DCIT, CIR 16(2), MUMBAI vs. M/S KPMG ASSURANCE AND CONSULTING SERVICES LLP, MUMBAI

We have heard the both the sides and perused the material on record including the written submission filed by both the sides (though the same have not been reproduced herein for the sake to brevity and to avoid repetition). We have also taken into consideration the Written Submissions, dated 05/02/2024, chart of issues, paper-book and case laws compilation filed on behalf of the Assessee, as well as the Written Submissions, dated 08/02/2024, and case laws compilation filed on behalf of the Revenue to the extent the same were relied upon during the course of hearing. Ground No. 1 to 4 raised by the Revenue; Cross Objection No. 1 raised by the Assessee; Ground No. 1 & 2 raised by the Assessee 4. Ground No. 1 to 4 raised by the Revenue; Cross Objection No. 1 raised by the Assessee; and Ground No. 1 & 2 raised by the Assessee pertain to disallowance made by the Assessing Officer under Section 40(a)(i) of the Act.

The Assessee claimed deduction for the following fee paid/payable to the non-residents aggregating to INR 11,21,42,029/-: Sl.No. Name & Country of Tax Residence Status Amount (INR) Note Ref 1. Houthoff Buruma, Netherlands Company 8,89,560/- 2 2. KPMG AB, Sweden Company 19,19,086/- 2 3. KPMG Abogados S.L., Spain Company 1,93,758/- 2 4. KPMG Advisory N.V., Netherlands Company 16,75,488/- 2 5. KPMG Advisory Services, Nigeria LLP 29,50,726/- 3 6. KPMG ASESORES S.L., Spain Company 33,73,980/- 2 7. KPMG Audyt Sp. Zoo, Poland LLP 5,62,275/- 3 8. KPMG Hadibroto, Indonesia Company 2,81,781/- 2 9. KPMG IFRG LTD, United Kingdom Company 8,03,238/- 2 10. KPMG LLP, Singapore Firm 43,02,822/- 2 11. KPMG LLP, United Kingdom Firm 2,66,44,228/- 2 12. KPMG LLP, United States of America Firm 2,78,12,989/- 1 13. KPMG Lower Gulf Limited, UAE Company 10,36,145/- 2 14. KPMG Meijburg & Co Special Services B V, Netherlands Company 1,71,131/- 2 15. KPMG Services Pte.Ltd., Singapore Company 2,09,48,526/- 2 16. KPMG Siddharta Advisory, Indonesia Company 4,11,141/- 2 17. KPMG, Tanzania Firm 4,47,678/- 1 18. KPMG United Kingdom Plc United Kingdom Company 74,17,104/- 2 19. KPMG, Ireland Firm 1,20,808/- 1 20. KPMG, Sri Lanka Firm 30,05,238/- 1 21. Manabat Sanagustin & Co. CPAs Philippines Firm 59,15,576/- 1 22. Mr. Philip Baker Q.C, UK Individual 4,07,375/- 1 23. Rahman Rahman Huq, Bangladesh Firm 1,48,076/- 2 24. Simon Mort Reports Limited, UK Company 7,03,300/- 2 Total 11,21,42,029/- 6. The Assessing Officer denied deduction for the entire amount of INR 11,21,42,029/- holding that the Assessee was under obligation to withhold tax from professional fee paid to non resident under Section 195 of the Act as the same were chargeable to tax in India in terms of Section 9(1)(vii) of the Act read with either Article 12 or Article 22/23 of the corresponding DTAAs as FTS or Other Income, respectively. Since the Assessee had failed to deduct tax from the same in terms of Section 195 of the Act, the Assessing Officer made disallowance of INR 11,21,42,029/- invoking provisions contained in Section 40(a)(i) of the Act.

In appeal before the CIT(A), by placing reliance upon the judgments/decision including those in the case of the Assessee and its member concerns, it was contended on behalf of the Assessee that disallowance under Section 40(a)(i) of the Act was not warranted since the Assessee was not under obligation to withhold tax in view of the following: (i) In respect of 6 non-resident parties2 [at Sl.No. 12, 17, 19, 20, 21, 22 and 23 of Table in paragraph 5 above] it was contended that professional fee paid to the parties was in the nature of income from IPS and in absence of a fixed base/physical presence of the said parties in India, the same was not liable to tax in India in terms of Article 14/15 of the corresponding DTAA. [Refer to Note 1 at 65 of impugned order passed by the CIT(A)] (ii) In respect of 2 non-resident parties3 [at Sl.No. 5 and 7 of Table in paragraph 5 above] it was contended that professional fee were not liable to tax in India in terms of Section 9(1)(vii)(b) of the Act for the reason the same were utilized outside India and/or for earning income from source outside India. [Refer to Note 3 at 65 of impugned order passed by the CIT(A)] (iii) In respect of balance 16 non-resident parties4 [at Sl.No. 1 to 4, 6, 8 to 10, 13 to 16, 18 and 23 to 24 of Table in paragraph 10.1 above] it was contended that professional fee paid to some parties was in the nature of Business Profits and in absence of a Permanent Establishment of the said parties in India, the same was not liable to tax in India under Article 7 of the corresponding DTAA. [Refer to Note 2 at 65 of impugned order passed by the CIT(A)] 8. Accepting the above submission of the Assessee, the CIT(A) concluded that disallowance under Section 40(a)(i) of the Act was not warranted except for the professional fee aggregating to INR 8,55,053/- consisting of professional fee of INR 4,07,375/- paid/payable to Mr. Phillip Baker [at Sl. No 22 of Table in paragraph 5 above] and professional fee of INR 4,47,678/- paid/payable to KPMG Tanzania [at Sl.No. 17 of Table in paragraph 5 above]. In relation to the aforesaid two professional fee payments, the CIT(A) gave direction to the Assessing Officer to decide the issue after verifying whether the aforesaid non resident parties had a fixed base or physical in India since it was contended on behalf of the Assessee that the professional fee paid/payable to the aforesaid 2 non-resident parties was not liable to tax in India as IPS in terms of Article 14/15 of the DTAA between India and country of tax residence of such non residents in absence of a fixed base/physical presence in India. Thus, out of the aggregate disallowance of INR.11,21,42,029/- made by the Assessing Officer under Section 40(a)(ia) of the Act, the CIT(A) deleted the disallowance of INR 11,12,86,976/-5. 9. Now, both, the Assessee as well as the Revenue are in appeal against before the Tribunal against the above order passed by the CIT(A). 9. 1. The Revenue is aggrieved by the deletion of disallowance made by the Assessing Officer under Section 40(a)(i) of the Act. While the Assessee has challenged, by way of cross-appeal, the directions issued by the CIT(A) to the Assessing Officer in respect of the professional fee of INR 8,55,053/- consisting of INR 4,47,678/- and INR 4,07,375/- paid/payable to KPMG Tanzania and Mr. Phillip Baker, respectively. 9. 2. By way of cross-objections, the Assessee is supporting order of CIT(A) deleting the disallowance made under Section 40(a)(i) of the Act on the ground that provisions of Section 40(a)(i) and Section 195 of the Act do not get triggered in case the payments made to tax residents of Sweden [at Sl. No 2 of Table in paragraph 5 above] and Spain [at Sl. No 3 & 6 of Table in paragraph 5 above] are not liable to tax in India in terms of Article 14/15 of the corresponding DTAAs since the same are in the nature of IPS.

Before summarizing the rival contention, we deem it appropriate to identify the following facts/issues which are not in dispute: (a) There is no dispute regarding the rendition of services or nature of services except to the extent the contention of the Revenue has been that the services under consideration make available technical skill, knowledge, experience etc. to the Assessee and therefore, satisfy the requirement of ‘Make Available Clause’ contained in the FTS Article of the applicable DTAAs. In this regard, it is admitted position that the Tribunal6 as well as the Hon’ble Bombay High Court7 has, after examining identical services provided to the Assessee by the non-resident, rejected the aforesaid contention of the Revenue and held that the services provided by the non-residents to the Assessee do not make available any technical skill, knowledge and experience to the Assessee. Accordingly, payments made by the Assessee to the non-resident are not liable to tax in India as FTS in the hands of such non residents. Therefore, payments made by the Assessee to tax resident of countries having Make Available Clause in the FTS Article, cannot be treated as FTS. (b) It is not the case of the Revenue that the non-resident parties have a permanent establishment in India in terms of Article 5 of the applicable DTAAs. (c) Similarly, the Revenue has also not set up a case that the non-resident service providers have a fixed base or physical presence in India to satisfy the requirements of Article 14/15 of the applicable DTAA dealing with IPS.

The contentions of the Revenue can be summarized as under: (a) The professional fee for services paid/payable to the non-resident parties is liable to tax in India as FTS per the provisions of the Act. (b) The services provided by the non-residents satisfy the requirement of Make Available Clause and therefore, the same are in the nature of FTS liable to tax in India in terms of Article 12/13 of the applicable DTAA in the hands of such non-residents. In view of the judgment of the Hon’ble Supreme Court in the case of Assessing Officer (International Taxation) Vs. Nestle SA: [2023] 458 ITR 756 (SC) the benefit of ‘Make Available Clause’ was not available in respect of DTAAs having MFN Clause in absence of a separate notification having been issued by the Government of India in respect of the applicable DTAA. FTS Clause being specific clause shall prevail over other general clauses dealing with Book Profits (Article 7) or Independent Personal Services (Article 14/15). (c) Article 14/15 of the DTAAs provides for beneficial treatment only in respect of specified professional services of personal and independent nature provided by individuals. The use of term ‘his’, ‘him’ and ‘his’ clearly shows that the said article was intended to cover only individuals. The provisions contained in Article 14/15 of the applicable DTAAs cannot be interpreted in a manner so as to extend the benefit of the said article to non-residents (other than individuals). The use of expression ‘resident of contracting state’ must be understood as making reference of a resident individual only. The services provided by the non residents (other than individuals) must, therefore, be considered to be taxable in India in terms of Article 14/15 of the applicable DTAA. (d) Without prejudice (a) & (b) above, the services provided by the non-residents (other than individuals) would fall within the ambit of residuary article dealing with ‘Other Income’ which grants the source state (i.e. India in the present case) to tax such income as per the domestic laws. (e) In the DTAAs where there is no FTS Clause, it cannot be said that there is a conflict between the provisions contained in the domestic tax law and the provisions contained in the DTAA, therefore, the provisions contained in the Act must apply/prevail. Accordingly, the payment of professional fee for services made to tax residents of countries not having FTS Clause in the applicable DTAAs, would be liable to tax in India as FTS in terms of Section 9(1)(vii) of the Act.

Per Contra, it was contended on behalf of the Assessee that: (a) As per Article 7 of the applicable DTAAs, in absence of Permanent Establishment in India, the payment of professional fee by the Assessee to non-residents could not be brought to tax as ‘Business Profits’. (b) The services provided by the non-residents to the Assessee were did not make available any skill, knowledge, information etc. to the Assessee. The requirement of Make Available Clause not being satisfied, such payments could not be taxed in India as FTS. (c) Where DTAAs do not have FTS Clause, the professional fee payments would fall within the ambit of Article 7 of DTAAs and not residuary article on ‘Other Income’. (d) The services provided by non-residents to the Assessee were not liable to tax in India in terms of Article 14/15 of the applicable DTAA in absence of a fixed base and/or physical presence of such non-resident in India. The expression ‘resident of contracting state’ is wide enough to include in its ambit all resident persons whether individual or company. (e) Where the payments have been made by the Assessee to non-residents for the purpose of earning income from a source outside India, such payments were not liable to tax in India in terms of Section 9(1)(vii)(b) of the Act.

Before dealing with the specific contentions raised by both the sides, we deem it appropriate to refer to the relevant legal background common to all the contentions. 13. 1. Section 40(a)(i) of the Act, inter alia, provides that while computing the income chargeable under the head ‘Profits and Gains of Business or Profession’, deduction shall not be allowed for royalty, fees for technical services or other sum chargeable under the Act paid/payable outside India in case of a default committed by the Assessee in withholding tax from the same. 13. 2. Section 195 of the Act, inter alia, casts obligation on person responsible for making payment to a non-resident to withhold tax from amounts paid/payable to non-resident payees in case the same is chargeable to tax in India. 13. 3. As per Section 4 of the Act, income tax is chargeable in respect of total income of the previous year of every person (including a non-resident). For a non-resident the total income of a previous year is to be determined as per the scope of total income specified in Section 5(2) of the Act read with deeming provisions contained in Section 9 of the Act. 13. 4. As per Section 9(1)(vii) of the Act income by way of fee for technical services payable by person resident in India shall be deemed to accrue or arise in India except where such fee is payable in respect of service utilized, inter alia, for the purpose of earning income from any source outside India. Explanation 2 to Section 9(1)(vii) of the Act defines the expression ‘Fees for Technical Services’ to mean consideration for rendering any managerial, technical or consultancy services (excluding consideration chargeable to tax under the head ‘Salaries’). 13. 5. Section 90(1) of the Act permits the Government of India to enter into agreement with the government of foreign country, inter alia, for avoidance of double taxation of income [referred to as ‘Double Taxation Avoidance Agreement’ or ‘DTAA’]. Section 90(2) of the Act provides that the provisions of the DTAA shall apply to the extent the same are more beneficial to the assessee. India has entered into a number of DTAAs which contain provisions which are more beneficial to assessee as the same provide for restricted scope of income or lower rate of taxation when compared to the provisions of the Act. For example, in case of Fee for Technical/Included Services (for short ‘FTS’), some of the DTAAs contain FTS Clause which provides that the FTS would be liable to tax in case the services provided by the non-resident make available technical knowledge, skill, experience, know-how etc. [generally referred to as ‘Make Available Clause’]. In such cases, an assessee can opt to be governed by the more beneficial provisions contained in the DTAAs. In case the FTS do not meet the requirement of Make Available Clause, the same cannot be brought to tax in India as per the provisions of the aforesaid DTAAs. 13. 6. In order to drive home their respective points, the Assessee and the Revenue had placed reliance on various clauses of the applicable DTAAs dealing with Business Profits, FTS, IPS and Other Income. To bring out the interplay between different clauses and to address some the broad contentions raised by both the sides, we deem it appropriate to consider the model clauses contained in OECD Model Tax Convention8 [for short ‘OECD MTC’] and United Nation Model Tax Convention [for short ‘UN MTC’] and related commentaries (even though the DTAAs may have clauses which depart from model tax conventions). 13. 7. Article 7 of OECD Model Tax Convention, 1998 [for Short ‘MTC98’] deals with allocation of taxing rights between source state and resident state with respect of Business Profits. Article 7(1) of MTC98 reads as under: