ASST CIT 11(2), MUMBAI vs. BSR & CO., MUMBAI

This appeal by Revenue is directed against the order of the CIT(A)-3, Mumbai dated 26.02.2014 for A.Y. 2008-09, which arose out of the order of assessment passed under section 143(3) of the Income Tax Act, 1961 (in short 'the Act') dated 31.12.2011.

1. On the facts and in the circumstances of the case and in law, whether the Ld. CIT(A) was justified in deleting the disallowance of Rs.78,21,340/- u/s. 40(a)(i) being professional fees paid outside India without deduction of tax at source.

2. The appellant prays that the order of the CIT (Appeals) on the above grounds be set aside and that of the Assessing Officer be restored.

3. The appellant craves leave to amend or alter any ground or add a new ground with may be necessary.”

4. Ground No. 1 - Disallowance under section 40(a)(i) of the Act - `78,21,340/- 4.1 From a perusal of the grounds raised it is seen that Revenue has raised the single issue arising from the action of the learned CIT(A) in holding that the Assessing Officer (AO) was not justified in disallowing a sum of `78,21,340/- under section 40(a)(i) of the Act. 4.2 The facts of the matter as emanate from the record are that the assessee is a firm of Chartered Accountants. In the course of assessment proceedings the AO observed that the assessee had made payments to various entities on account of professional fees outside India without deducting tax at source thereon. On being required to show cause by the AO as to why the aforesaid payments of professional fees outside India should not be disallowed under section 40(a)(i) of the Act, the assessee, in its reply dated 16.12.2010, explained that the payments were made to various non-residents and these payments were not in the nature of income chargeable to tax in India and therefore it was not required to M/s. BSR & Company deduct tax at source thereon in terms of section 195 of the Act. The AO, however, did not accept the explanations put forth by the assessee and proceeded to hold that tax was required to be deducted at source of the said payments and in view of its failure to do so, the expenditure of `78,21,340/- was to be disallowed as per the provisions of section 40(a)(i) of the Act. 4.3 The learned D.R. was heard in support of the ground raised and placed reliance on the order of the AO on this issue. 4.4 The learned A.R. for the assessee supported the impugned order of the learned CIT(A) on this issue. It was submitted that the names of the parties country-wise and nature of services rendered by each of the non resident recipients of the said payments, detailed at para 2.9 of the impugned order, indicate that the professional services rendered by these entities are for assistance in audit, taxation services and accounting matters. The learned A.R. also made reference to the respective clauses in DTAAs concerned and relied on the findings rendered by the learned CIT(A) at paras 2.8 and 2.9 of the impugned order. The learned A.R. further submitted that this very same issue, that is for consideration before the Bench, has been considered in the assessee’s own case for A.Y. 2009-10 and held in favour of the assessee by a Coordinate Bench of this Tribunal in its order in dated 06.05.2016. The learned A.R. prays that in view of the above, the order of the learned CIT(A) ought to be upheld and Revenue’s appeal dismissed. 4.5.1 We have heard the rival contentions of both the parties and perused and carefully considered the material on record, including the judicial pronouncement cited and placed reliance upon. The issue before us revolves around the payments made by the assessee to certain non resident entities for professional services rendered by them outside India which were availed in the course of execution of engagements of the assessee firm. The AO invoked the provisions of section 40(a)(i) of the Act and disallowed this expenditure, since the assessee did not deduct tax at source on such payments to the non resident entities. The details of the entities along with the amounts paid, nature of services rendered, etc. find place at para 2.9 of the impugned order and the same are extracted hereunder for clarity: - Sr. Ground Name of Resident Constitution Nature of Amount No. No. the payee of services 1 2(A) KPMG LLP USA Firm of Taxation and 50,67,431 and (B) individuals audit services 2 2(c) Mr. Nihal USA Individual Taxation 8,86,240 Dalvi services 3 2(e) KPMG LLP UK Limited liability Taxation 2,76,540 and (f) partnership of individuals 4 2(g) Nelsons UK Limited liability Taxation 81,300 Solicitors partnership of individuals 5 2(d) KPMG UK Company Response to 1,39,562 IFRG Ltd. query on accounting matters 6 2(h) KPMG Ireland Partnership firm Taxation 5,60,800 of individuals services 7 2(i) Siddharta Indonesia Partnership firm Audit 8,09,467 Siddharts of individuals services & Widjaja TOTAL 78,21,340 4.6.1 From a perusal of the Table above, it is seen that the payments have been made to seven different entities based in four different countries. In respect of payments made to KPMG LLP, USA and Nihal Dalvi, USA, the same payments have been made in respect of professional services rendered in relation to taxation services and audit services, which have been undisputedly rendered by these entities outside India. The stand of Revenue is that such services are in the nature of ‘fees for technical services’ (FTS) and therefore tax was to have been deducted at source by the assessee on such payments/expenditure in India. From the details on record there is no material to establish that any technical knowledge, skill, etc. have been made available to the assessee in order to establish that it falls within the purview of Article 12 of the Indo-USA DTAA. It is also an undisputed fact that such non-residents recipients do not have any permanent establishment (PE) in India. We find that the similar issue was considered and adjudicated by the Coordinate Bench of this Tribunal in the assessee’s own case for A.Y. 2009-10 in dated 06.05.2016 and the Coordinate Bench held in favour of the assessee M/s. BSR & Company that such income/amounts cannot be held to be chargeable to tax in India so as to require deduction of tax at source thereon and therefore invoking of section 40(a)(i) of the Act to disallow such expenditure is not sustainable. In this regard, at para 5 of its order, the Coordinate Bench has held as under: - “5. ...... In so far as the payments that are made to KPMG LLP, USA and KPMG LLP, Canada are concerned, the same has been made on account of professional services rendered in relation to taxation and transfer pricing. Undisputedly, the professional services have been rendered by the aforesaid entities outside India. The stand of the Revenue is that such services are in the nature of ‘fee for technical services’ and, therefore, tax was liable to be deducted at source in India. Factually speaking, the aforesaid stand of the Revenue is devoid of any support because there is no material to establish that any technical knowledge, skill, etc. has been made available to the assessee so as to consider it as falling within the purview of Article- 12 of Indo-US Double Taxation Avoidance Agreement. It is also an established fact that such non-resident recipients do not have permanent establishment in India and, therefore, in the said background the same can, at best, be treated as independent personal services covered by Article-15 of the Indo-US Double Taxation Avoidance Agreement. As a consequence and in the absence of any fixed base in India, such income cannot be held chargeable to tax in India so as to require deduction of tax at source. Therefore, invoking of section 40(a)(i) of the Act to disallow such expenditure is not tenable.” 4.6.2 Following the aforesaid decision of the Coordinate Bench of this Tribunal in the assessee’s own case for A.Y. 2009-10 (supra), we hold that, in the factual circumstances of the case as discussed above, the amounts paid by the assessee to non resident parties in USA for rendering of professional services cannot be held to be exigible to tax in India, so as to require deduction of tax at source thereon and therefore invoking of the provisions of section 40(a)(i) of the Act to disallow the same is not sustainable. 4.7.1 In respect of payments made to KPMG LLP, UK, Nelsons Solicitors, UK and KPMG IFRG Ltd. UK, we find that these non-resident entities too undisputedly do not have any PE in India. The learned CIT(A) has also observed that these entities are eligible for the benefit of Article 15 of the Indo-UK DTAA dealing with independent personal services and that therefore the said payments are not exigible to tax in India so as to require M/s. BSR & Company deduction of tax at source thereon. We find that the same issue was considered and adjudicated by the Coordinate Bench of this Tribunal in the assessee’s own case for A.Y. 2009-10 in dated 06.05.2016. At para 5.1 of its order, the Coordinate Bench held in favour of the assessee as under: - “5.1 In so far as payments to KPMG LLP, UK and KPMG USMCG Ltd. UK are concerned, herein also the said entities do not have permanent establishment in India. The CIT(Appeals) has found that such entities are eligible for the benefit of Article -15 of Indo-US Double Taxation Avoidance Agreement dealing with independent personal services and hence, payments are not chargeable to tax in India so as to require deduction of tax at source. The aforesaid findings have not been disputed before us on the basis of any cogent material and, therefore, we hereby affirm the same. Consequently, invoking of section 40(a)(i) in the context of aforesaid payments is also not justified.” 4.7.2 Following the above decision of the Coordinate Bench of this Tribunal in the assessee’s own case for A.Y. 2009-10 (supra), we hold that, in the factual circumstances of the case on hand, the amounts paid by the assessee to non-resident entities in UK for rendering of professional services cannot be held to be exigible to tax in India, so as to require deduction of tax at source thereon and therefore invoking of provisions of section 40(a)(i) of the Act to disallow the aforesaid payments is not sustainable. 4.8 In respect of the payment made by the assessee to KPMG, Ireland for audit services, it is not in dispute that the said services have been rendered outside India and the same cannot be construed as managerial or technical services so as to be governed by Article 13 of India-Ireland DTAA as contended by Revenue. In our view, they are clearly in the nature of independent personal services coming within the purview of Article-14 of the India-Ireland DTAA and therefore in the absence of any fixed place of business of the recipient, the said payments/income is not exigible to tax in India. In this view of the matter, we are of the considered view that the assessee is not liable to deduct tax on the aforesaid payment made to the non-resident entity in Ireland for the provisions of section 40(a)(i) of the Act to be invoked. We, therefore, uphold the finding of the learned CIT(A) on this issue which has not been controverted before us by the Revenue.

M/s. BSR & Company 4.9 With respect to the payment made by the assessee to Siddharta Siddharta and Widjaja, Indonesia for rendering of audit services, it is seen by the learned CIT(A) that the India-Indonesia DTAA does not have any Article defining FTS and that the services were rendered in respect of audit and taxation matters. In these factual circumstances the learned CIT(A) was of the view that since the payment made by the assessee for such services fall within the scope of Article-14 of the India-Indonesia DTAA dealing with independent personal services and in the absence of any PE of the recipient in India, income from such services is not exigible to tax in India, there was no requirement to deduct tax at source on the said payment and accordingly deleted the disallowance under section 40(a)(ia) of the Act as not sustainable. In this factual matrix, we are of the considered view that the assessee is not liable to deduct tax at source on the aforesaid non-resident entity in Indonesia for the provisions of section 40(a)(i) of the Act to be evoked. We, therefore, uphold the finding of the learned CIT(A) on this issue which has not been controverted before us by the Revenue. 4.10 Apart from our findings above (supra), even if we were to accept, for the sake of argument, that the services by the aforesaid entities are in the nature of FTS and are rendered and utilized in India so as to be taxable in terms of section 9(1)(vii) of the Act, even then the disallowance is not warranted for the following reasons. Ostensibly, the requirement of rendering services in India in order to attract section 9(1)(vii) of the Act was removed by insertion of Explanation by the Finance Act, 2010 with retrospective effect from 1/4/1976. This has been understood by the Revenue to say that inspite of the services having been rendered by the recipients outside India, the same is taxable in India by applying the aforesaid amendment. In our view, such retrospective amendment would be determinative of the tax liability in the hands of the recipients of income. So however, in the present case, what is held against the assessee is the failure to deduct tax at source at the time of payment of such income. Ostensibly, dehors the aforesaid amendment, the impugned income was not subject to tax deduction at source in India as per the