M/S. GRANT THORNTON ADVISORY (P) LTD.,NEW DELHI vs. DCIT, NEW DELHI

PER SAKTIJIT DEY, JM:

Captioned appeal of the assessee arises out of order dated

30.03.2017 of learned Commissioner of Income Tax (Appeals)-16,

New Delhi, pertaining to assessment year 2011-12.

2 ITA No. 3259/Del/2017 AY: 2011-12 [Grant Thornton Advisory (P.) Ltd.] to tax deduction at source. Thus the disallowance so made should be deleted. 2. The CIT (A) erred in law and on facts in confirming the disallowance of Rs. 21,76,575/- (correct figure is Rs. 18,44,925/-) being the professional fees paid to GT UK LLP u/s 40(a)(ia) of the Act due to non-deduction of TDS ignoring the facts and evidences placed on record to show that the said payments were not taxable in India and therefore not liable to tax deduction u/s 195 of the Act. Thus the disallowance so made should be deleted.

Rs.2,73,52,203/- under section 40(a)(i) of the Income-tax Act,

1961 (for short ‘the Act’) for alleged non-deduction of tax at

source on payment made towards membership/subscription fee.

3.1 Briefly the facts are, the assessee, a resident company, is

engaged in the business of advisory services. For the assessment

year under dispute, the assessee filed its return of income on

29.09.2022 declaring income of Rs.35,59,230/-. In course of

assessment proceedings, the Assessing Officer while perusing the

materials on record, noticed that in the year under consideration,

the assessee has paid Rs.2,73,52,203/- to Grant Thornton

International Ltd., London, UK (GTIL) towards membership/

subscription. He observed, the assessee has entered into an

agreement with Grant Thornton International Ltd. on 01.07.2007,

as per which, the assessee is paying certain percentage of its

receipts towards membership and subscription fee. Referring to

3 ITA No. 3259/Del/2017 AY: 2011-12 [Grant Thornton Advisory (P.) Ltd.] section 9(1) of the Act, the Assessing Officer observed, such

payment made to the overseas entity is in the nature of income

deemed to accrue or arise in India. Therefore, before paying the

amount, the assessee should have deducted tax at source in

terms of section 195 of the Act. Since, the assessee had failed to

do so, the Assessing Officer show-caused the assessee to explain,

as to why the amount should not be disallowed under section

40(a)(i) of the Act. In reply, it was submitted by the assessee that

the overseas entity does not have any fixed base in India and

renders professional services outside India. Further, it was

submitted, since the overseas entity does not have any Permanent

Establishment (PE) in India, the amount paid towards

subscription and membership fee outside India is not subject to

TDS under section 195 of the Act. The Assessing Officer, however,

was not convinced with the submissions of the assessee.

Referring to certain clauses of the agreement and the provision

contained under section 9(1)(vii) of the Act, the Assessing Officer

observed that there is an element of consultancy, technical and

managerial services, for which, the assessee had paid the

subscription and membership fee. Thus, he held that

subscription and membership fee paid by the assessee would fall

4 ITA No. 3259/Del/2017 AY: 2011-12 [Grant Thornton Advisory (P.) Ltd.] within the category of Fees for Technical Services (FTS).

Accordingly, he held that the amount paid by the assessee to

Grant Thornton International Ltd., London, UK, being in the

nature of FTS, the assessee was required to deduct tax at source

under section 195 of the Act. The assessee having failed to do so,

the Assessing Officer disallowed the amount of Rs.2,73,52,203/-

under section 40(a)(i) of the Act. Contesting the disallowance so

made, the assessee preferred appeal before learned Commissioner

(Appeals).

3.2 After perusing the facts on record and the nature of

payment, learned Commissioner (Appeals) called upon the

assessee to explain, as to why the payment should not be treated

as royalty under section 9(1)(vi) of the Act for using the brand of

the overseas entity. Though, the assessee submitted that the

payment made is purely in the nature of reimbursement of

expenses incurred to develop GT brand in India, however,

rejecting the submissions of the assessee, learned Commissioner

(Appeals) held that the amount paid by the assessee for user of

the brand has to be treated as royalty, hence, taxable in India.

Since, the assessee had failed to deduct tax at source under

section 195 of the Act while making such payment, learned

5 ITA No. 3259/Del/2017 AY: 2011-12 [Grant Thornton Advisory (P.) Ltd.] Commissioner (Appeals) sustained the disallowance made by the

Assessing Officer, though, on a completely different reasoning.

3.3 Before us, learned counsel for the assessee submitted, GTIL,

an overseas entity, is a non-profit, non-practicing international

association of accountancy and assurance firm which works for

mutual benefit of members on no profit/no loss basis. He

submitted, GTIL has neither any office nor any business

connection in India. He submitted, the objective of GTIL is to

move towards the adoption of common standards and policies for

professional services rendered by its member firms. He submitted,

since GTIL does not have any independent source of income, its

operational expenses are shared/borne by its members. He

submitted, the receipts from the members constitute some

percentage of fees received by them on their internationally

referred work by the members amongst them and deficit of

receipts over expenses is as per a formula determined amongst

them from time to time. He submitted, as such, GTIL does not

render any services to its members. He submitted, the amount

paid by the assessee to GTIL is not towards payment for any

services rendered by GTIL but share of assessee in operational

expenses of GTIL. He submitted, as a member of GTIL, the

6 ITA No. 3259/Del/2017 AY: 2011-12 [Grant Thornton Advisory (P.) Ltd.] assessee gets benefitted as the other member of GTIL referred

work in India to the assessee. Therefore, in a way, membership in

GTIL helps assessee to get more business in this manner.

Referring to India – UK Tax Treaty, learned counsel for the

assessee submitted, the definition of FTS under the DTAA is

narrower than the definition under the Act. He submitted, the

definition of ‘FTS’ in the Tax Treaty is much narrower as it speaks

of make available of technical services. He submitted, neither in

the year under consideration nor in any other assessment year

GTIL rendered any technical, managerial consultancy to the

assessee nor give technical material, information, managerial

skills or advisory services to the assessee on any issues, as

alleged by the Assessing Officer. He submitted, the payment of

membership contribution does not involve any services being

given by any of the employee of GTIL to the assessee. He

submitted, the membership contribution is not a consideration

for conferment of any right, GTIL takes contributions from its

members for formulating the standard practices and other heads

which can lead to overall growth of the members. Referring to

Article 13(4) of the Tax Treaty, learned counsel submitted the

assessee has never made payment for any services ancillary and

7 ITA No. 3259/Del/2017 AY: 2011-12 [Grant Thornton Advisory (P.) Ltd.] subsidiary to the application or enjoyment of the right, property

or information for which royalties are paid. Therefore, he

submitted, the payment cannot be treated as royalty. Further, he

submitted, expression “make available” used in Article of the Tax

Treaty implies that the technical knowledge, skill, etc. remain

with the person utilizing the services even after the particular

transaction is over or even after the particular contract comes to

an end. In support of such contention, he relied upon the

following decisions:

(a) Cushman & Wakefiled (S) Pte. Ltd. (2008) 305 ITR 208

(b) Sandvik Australia Pty. Ltd. Vs. DDIT (International Taxation) (2013) 141 ITD 598 (Pune)

(c) CIT Vs De Beers India Minerals Pvt. Ltd. (2012) 346ITR 467 (Karn)

(d) ISR0 Satellite Centre (ISAC) (2008) 307 ITR 59 (AAR)

(e) Intertek Testing Services India (P) Ltd. Vs. Authority for Advance Rulings (2008) 307 ITR 418

(f) BharatiAxa General Insurance Co. Ltd. (2010) 326 ITR 477 (AAR)

(g) Cable & Wireless Networks India Pvt. Ltd. (2009) 315 ITR 72

(h) Invensys Systems Inc., (2009) 317 ITR 438

(i) Guy Carpenter & Co. Ltd. Vs ADIT (2012) 18 ITR (Trib) 414 (Delhi)

8 ITA No. 3259/Del/2017 AY: 2011-12 [Grant Thornton Advisory (P.) Ltd.]

(j) WNS North America Inc. Vs ADIT (International Taxation) (2013) 141 ITD 117 (Mumbai) : (2013) 25 ITR (Trib) 582 (Mumbai)

k) Emst & Young Pvt. Ltd., (2010) 323 ITR 184 (Pages 197 - 204 of the PB)

3.4 He submitted, the assessee renders consultancy and

advisory services; hence, there is no use of technical design or

processes. Therefore, there was no transfer or development of any

technical plan or technical design. That being the case, the

payment cannot be treated as FTS under the Tax Treaty

provision. Without prejudice, he submitted, the membership fee

cannot come within the ambit of royalty as per Article 13(3) of the

DTAA. Drawing our attention to the said provision, he submitted,

the assessee has not paid the membership fee for use of any

copyright, patent, trademark, or any industrial, commercial or

scientific equipment. Thus, it cannot be treated as royalty. In

support of such contention, be relied upon the decision of the

Authority for Advance Ruling (AAR) in case of ABB Ltd. (2010) 322

ITR 255. Proceeding further, he drew our attention to a decision

of the Tribunal in case of DCIT Vs. KPMG (2017) 81 taxmann.com

118 (Mum.-Trib.). The point in dispute in the referred case was on

9 ITA No. 3259/Del/2017 AY: 2011-12 [Grant Thornton Advisory (P.) Ltd.] the issue, whether the membership fee paid by KPMG to KPMG

International can be disallowed under section 40(a)(i) of the Act

for alleged non-deduction of tax at source. He submitted, while

deciding the issue, the Tribunal held that there being a complete

identity between the contributors and participators and their

action being in furtherance of the mandate of the association, the

payment made is not taxable. He submitted, both the assessee

and KPMG are advisory firms and in the same business segment,

and are members of their international associations. He

submitted, while deciding the issue, the Tribunal held that the

membership fee paid is neither in the nature of royalty nor FTS.

Rather, it is reimbursement of cost incurred by the international

association, though named as membership fee. He submitted,

since there is complete identity between the contributors and

participators, and their action is in furtherance of the mandate of

the association, the payment would be governed by the principle

of mutuality, hence not chargeable to tax as income at the hands

of GTIL. Therefore, there is no need for the assessee to deduct tax

at source. Thus, he submitted, the disallowance under section

40(a)(i), having been wrongly made, should be deleted.

10 ITA No. 3259/Del/2017 AY: 2011-12 [Grant Thornton Advisory (P.) Ltd.] 4. Strongly relying upon the observations of learned

Commissioner (Appeals), learned Departmental Representative

submitted, in course of proceedings before learned appellate

authority, the assessee tried to give a new angle to the entire

dispute by claiming that the membership fee and subscription

paid to GTIL is nothing but reimbursement of cost. He submitted,

to support its claim the assessee has also furnished a separate

agreement for reimbursement of cost. He submitted, in course of

assessment proceeding, this was never the case of the assessee.

Therefore, the first appellate authority has rightly rejected the

fresh claim of the assessee. Proceeding further, he submitted, the

assessee has paid the amount to its AE not only for using the

brand, but also for availing certain services. Therefore, the

amount paid has to be treated as royalty, both under section

9(1)(vi) as well as under the provisions of India – UK DTAA.

decisions relied upon and perused the materials on record. The

controversy between the parties is with regard to the nature of

membership and subscription fee paid to GTIL and whether such

payment required withholding of tax at source under section 195

of the Act. It is evident, the Assessing Officer treated the payment

11 ITA No. 3259/Del/2017 AY: 2011-12 [Grant Thornton Advisory (P.) Ltd.] made towards membership and subscription fee as FTS, both

under section 9(1)(vii) as well as Article 13(4) of India – UK DTAA.

Whereas, learned Commissioner (Appeals) proceeded in a

completely different footing by holding that the payment made to

GTIL towards membership and subscription fee is in the nature of

royalty. While coming to such conclusion, learned Commissioner

(Appeals), as is apparent, referred to the meaning of royalty as

finds place under explanation 2(iii) to section 9(1)(vi) of the Act.

He never examined, whether the payment would also fall within

the ambit of royalty as defined under Article 13(3) of India –UK

DTAA. It is further relevant to observe, on going through the

reasoning of learned Commissioner (Appeals), it is very much

clear that he has treated the payment made by the assessee to

GTIL as royalty for alleged use or right to use of brand

name/trade mark. Admittedly, the Revenue has not challenged

the decision of learned Commissioner (Appeals) in treating the

payment made by the assessee to GTIL towards membership and

subscription fee as royalty.

5.1 Therefore, in the facts of the present case, we have to

examine, whether the payment made by the assessee to GTIL falls

within the definition of royalty either under the India- UK DTAA

12 ITA No. 3259/Del/2017 AY: 2011-12 [Grant Thornton Advisory (P.) Ltd.] or domestic law. Before doing so, it is necessary to take note of

some relevant facts which would be crucial for deciding the issue

at hand. On a perusal of member firms agreement between the

assessee and GTIL executed on 1st July, 2007, it is evident that as

per the description of GTIL in the preamble of the agreement, it is

a non-practicing and not for profit international umbrella entity

organized as a private company limited by guarantee not having

share capital and incorporated in England and Wales. On further

examination of the agreement, it is observed that GTIL had

neither any office, nor any business connection in India. The

objective of GTIL is to facilitate adoption of common standard and

policies for professional services to be rendered by its member

firms in various fields, including assurance, tax, legal, specialized,

advisory, consulting and related services in accordance with GTIL

policies and professional standards. It is further evident, GTIL by

itself does not render any service to its members. Rather, the

member firms get benefited from each other by way of referral. In

other words, if a member firm located in a particular country is

entrusted with professional work by a client located in another

country, such work can be referred to a member firm located at

the place where the client is located. Of course, the choice to

13 ITA No. 3259/Del/2017 AY: 2011-12 [Grant Thornton Advisory (P.) Ltd.] entrust work to such member firm is completely at the discretion

of the client.

5.2 Clause 4 of the agreement provides for a separate name use

agreement under which a member firm can request for entering

into a name use agreement which will enable such member firm

to use the name ‘Grant Thornton” or an approved derivative

thereon. However, such request of a member firm to enter into a

name use agreement has to be approved by the members of Board

of GTIL present at a meeting with Corum by at least 75% vote.

Thus, from the aforesaid clause, it is very much clear that user of

brand name/trade mark (Grant Thornton) is not mandatory, but

on request of a particular member firm. Clause 5 of the

agreement speaks of permanent contribution by member firm to

GTIL. Clause 9.1 of the agreement provides that in order to assist

in equitable allocation of GTIL expenses amongst members who

have benefited from GTIL membership, a member firm shall pay

to GTIL a service charge to be computed as a percentage of total

net fees billed and collected by a member firm arising from

international work referred to such member firm by another

correspondent firm. It is further provided, in order to, encourage

member and correspondent firms to refer work to member and

14 ITA No. 3259/Del/2017 AY: 2011-12 [Grant Thornton Advisory (P.) Ltd.] correspondent firms, the board of GTIL may permit either some or

all of the service charges received from member or correspondent

firms in respect of such referral to be paid to the referring

member or correspondent firms. Clause 9.2 of the agreement

says, an annual membership contribution shall be paid to GTIL

by each member firm. Such annual membership contribution

shall be based on the anticipated excess of operating expenses

over referral fees and other income as set forth in the budget for

the year in question and as approved by Board. This annual

subscription fee has to be allocated amongst member firms on a

basis to be determined by Board from time to time. Clause 9.4 of

the agreement provides that any travel and other expenses

incurred by partners, owners and personnel or their member

firms in providing services to GTIL in connection with the

operation of GTIL or any other recovery in connection therewith

shall be reimbursed by GTIL periodically. Clause 11.4 provides

that on dissolution/liquidation of GTIL, the amount received from

realization of assets, if is in excess after discharging liabilities, will

be distributed amongst the members. Clause 17.1 of the

agreement makes it clear that GTIL shall be the sole owner of

copyright, design rights, database rights, patent rights, rights in

15 ITA No. 3259/Del/2017 AY: 2011-12 [Grant Thornton Advisory (P.) Ltd.] know-how or trade secret, trademark, trade names, logos and

associated goodwill and other intellectual property rights that

subsists or may arise in connection with software and related

materials described in Exhibit–A and all modifications and

enhancements thereon, whether made by GTIL or a member firm.

Further, it provides that a member firm can assign to GTIL with

full title guarantee any right, title and interest that such member

firm may be having at any time in the software and the

intellectual property right. On perusal of Exhibit–A to the

agreement, it is noticed that GTIL has permitted use of software

only for the purpose of performing the work in accordance with

uniform standard prescribed by GTIL. No member is permitted to

effect modification/enhancement to the software owned by GTIL.

Further, clause 17.4 of the agreement stipulates that GTIL will

grant each member firm a limited royalty-free, non-exclusive, non

transferable and non-sublicensable right and licence (a) to use

the software in object code format; (b) to modify and enhance (i)

the object code version of the software to the extent, if any,

provided on Exhibit–A or in the documentation that the GTIL

provides with the software; and (ii) the source code version of the

software to the extent necessary to correct errors, ingredients or

16 ITA No. 3259/Del/2017 AY: 2011-12 [Grant Thornton Advisory (P.) Ltd.] otherwise operate the software for member firms’ for internal

business purposes and make as many copy of the software as

reasonably necessary for such permitted use, modification and

enhancement and such backup copies as are necessary for its

lawful use. Clause 17.5 puts further restrictions/conditions to the

aforesaid license right as provided under section 17.4.

5.3 Thus, on a reading of the salient features of the agreement

as a whole, it is very much clear that GTIL on its own does not

render any services to its members. On the contrary, the

members, if required, render services to GTIL. Further, GTIL does

not have any source of income. The operational expenses of GTIL

are shared/borne by its members. Keeping in perspective the

facts as discussed hereinbefore, it is necessary to examine,

whether the payment made by the assessee to GTIL would fall

within the four corners of the expression “royalty” under Article

13(3) of India – UK DTAA. Article 13(3) of the Tax Treaty is

reproduced hereunder:

“13(3). For the purposes of this Article, the term "royalties" means: (a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work, including cinematograph films or work on films, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience; and

17 ITA No. 3259/Del/2017 AY: 2011-12 [Grant Thornton Advisory (P.) Ltd.]

(b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment, other than income derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic.”

5.4 On a reading of Article 13(3)(a), it becomes clear that

payments of any kind received as a consideration for the use of,

or the right to use, any copyright of a literary, artistic or scientific

work, including cinematograph films or work on films, tape or

other means of reproduction for use in connection with radio or

television broadcasting, any patent, trademark, design or model,

plan, secret formula or process, or for information concerning

industrial, commercial or scientific experience is treated as

royalty. Article 13(3)(b) explains the meaning of royalty further by

saying that payments received for the use of, or the right to use,

any industrial, commercial or scientific equipment, other than

income derived from the operation of ships or aircraft in

international traffic can be considered as royalty. Obviously, at

the threshold, Article 13(3)(b) would not be applicable to the

payments made. Thus, if at all, the payment may come within

Article 13(3)(a) of the Treaty.

5.5 As discussed earlier, learned Commissioner (Appeals) has

treated the payment as royalty for use of trade mark/trade name

18 ITA No. 3259/Del/2017 AY: 2011-12 [Grant Thornton Advisory (P.) Ltd.] of GTIL. However, the different clauses of the agreement, as

discussed earlier, which provide for permanent contribution,

annual contribution etc. do not demonstrate that the payments

are made for use of or right to use of trademark/brand name etc.

Rather, the clauses in the agreement make it clear that the

payments received from members in a given circumstance can be

given to a member firm either fully or in part towards fees for

referral to another member firm. The clauses of the agreement

further demonstrate that the excess of expenses over receipt are

allocated to member firms. If, that is so, assessee’s claim that

these are reimbursement of expenses on cost to cost basis cannot

be rejected. In fact, the reimbursement of expenses is implicit in

Member Firms Agreement and one does not have to go to the cost

reimbursement agreement dated 05.05.2010, whose genuineness

learned Commissioner (Appeals) doubted.

5.6 Further, clause 17.1 of the agreement, as discussed earlier,

makes it absolutely clear that GTIL shall be the sole owner of all

intellectual property rights, including trademarks, trade name,

logos and associated goodwill. On the contrary, this clause

provides for assignment of right, title and interest held by any

firm in respect of software to GTIL. Thus, the member firms

19 ITA No. 3259/Del/2017 AY: 2011-12 [Grant Thornton Advisory (P.) Ltd.] agreement read as a whole would clearly demonstrate that the

payment made by the assessee to GTIL is in the nature of

reimbursement of expenses and under no circumstance can be

said to be a payment for use of or right to use of any intellectual

property, including trade name/brand name. While treating the

membership fee paid by the assessee as royalty learned

Commissioner (Appeals) has alleged that assessee never provided

straightforward reply to the query raised as to whether the use of

trade mark/brand name is voluntary and mandatory. In our view,

irrespective of the fact whether use of trade mark/brand name is

mandatory or voluntary, the nature and character of payment

made has to be determined by looking at the terms of the

agreement under which payment was made. A reading of the

Member Firms Agreement as a whole does not indicate that the

payment made was for use of brand name.

5.7 The Member Firms Agreement read as whole would

demonstrate that the umbrella association, GTIL, was formed for

the benefit of its members. Therefore, the relationship between

GTIL and its members would be governed by the principle of

mutuality. While dealing with, more or less, identical issue

concerning payment of membership fee by KPMG to an

20 ITA No. 3259/Del/2017 AY: 2011-12 [Grant Thornton Advisory (P.) Ltd.] international association/umbrella association, viz, KPMG

International, the Coordinate Bench in case of DCIT Vs. KPMG

(supra) has held that the amount paid by a member firm to the

umbrella association would fall within the ambit of principle of

mutuality, hence, would not be taxable. Therefore, the Bench held

that there was no obligation on the assessee to deduct tax at

source. In our view, the ratio laid down by the Coordinate Bench

in case of DCIT Vs. KPMG (supra) will also apply to the facts of

the present appeal. In a recent decision rendered in case of DCIT

vs. M/s. Deloitte Touche Tohmastu, ITA No. 6703/Del/2015 and

others dated 11.04.2022, the Coordinate Bench has reiterated the

view expressed in case of DCIT Vs. KPMG. Thus, the issue in

dispute, in a way, is covered by the aforesaid decisions of the

Tribunal.

5.8 Thus, on overall consideration of facts and materials on

record and keeping in view the ratio laid down in the judicial

precedents cited before us, we hold that the payment made by the

assessee to GTIL towards membership and subscription fee is not

taxable at the hands of the payee. That being the case, the

assessee was not required to withhold tax at source in terms with

21 ITA No. 3259/Del/2017 AY: 2011-12 [Grant Thornton Advisory (P.) Ltd.] section 195 of the Act. In view of the aforesaid, we delete the

addition. This ground is allowed.

disallowance of Rs.21,76,575/- under section 40(a)(i) of the Act.

into an agreement with M/s. Hindustan Polyamides & Fibres Ltd.

to conduct a limited scope tax due diligence of M/s Tessenderlo

Fine Chemicals Ltd., an international chemical group. Since, such

professional work has to be performed in UK, GT Firm entered

into an agreement with GT UK LLP to do the work. For rendering

professional services GT Firm raised a bill of 25,500 GBP on

Hindustan Polyamides & Fibres Ltd. Whereas, for the services

rendered to GT Firm, GT UK LLP raised a bill of Rs.18,44,925/-

equivalent to 25,500 GBP on the assessee which was paid to GT

UK LLP. However, the assessee received the amount of

Rs.18,50,000/- from GT Firm as reimbursement of the amount

paid to GT UK LLP, which the assessee credited to its profit and

loss account as professional fee. Similarly, the payment to GT UK

LLP was claimed as expenses. The Assessing Officer was of the

view that while paying the professional fee to GT UK LLP, the

assessee should have withheld tax under section 195 of the Act as

22 ITA No. 3259/Del/2017 AY: 2011-12 [Grant Thornton Advisory (P.) Ltd.] the amount received by GT UK LLP was for professional services

rendered or deemed to have been rendered in India. Referring to

section 9(1)(i) and 9(1)(vii) of the Act, the Assessing Officer held

that the payment made to GT UK LLP is in the nature of Fees for

Technical Services (FTS), hence, taxable under the provisions of

the Act. Since, the assessee had failed to deduct tax at source

while making payment to GT UK LLP, the Assessing Officer

disallowed an amount of Rs.21,76,575/- under section 40(a)(i) of

the Act. While deciding the issue in appeal, learned Commissioner

(Appeals) endorsed the view of the Assessing Officer by holding

that GT UK LLP has provided services in India. Even, learned

Commissioner (Appeals) went a step further by holding that the

payments made to GT UK LLP establish that assessee was acting

as an agent of GT UK LLP. Accordingly, he upheld the decision of

the Assessing Officer. However, he directed the Assessing Officer

to verify, whether an amount of Rs.3,31,650/- pertains to the

year under consideration or subsequent year.

non-resident company having no permanent establish or liason

office in India. He submitted, merely because it holds debentures

of an Indian company it cannot be said that it is a Permanent

23 ITA No. 3259/Del/2017 AY: 2011-12 [Grant Thornton Advisory (P.) Ltd.] Establishment (PE) in India. He submitted, there cannot be any

dispute that while performing the work entrusted by GT Firm, GT

UK LLP has not rendered any part of the services in India. None of

the professionals/employees came to India to render their

services. Mentioning of name of the Indian group entities on the

invoices was only to keep track as to who was to be contacted in

the respective firm for any reference in respect of the work

assigned and under no circumstances it proves that any of the

employees visited India. He submitted, when the assessee or the

other group entity gets some assignment in UK instead of sending

team from India they utilize the services of GT UK LLP. Similarly,

if GT UK LLP has some work in India, it engages either assessee

or other group entity to carry out the work. Therefore, the services

of each other are utilized on reciprocal basis. He submitted, while

treating the payment made as FTS under section 9(1)(vii) of the

Act, the departmental authorities have totally overlooked the fact

that the taxability of the amount paid to GT UK LLP has to be

examined by applying the provisions of India – UK DTAA. Drawing

our attention to Article 13(4) of the India – UK DTAA which

defines the scope of FTS, learned counsel for the assessee

submitted, the payment made by the assessee cannot be regarded

24 ITA No. 3259/Del/2017 AY: 2011-12 [Grant Thornton Advisory (P.) Ltd.] as FTS as the payee has not made available technical knowledge,

experience, skill, know-how or processes, or transferred a

technical plan or technical design while rendering the services. He

submitted, the meaning of FTS under the Treaty provision is

narrower than the meaning under section 9(1)(vii) of the Act. He

submitted, since, there is no provision akin to explanation 2 to

section 9 in the India – UK DTAA, such meaning cannot be given

to the payment made while applying the Treaty provision. Thus,

he submitted, under no circumstances, the legal and professional

fee paid by the assessee can come within the definition of FTS

under Article 13(4) of the Treaty. He submitted, at best, the

payment made by the assessee can come within the expression

‘independent personal services’, as provided under Article 15 of

the Tax Treaty. He submitted, even the payment is not taxable in

India under Article 15 as the services were neither performed in

India, nor any of the employees visited in India for rendering such

services or GT UK LLP has a fixed base regularly available to it for

performing its activity. Thus, he submitted, even under Article 15,

the amount is not taxable as none of the conditions of paragraph

1 to Article 15 of the Tax Treaty are fulfilled.

25 ITA No. 3259/Del/2017 AY: 2011-12 [Grant Thornton Advisory (P.) Ltd.] 8.1 Without prejudice, he submitted, the assessee remitted the

amount to GT UK LLP based on a certificate obtained from the

Chartered Accountant who has opined that no tax is required to

be withheld on the payment made. So, the assessee acted

bonafide. Learned counsel submitted, in any case of the matter,

the amount paid by the assessee to GT UK LLP was reimbursed

by GT Firm and the assessee has also offered such amount as

income and paid the tax by way of TDS. Therefore, no prejudice

has been caused to the Revenue. He submitted, while deciding

similar nature of dispute in assessee’s own case in assessment

year 2009-10, the Tribunal has remanded the issue to the

Assessing Officer to examine applicability of explanation 2 to

section 9 of the Act. He submitted, the applicability of explanation

2 to section 9 will arise only when assessee’s case is not covered

under India – UK DTAA or the provisions of Tax Treaty are less

beneficial. Thus, he submitted, when the Treaty provisions are

more beneficial to the assessee, there is no need for examining

the applicability of explanation 2 to section 9 of the Act. Thus, he

submitted, there is no need to remand the matter to the Assessing

Officer in the impugned assessment year.

26 ITA No. 3259/Del/2017 AY: 2011-12 [Grant Thornton Advisory (P.) Ltd.] 9. Learned Departmental Representative strongly relied upon

the observations of the Assessing Officer and learned

Commissioner (Appeals).

decisions relied upon and perused the materials on record. The

issue arising for consideration is, whether the assessee was

required to withhold tax under section 195 of the Act on the

payment made to GT UK LLP. A reading of section 195 of the Act

makes it clear that the assessee is required to deduct tax at

source while making payment of certain income arising to a non-

resident, if such income is chargeable to tax in India. Therefore,

the crucial words which need to be kept in mind is ‘income

chargeable to tax in India’. Thus, obligation of the assessee to

withhold tax arises only when the payment to be made to the

non-resident assumes character of income chargeable to tax in

India. If the payment made has no element of income chargeable

to tax in India, there is no requirement of withholding of tax

under section 195 of the Act. This is a fairly well settled legal

principle propounded by the Hon’ble Supreme court in case of GE

India Technology Cent. Pvt. Ltd. Vs. CIT (Civil Appeal Nos. 7541-

77542 of 2010, dated 09.09.2010). Therefore, what logically

27 ITA No. 3259/Del/2017 AY: 2011-12 [Grant Thornton Advisory (P.) Ltd.] follows is, the liability of the assessee to withhold tax at source

under section 195 of the Act would arise only where the income is

chargeable to tax in India.

10.1 In the facts of the present case, an Indian company had

engaged a group entity of the assessee in India to render certain

professional services which required to be performed in UK.

Instead of deploying its employees to travel to UK to do the work,

GT Firm engaged another group entity GT UK LLP to do the work

on its behalf. GT UK LLP instead of raising the invoice for the

services rendered on GT Firm raised it on the assessee. Whereas,

GT Firm reimbursed the expenses incurred by the assessee on

actual basis after deduction of tax at source. Obviously, the

departmental authorities have treated the payment made by the

assessee to GT UK LLP as FTS under section 9(1)(vii) of the Act.

However, the departmental authorities have not at all examined,

whether it can be regarded as FTS under Article 13(4) of the Tax

Treaty. On a reading of Article 13(4) as a whole, it becomes very

much clear that the payment made is not coming within Article

13(4)(a) as it is not in connection with any servicer ancillary or

subsidiary to the application or enjoyment of right, property,

information for which payment was made. In other words, the

28 ITA No. 3259/Del/2017 AY: 2011-12 [Grant Thornton Advisory (P.) Ltd.] payment is not in the nature of enjoyment of any right which can

be termed as royalty. Therefore, the only other clause under

which it can come is Article 13(4)(b). However, the said provision

also speaks of making available technical knowledge, experience,

knowhow or processes, including transfer of a technical plan or

technical design. There is no material on record to demonstrate

that the payee has made available any technical knowledge,

experience, skill, know-how or processes or has transferred

technical plan or technical design for which the payment was

made. Thus, in our view, the payment made cannot be regarded

as FTS under Article 13(4) of the Tax Treaty. The only other

provision under which it can fall is Article 15 of the Tax Treaty

which speaks of independent personal services. However, the

payment cannot also fit into Article 15 as neither the services

were rendered in India or any employees of the payee came to

India to render such services. Even, there is no material on record

to suggest that the payee has rendered such services from any

fixed base in India. Thus, the payment made cannot even come

under Article 15. In any case of the matter, the amount in dispute

has been subjected to TDS in India, though, may not be at the

hands of the payee but certainly at the hands of the assessee.

29 ITA No. 3259/Del/2017 AY: 2011-12 [Grant Thornton Advisory (P.) Ltd.] That being the factual position, in our view, the assessee was not

obliged to deduct tax at source under section 195 of the Act while

remitting the amount to GT UK LLP. Accordingly, the

disallowance is deleted. Ground is allowed.

Order pronounced in the open court on 29th April, 2022

Sd/- Sd/- (G.S. PANNU) (SAKTIJIT DEY) PRESIDENT JUDICIAL MEMBER

Dated: 29th April, 2022. RK/- Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi