and deposited 20% withholding taxes on such payment as per the agreement.
b) Subsequently, it filed an appeal before Commissioner (Appeals) and contended that the impugned payment was not liable to be taxed in India. Said contention was considered but dismissed by the Commissioner (Appeals) on the ground that no new source of income came into existence by obtaining the legal services, and hence, the impugned payment constituted 'Royalty'/'FTS' as per section 9(1)(vi)/(vii).
The ITAT held as under:
1) The impugned payments were made by assessee for creating or earning a new source of income outside India by way of establishment of new Bank Branch or acquisition of Bank.
2) Section 9 provides that royalty or FTS is deemed to accrue or arise in India if it is payable by a person who is resident, except where the fees are payable for the purposes of making or earning any income from any source outside India;
3) In the instant case the assessee was contemplating to create a source for earning income outside India and therefore, these payments would fall within the exceptions of Section 9(1) (vi)/(vii) and accordingly, not taxable under the domestic law. The Mumbai Tribunal in case of ITO (International Taxation) v. Bajaj Hindustan Ltd. [2011] 13 taxmann.com 13 dealt with the similar issue and held as under:
It is no doubt true that the source of income has not come into existence. But there is nothing in section 9, to show that the source of income should have come into existence so as to be covered under the exception of Section 9. The expression used is "for the purpose of earning any income from any source outside India." There is nothing in the language of sec. 9, which would go to show that the same is restricted to only to an existing source of income. - [2016] 74 taxmann.com 246 (Mumbai - Trib.)
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