TMI Blog2013 (11) TMI 188X X X X Extracts X X X X X X X X Extracts X X X X ..... see's own case for assessment years 1997-98, 2005-06 and 2006-07, which are the latest orders. Disallowance u/s 40(a)(i) in respect of reimbursement of expenditure and professional fee - Held that:- Taxability in one country was not sine qua non for availing relief under the treaty from taxability in other country - All that was necessary was that a person should be liable to tax in the contracting State by reason of domicile, resident, place of management, place of incorporation or any other similar criterion which refers to fiscal domicile of such person - If a fiscal domicile of a person was in the contracting State, which in the present case had not been doubted is in U.A.E. then was to be treated as resident of that contracting State irrespective of whether or not that person was actually liable to pay tax in that country - Liable to tax in the contracting State cannot be implied as the person is actually liable to tax but would also cover the cases where the other contracting State had the right to tax such person – Following Assistant Director of Income-tax Versus Green Emirate Shipping & Travels [Mumbai] [2005 (11) TMI 239 - ITAT MUMBAI] - It was immaterial whether or n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re was remittance an obligation to deduct TAS arises, which view stands hereby overruled - Since the High Court did not go into the merits of the case on the question of payment of royalty, we hereby set aside the impugned judgments of the High Court and remit these cases to the High Court for de novo consideration of the cases on merits - The question which the High Court will answer was-whether on facts and circumstances of the case the Tribunal was justified in holding that the amount(s) paid by the appellant(s) to the foreign software suppliers was not "royalty" and that the same did not give rise to any "income" taxable in India and, therefore, the appellant(s) was not liable to deduct any tax at source. - ITA no. 2497,1820/Mum./2009 - - - Dated:- 22-2-2013 - B. RAMAKOTAIAH AND AMIT SHUKLA , JJ. For the Appellant : Sunil Lala. For the Respondent : Narendra Kumar. ORDER:- These cross appeals are directed against the impugned order dated 18th December 2008, passed by the learned Commissioner (Appeals)-XI, Mumbai, for the quantum of assessment passed under section 143(3) of the Income Tax Act, 1961 (for short "the Act"), for the assessment year 2004-05. Since t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as well as 1999-2000, 2001-02, and that the appeals should be restored to the file of Commissioner (Appeals) to adjudicate the issue of chargeability of income of payments made to KMPG International. The Tribunal in ITA Nos. 1959 and 1823/Mum./ 2007, at Paras 9 and 10 / Page 7, held as follows:- "9. The has raised legal argument that the payment made to M/s KPMG International is not chargeable under the provisions of the Act, for the reason that M/s KPMG International is a mutual organization and the assessee is a member of such mutual organization. This argument has not been adjudicated upon by the first appellate authority for the reasons given at para 5.5 at page 15 of his order, which is already extracted by us hereinabove. In our considered view the first appellate authority was in error in not adjudicating the issue. The assessee has a right to argue that, the amount paid by it to M/s KPMG International does not give rise to any income chargeable to tax in India and thus the ages deduct any tax at source. The issue whether the assessee can take such an argument has attained finality by the decision of the Hon'ble Supreme Court of India in the case of G.E. India Technol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated 20-10-2010 in ITA Nos. 1959 and 1823/M/2007 held that CIT(A) was not justified in not adjudicating the ground relating to non taxability of the payment on account of mutuality. The tribunal also observed that it was for the assessee who was a member of KPMG International to satisfy the adjudicator with all possible evidences that KPMG International was a mutual concern, the tribunal thereafter set aside the appeals to the file of CIT(A) with direction to adjudicate the issue raised by the assessee on the chargeability of income-tax on payments made to M/s. KPMG International. Both the parties agreed that the facts in the present appeals were identical and therefore there was no objection to the matter being restored to the file of CIT(A) following the earlier decision of the tribunal. We therefore set aside the orders of CIT(A) and restore the issue to the file of CIT(A) for passing fresh orders after necessary examination in the light of observations made above and after allowing opportunity of hearing to the assessee. 4. In the result all the appeals of the revenue are allowed for statistical purposes." 6. Thus, consistent with the view taken therein, we also set a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere produced. With regard to the professional services, the assessee's main contentions were that the payments were made in pursuance of professional services carried out by KPMG, Dubai, through proprietor Mr. Vijay Malhotra, the income of his was not chargeable in India since he was not in India for more than 183 days. The main contentions of the assessee, as incorporated by the Commissioner (Appeals), are as under: "Mr. Vijay Maihotra did not have a fixed base in India. He did not stay in India for more than 183 days. The services were rendered by Mr. Malhotra to the appellant in India and at UAE. Provisions of Articles 3(e), 4(1) and 14 of the DTAA with UAE was referred to. The decision of the Apex Court in Azadi Bachao Andolan [2003] 263 ITR 706 was also referred to. In view of the said Supreme Court's decision read with the said Tribunal decision the appellant argued that Mr. Malhotra was liable to pay tax in UAE because as held in the said decision of the Tribunal, "It is thus clear that a tax treaty not only prevents 'current' but also 'potential' double taxation... It is thus clear that taxability in one country is not sine qua non ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and, in any case, no one-to-one relation was established between to such expenses and the so-called reimbursements. The alternative plea that the same were covered within the meaning of Article 14 with regard to Independent Personal Services is also not sustainable because no services have been identified so as to be covered within the meaning of such provision. This part of Ground No. 8 deserves to be rejected." 11. Before us, the learned Counsel for the assessee, after reiterating the contentions made before the Commissioner (Appeals), submitted that the main allegation of the income tax authorities was that Mr. Malhotra, is not paying tax in U.A.E. and, therefore, he is not a resident of U.A.E. within the meaning of Article-4(1) of DTAA Indo-U.A.E. Such reasoning is wholly erroneous as he was liable to tax in U.A.E. which is a sufficient condition and it is not necessary to actually pay the tax. In support of this contention, he relied upon catena of decisions, which are as follows:- Azadi Bachao Andolan Anr, [2003] 263 ITR 706 (SC); Asstt. DIT v. Green Emirate Shipping Travels [2006] 100 ITD 203 (Mum.); Bhagwan T. Shivlani [2012] 12 Taxman.com 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India. The main allegation of the Assessing Officer which has been confirmed by the Commissioner (Appeals) is that Mr. Malhotra, cannot be treated as resident of U.A.E. within the meaning of Article-4(1) of DTAA, as Mr. Malhotra, was not paying tax in U.A.E. Article-4(1) provides that under the agreement, the term "Resident" of a "Contracting State" means any person, who, under the laws of that State (U.A.E.), is liable to tax therein by reason of his domicile resident: place of management, place of incorporation, or any other criterion of similar nature. The term liable to tax in the contracting State have been held by catena of decisions that it does not necessarily imply that the person should actually pay the tax in that contracting State. Right to tax on such person is sufficient. This aspect of the matter was clarified by the Hon'ble Supreme Court in Azadi Bachao Andolan (supra). This principle has been reiterated by the co-ordinate bench of the Tribunal in several cases. The Tribunal in Green Emirates Shipping Travels (supra), concluded in the following manner:- "It is thus clear that a tax treaty not only prevents current' but also potential' double taxation. Therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chments that attract residence type taxation. Therefore, as long as a person has such locality-related attachments which attract residence type taxation, that 'person' is to be treated as resident and this status of being a 'resident' of the Contracting State is independent of the actual levy of tax on that person. Viewed in this perspective, we are of the considered opinion that being 'liable to tax' in the Contracting State does not necessarily imply that the person should actually be liable to tax in that Contracting State by virtue of an existing legal provision but would also cover the cases where that other Contracting State has the right to tax such persons irrespective of whether or not such a right is exercised by the Contracting State. In our humble understanding, this is the legal position emerging out of Hon'ble Supreme Court judgment in Azadi Bachao Andolan's case (supra). The plea taken by the Revenue that the assessee was not 'liable to tax', which was anyway not taken by the AO or before the CIT(A), is also not sustainable in law either. 9. For the reasons set out above, and even though we do not approve the reasoning adopted by the CIT(A), we approve the con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Hon'ble Supreme Court concluded that obligation to deduct tax is limited to the appropriate portion of income which is chargeable under the Act. Further, on the issue that provisions of section 40(a)(i) cannot be applicable on reimbursement of expenses, has been upheld by various decisions, as relied upon by the learned Counsel which has been incorporated hereinabove. Thus, on this score also, we hold that no TDS was deductible on the reimbursement of expenses. Accordingly, this ground is treated as allowed. 18. In the result, assessee's appeal is partly allowed for statistical purposes. We now take up Revenue's appeal in ITA no.l020/Mum./2008, vide which following grounds have been raised:- "1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in deleting the addition of Rs. 3,04,08,658 being reimbursement of professional indemnity insurance charges and Rs. 20,14,111 being bank guarantee charges holding that these amounts are only reimbursement of actual expenses and hence are not subject to TDS while remitting to foreign concern. 2. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The partner of CRC have provided this service in India for a time of 20 days. If the income of such service is said to be covered under Article-7 of the Treaty dealing with business profit, then the same cannot be taxed in India because CRC did not have P.E. or fixed base in India. Likewise also, there was no make available of any technical knowledge, experience skills, know-how or process. Lastly, on account of remittance made to Bala Kumar Thambia, Malaysia, was on account of conducting advance Advisory Consulting and Project Leadership Workshops, it was submitted that he is a resident of Malaysia, and was in India for 14 days for providing such profession services. He also did not have any P.E. or fixed base in India, therefore, the same cannot be held to be taxable in India. 22. Regarding applicability of the judgment of Hon'ble Supreme Court in Transmission Corpn. of A.P. Ltd. (supra) detail analysis was given before the Commissioner (Appeals). The Commissioner (Appeals), after appreciating the contentions of the assessee, deleted the said disallowance made under section 40(a)(ia) on the ground that the Assessing Officer has not properly appreciated the facts and the content ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the service does not result in making available of any such thing, then the same would not fall within the ambit of fees for technical service. These payments also cannot be taxed under Article-7 as none of them were having any P.E. or fixed base in India and the duration of their visit in India was also for a very less period as has been discussed upon. Therefore, such a payment does not attract the provisions of TDS under section 195. Provisions of section 195(1) uses the expression "chargeable under the provisions of the Act". The payer is bound to deduct tax at source only if the sum paid is assessable to tax in India. The obligation to deduct tax is limited to the appropriate proportion of income which is chargeable under the Act and not otherwise. The Hon'ble Supreme Court in G.E India Technology Centre (P.) Ltd. (supra), after analyzing the provisions of section 195 and the decision in Transmission Corpn. of A.P. Ltd. (supra) has made a very important observation, which for the sake of ready reference, is reproduced below:- "7. Under s. 195(1), the tax has to be deducted at source from interest (other than interest on securities) or any other sum (not being salaries) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imited to the appropriate proportion of income flows from the words used in s. 195(1), namely, "chargeable under the provisions of the Act". It is for this reason that vide Circular No. 728, dt. 30th Oct., 1995 [(1995) 129 CTR (St) 1] the CBDT has clarified that the tax deductor can take into consideration the effect of DTAA in respect of payment of royalties and technical fees while deducting TAS. It may also be noted that s. 195(1) is in identical terms with s. 18(3B) of the 1922 Act. In CIT v. Cooper Engineering Ltd. [1968] 68 ITR 457 (Bom.) it was pointed out that if the payment made by the resident to the non-resident was an amount which was not chargeable to tax in India, then no tax is deductible at source even though the assessee had not made an application under s. 18(3B) [now s. 195(2) of the IT Act)]. The application of s. 195(2) presupposes that the person responsible for making the payment to the non-resident is in no doubt that tax is payable in respect of some part of the amount to be remitted to a non-resident but is not sure as to what should be the portion so taxable or is not sure as to the amount of tax to be deducted. In such a situation, he is required to make ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Chapter XVII which deals with collection and recovery. Chapter XVII-B deals with deduction at source by the payer. On analysis of various provisions of Chapter XVII one finds use of different expressions, however, the expression "sum chargeable under the provisions of the Act" is used only in s. 195. For example, s. 194C casts an obligation to ' deduct TAS in respect of "any sum paid to any resident". Similarly, ss. 194EE and 194F inter alia provide for deduction of tax in respect of "any amount" referred to in the specified provisions. In none of the provisions we find the expression "sum chargeable under the provisions of the Act", which as stated above, is an expression used only in s. 195(1). Therefore, this Court is required to give meaning and effect to the said expression. It follows, therefore, that the obligation to deduct TAS arises only when there is a sum chargeable under the Act. Sec. 195(2) is not merely a provision to provide information to the ITO(TDS). It is a provision requiring tax to be deducted at source to be paid to the Revenue by the payer who makes payment to a non-resident. Therefore, s. 195 has to be read in conformity with the charging provisions, i.e. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n-resident is necessarily required to deduct TAS then the consequence would be that the Department would be entitled to appropriate the moneys deposited by the payer even if the sum paid is not chargeable to tax because there is no provision in the IT Act by which a payer can obtain refund. Sec. 237 r/w s. 199 implies that only the recipient of the sum, i.e., the payee could seek a refund. It must therefore follow, if the Department is right, that the law requires tax to be deducted on all payments. The payer, therefore, has to deduct and pay tax, even if the so-called deduction comes out of his own pocket and he has no remedy whatsoever, even where the sum paid by him is not a sum chargeable under the Act. The interpretation of the Department, therefore, not only requires the words "chargeable under the provisions of the Act" to be omitted, it also leads to an absurd consequence. The interpretation placed by the Department would result in a situation where even when the income has no territorial nexus with India or is not chargeable in India, the Government would nonetheless collect tax. In our view, s. 195(2) provides a remedy by which a person may seek a determination of the "ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nquiry if the AO finds that the sums remitted outside India comes within the definition of royalty or fees for technical service or other sums chargeable under the IT Act then it would be open to the AO to disallow such claim for deduction. Similarly, vide Finance Act, 2008, w.e.f. 1st April, 2008 sub-s. (6) has been inserted in s. 195 which requires the payer to furnish information relating to payment of any sum in such form and manner as may be prescribed by the Board. This provision is brought into force only from 1st April, 2008. It will not apply for the period with which we are concerned in these cases before us. Therefore, in our view, there are adequate safeguards in the Act which would prevent revenue leakage. Applicability of the judgment in the case of Transmission Corporation (supra). In Transmission Corporation case (supra) a non-resident had entered into a composite contract with the resident party making the payments. The said composite contract not only comprised supply of plant, machinery and equipment in India, but also comprised the installation and commissioning of the same in India. It was admitted that the erection and commissioning of plant and machinery in I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India", then no TAS is required to be deducted from such payment. This interpretation of the High Court completely loses sight of the plain words of s. 195(1) which in clear terms lays down that tax at source is deductible only from "sums chargeable" under the provisions of the IT Act, i.e., chargeable under ss. 4, 5 and 9 of the IT Act. Before concluding we may clarify that in the present case on facts the ITO(TDS) had taken the view that since the sale of the concerned software, included a license to use the same, the payment made by appellant(s) to foreign suppliers constituted "royalty" which was deemed to accrue or arise in India and, therefore, TAS was liable to be deducted under s. 195(1) of the Act. The said finding of the ITO(TDS) was upheld by the CIT(A). However, in second appeal, the Tribunal held that such sum paid by the appellant(s) to the foreign software supplier was not a "royalty" and that the same did not give rise to any "income" taxable in India and, therefore, the appellant(s) was not liable to deduct TAS. However, the High Court did not go into the merits of the case and it went straight to conclude that the moment there is remittance an obligation to de ..... X X X X Extracts X X X X X X X X Extracts X X X X
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