9911796707
TMI Blog2017 (2) TMI 797X X X X Extracts X X X X X X X X Extracts X X X X ..... learned Commissioner (Appeals) erred in confirming disallowance under section 40(a)(i) of Rs. 24,05,014 in respect of payments of subscription fees to Deloitte Touche Tohmatsu, a Swiss Verein, on the ground that tax ought to have been deducted; 1.2 The learned Commissioner (Appeals) ought to have appreciated that subscription fee paid to Deloitte Touche Tohmatsu was not chargeable to tax in India in the absence of accrual/deemed accrual/receipt or deemed receipt thereof and therefore the appellant was not required to deduct tax at source from the subscription fee paid to Deloitte Touche Tohmatsu; 1.3 The learned Commissioner (Appeals) ought to have appreciated that subscription fee paid to Deloitte Touche Tohmatsu was not chargeable to tax since it represented reimbursement of operational expenses; 1.4 Alternatively, the learned Commissioner (Appeals) ought to have appreciated that subscription fee was not chargeable to tax in the hands of Deloitte Touche Tohmatsu in view of the principle of mutuality; 1.5 The learned Commissioner (Appeals) erred in holding that the appellant should have approached the Assessing Officer under section 195 for making remittance to Deloitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following break-up:- Invoice No. Date Nature of Payment TDS Amt (Rs.) Assessee's Share Amt. (Rs.) DTT02- SF187 1 February 2002 Allocated share of Deloitte Touche Tohmatsu's operation budget for the year ending 31 May 2002 Nil 12,06,456 DTT03- SF023 1 June 2002 Allocated share of Deloitte Touche Tohmatsu's operation budget for the year ending 31 May 2003 Nil 11,98,558 DTTSI02- 36 17 July 2001 Technology subscription charges for the period 1 June 2001 to 31 August, 2001 1,02,942 2,66,988 DTTSL02 118 16 October 2001 Technology subscription Charges for the period 1 September 2001 To 30 November 2001 2,17,681 29,55,914 Total 2,17,681 29,55,914 Less: Share of subscription fees received from other Firm 2,23,579 Deduction claimed for subscription fees 27,32,335 Regarding non-deduction of TDS for the sums aggregating to Rs. 21,81,435/- (comprising of Rs. 12,06,456 + Rs. 11,98,558 - Rs. 2,23,579) it was submitted that assessee firm is associated with Deloitte Touche Tohmatsu (DTT), which is a global organization of Professional Services Firms. Apart from assessee firm there were other Indian firms also which were also associated with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at Serial No.1, 2 and 3). In response, the assessee highlighted the nature of payment and also the services rendered by them and it was stated that these services were rendered by the non-resident entities outside India and same is not taxable in India either in terms of section 9(1)(i) or section 9(1)(vii). The assessee's submissions with regard to aforesaid three parties before the AO were as under:- Payment to Deloitte Touche Tohmatsu, New Zealand of Rs. 1,45,290. We were appointed by Punjab Agro Industrial Corporation Ltd., a Government of Punjab enterprise to carry out a study of the aqua sector and assist the Government in development of its business plan. In the process of providing the above services, we availed services of Deloitte Touche Tohmatsu, New Zealand. Deloitte Touche Tohmatsu, New Zealand is a firm of Certified Public Accountants. Deloitte Touche Tohmatsu, New Zealand rendered professional services of providing information on the global environment in the aqua sector in respect of the markets, competition, technology and regulations and other best practices followed by the global players. The entire services in relation to this job were performed outside In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India We have remitted fees of GBP 5,000 ('equivalent to Rs. 3,83,250) to Deloitte & Touche, London outside India. Thus Deloitte & Touche, London has received fees for professional services outside India. Therefore, the same cannot he said to be received in India or deemed to be received in India. Similarly, Deloitte & Touche, London has rendered their professional services outside India. Therefore, payment of professional fees cannot be said to accrue or arise in India". Payment to Deloitte Touche Tohmatsu, Canada of Rs. 2,91,780/- We were appointed by Punjab Agro Industrial Corporation Ltd, a Government of Punjab enterprise to carry out a study of the dairy sector and assist the Government in development of its business plan. In the process of providing the above services, we availed services of Deloitte Touche Tohmatsu, Canada. Deloitte Touche Tohmatsu, Canada rendered professional services in respect of providing information of the global environment in the dairy sector in respect of the markets, competition, technology and regulations and other best practices followed by the global players. The entire services in relation to this job were performed outside Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tes through contributions made by the Members, therefore, "principle of mutuality" is applicable and hence, on this score also there is no requirement for deducting TDS. 6. The Ld. Assessing Officer without considering the assessee's submissions which has been though incorporated by him in the assessment order, drew his conclusion by placing heavy reliance on a decision of ITAT Mumbai Bench in the case of Arthur Anderson and Co. Mumbai in ITA No. 9125/ Mum/ 1995, order dated 29th July, 2003. He, first of all, extracted the relevant portion of the decision of the Tribunal and observed as under:- "3.5 It is therefore, evident that in this case the tribunal is of the view that wherever there exists a doubt as to the chargeability of income to tax, tax must be deducted EX- ABUNDANTI-CAUTEA (by way of abundant caution). The assessee should have deducted the tax on payments made to its sister organizations (as mentioned above) based outside India and should have filed the return on behalf of its sister organizations (as representative assessee or otherwise) and could have claimed refund if it were still of the view that the income is not chargeable to tax in India. There certainly exis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness and profession is subject to filing of return and an assessment by the assessing authority. To reiterate, while filing return of income an appellant can claim the deduction under section 80 P and thereby file a nil return of income if such was warranted on the facts of its case but that such an income was taxable. It is seen that DTT has never filed a return of income nor claimed deduction under section 80 P in any of the earlier assessment years. Appellant would have been aware of this fact, when providing details to the chartered accountant for obtaining the certificate as required under section 195. Consequently it was not established that DTT was an entity based on and operating under the principles of mutuality under the Indian Income Tax Act. Therefore, there was no ascertainable basis on which the chartered accountant and/or appellant which is a firm of chartered accountants, could have formed an opinion that tax was not deductible at source on account of the principle of mutuality. Moreover, in view of the provisions of the Income Tax Act, it cannot be considered that decision in respect of such a claim would lie with an authority other than the assessing officer, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iture and no income is embedded in the payments made and therefore, payments have to be made after withholding tax. 2.1.2 It is also not ascertainable that this was reimbursement of expenses by appellant as appellant in the same arguments also claims that the payments were subscription fee. Details filed by appellant also indicate quite clearly that the payments form part of contract revenues i.e. where appellant is paying for expenses which are the obligation of recipient but are contractually agreed to be borne by the payer. The payments can, therefore, be regarded as taxable and included in the gross amount of fee for technical services/royalty. In the facts and circumstances of the case, the claim of reimbursement of expenses has also not been established by appellant and, therefore, on facts the cited case laws, with due respect, are not applicable. 2.1.3 In view of the facts and circumstances of the case discussed supra and further in view of AO's reliance upon (i) the honorable Supreme Court in the case of Transmission Corporation supra and (ii) the decision of honorable ITAT in Arthur Andersen and Co, the view of the AO that appellant ought to have approached the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, various provisions of Articles such as objects, members' eligibility criteria, management of activities, distribution in the event of dissolution clearly establishes that it is an organization by the member, of the members and for the members; (ii) The Verein itself does not carry on any income earning activity of rendering professional services. The expenses of Verein are met through the contributions by its members; (iii) The contribution is made by the members in the form of annual subscription fees and the articles provide for distribution amongst members in the event of winding up; (iv) Based on annual budgeted expenses of DTT, members are expected to contribute in the proportion of their size considered on the basis of their respective gross revenue; and (v) DTT is a Verein established in Zurich, Switzerland. The Verein has an office in the USA. Subscription fees were remitted to the US office of the Verein. The beneficial owner of subscription fees is DTT being entity established in Zurich, Switzerland. 10. On the reimbursement of expenses, he submitted that, true nature of remittance is assessee's contribution to its share of operational expenses of member's organi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rely in the nature of professional services for which there is specific Article 14 under India-Canada DTAA which applies to the said kind of payment. If the services for which the said payment has been made was entirely performed outside India and the non-resident recipient does have 'fixed base' or PE in India or none of its employee or professional was in India for more than 183 days, then same cannot be held to be taxable in India in terms of Article 14, where the right to tax lies with the Canada. Apart from that, the professional fees cannot be said to be covered under Article 12 as FIS/FTS also, because the services do not make available any kind of technical knowledge, experience, skill or knowhow to the assessee. Hence, it cannot be taxed under Article 12 also. Regarding DTT New Zealand, he submitted that, here also Article 14 of India-New Zealand DTAA provides that if the services have been performed outside India and recipient does not have any fixed base or PE in India or none of its employee or professional was in India for more than 183 days, then same cannot be taxed in India. However, so far as the definition for "fees for technical services" under Article 12(4), he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onal services in several countries and operational expenditure of DTT Swiss Verien is shared by its Member firms. The Verien recovers the amount of their operating expenditure from their Member firms. The nature and constitution and purpose have been enumerated in Article 1 of Verein which reads as under:- ARTICLE: 1 NAME, DOMICILE AND PURPOSES 1.1 Name and Domicile. A Verein is hereby established with domicile in Zurich, Switzerland, under the name of Deloitte Touche Tohmatsu ("Verein"). The Verein consists of members that are professional firms ("Member Firms"). The Member Firms are engaged in rendering professional services, to the extent they may lawfully be performed under Local Laws (§7.1), in the fields of accounting, auditing, insolvency, law, management consulting, taxation and related services ("Professional Services"). The Verein is governed by these Articles, by the Supplemental Agreement among the Member Firms supplementing these Articles ("Supplemental Agreement"), and by the applicable provisions of the Swiss Civil Code. 1.2 Purposes. The purposes of the Verein shall be: (a) to further international cooperation and cohesion among the Member Firms; (b) t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n India allocating the DTT's operational budget. This is evident from certificate of the Chartered Accountant given at page 67. While making the said payment, the assessee had not deducted the TDS inter alia on the ground that, firstly, the relationship between the DTT and its Member is based on 'principle of mutuality', therefore, the Verein itself does not earn any income or renders any kind of professional services and the expenses are made through contribution by its members; and secondly, the reimbursement of expenses is based on allocation made by the DTT which in turn is on the basis of actual expenses. However both the authorities, Assessing Officer as well as CIT (A), instead of adjudicating the issue whether the subscription fees paid by the assessee to DTT Switzerland is taxable under the Act in India or not, have proceeded to disallow the payment on the premise that even if there existed a doubt regarding chargeability of Income Tax, the assessee should have any way deducted the tax and should have complied with the provision of section 195 and 197. In support, strong reliance has been placed on the decision of ITAT Mumbai Bench in the case of Arthur Andersen & Co. and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the tax deductor can take into consideration the effect of DTAA in respect of payment of royalties and technical fees while deducting tax at source. The application of s. 195(2) pre-supposes 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 an application to the ITO (TDS) for determining the amount. It is only when these conditions are satisfied and an application is made to the ITO(TDS) that the question of making an order under s. 195(2) will arise. While deciding the scope of s. 195(2) it is important to note that the tax which is required to be deducted at source is deductible only out of the chargeable sum. This is the underlying principle of s. 195. Hence, apart from s. 9 (1), ss. 4, 5, 9, 90, 91 as well as the provisions of DTAA are also relevant, while applying TDS provisions. Reference to ITO (TDS) under s. 195(2) or s. 195(3) either by the nonresident or by the resident payer is to avoid any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount paid is not chargeable to tax in India at all. Sec. 195 cannot be read, as suggested by the Department, namely, that the moment there is remittance the obligation to deduct tax at source arises. If such a contention is accepted it would mean that on mere payment income would be said to arise or accrue in India. Therefore, as stated earlier, if the contention of the Department was accepted it would mean obliteration of the expression "sum chargeable under the provisions of the Act" from s. 195(1). While interpreting a section one has to give weightage to every word used in that section. While interpreting the provisions of the IT Act one cannot read the charging sections of that Act de hors the machinery sections. The Act is to be read as an integrated code. Hence, the provision relating to TDS applies only to those sums which are chargeable to tax under the IT Act. If the contention of the Department that any person making payment to a non-resident is necessarily required to deduct tax at source is accepted 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion ensures effective compliance of s. 195 relating to TDS in respect of payments outside India in respect of royalties, fees or other sums chargeable under the IT Act. In a given case where the payer is an assessee he will definitely claim deduction under the IT Act for such remittance and on inquiry 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. Therefore, there are adequate safeguards in the Act which would prevent revenue leakage.-CIT vs. Eli Lilly & Company (India) (P) Ltd. (2009) 223 CTR (SC) 20: (2009) 21 DTR (SC) 74 : (2009) 312 ITR 225 (SC) relied on; Transmission Corporation of A.P. Ltd. vs. CIT (1999) 155 CTR (SC) 489 : (1999) 239 ITR 587 (SC) distinguished; CIT vs. Samsung Electronics Co. Ltd. & Ors. (2009) 227 CTR (Kar) 335 : (2009) 31 DTR (Kar) 257 and C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out a study of the dairy sector and assist the Government in development of its business plan. In the process of providing the above services, the appellant availed services of DTT, Canada, who had rendered the "professional services" in respect of providing information of the global environment in the dairy sector in respect of the markets, competition, technology and regulations and other best practices followed by the global players. The entire services in relation to this job were performed outside India by the DTT and in respect of the aforesaid services it raised the invoice dated 23 October 2002 for an amount of USD 6,000. The assessee made remittance to the DTT, Canada without deduction of tax at source based on the certificate obtained from a chartered accountant in a prescribed form. The Ld. Counsel before us had stated that, relationship between the assessee and DTT Canada was occasional and there is absolutely no business connection of DTT Canada in India in terms of section 9(1)(i) and since services have been rendered outside India, therefore, it cannot be taxed in India. The Assessing Officer has made disallowance under section 40(a)(i) on the ground that, in some o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O that the impugned payment is taxable as 'fee for technical services'. She simply referred to a decision of Tribunal and held that retrospective amendment which has been brought in section 9(1)(vii) by the Finance Act, 2010, whereby it has been clarified that, if the technical services have been rendered outside India then also same is taxable in India. Before coming to this conclusion, she has not given any finding whatsoever how such a payment of fees for rendering of professional services falls within the ambit of fees for technical services. She has also failed to take the note of the fact that, under the DTAA with Canada, there is "make available clause", if this kind of payment is to be reckoned as 'fees for included services'. For the sake of ready reference Article 12(4) fees for technical services is reproduced hereunder:- 4. For the purposes of this Article, 'fees for included services' means payments of any kind to any person consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services: (a) are ancillary and subsidiary to the application or enjoyment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m residents of that other Contracting State or is borne by a permanent establishment which a person not resident in that other Contracting State has in that other Contracting State and such remuneration exceeds two thousand five hundred Canadian dollars ($2,500) or its equivalent in Indian Currency in the relevant fiscal year. 2. The term 'professional services' includes independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, surgeons, lawyers, engineers, architects, dentists and accountants. Here in this case, even if the payment is said to be made towards professional services then also same cannot be taxed because, DTT Canada does not have any fixed base, PE or any of its employee have stayed in India for more than 183 days. Thus, under the DTAA, the said payment is not taxable as fee for "professional services" because none of the conditions as mentioned in the aforesaid Para of Article 14 is satisfied. Once, the "professional fee" is not taxable under DTAA, then, no disallowance under Section 40(a)(i) can be made. On this ground alone, the disallowance made by the AO and confirmed by the CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or skill etc. A person professing any kind of profession requires extensive training and study and mastery of specialized knowledge. A professional person has to conduct himself within specified code of conduct or ethical conduct which is required from his field of profession like legal, medical, accountancy etc. In the case of rendering of technical services, the emphasis is more on giving services which are technical in nature and alludes to some kind of giving advice or consultancy in the field of technology or imparting of technical skills, knowledge, experience, know-how etc. Here 'consultancy' also means some kind of technical consultancy because it is preceded by the word 'technical'. The term 'managerial' is indicative of management of business or something like which is distinct from profession or rendering of professional services. Here in this case, professional services were rendered by DTT Canada in respect of providing information of the Global environment in dairy sector in respect of the markets, competition, regulations and other best practices followed by global players. Thus, the impugned payment cannot be reckoned as fees for rendering of technical services in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en under the Income Tax Act. Our finding given on the issue of FTS under Section 9 (1) (vii) will apply mutatis mutandis here also. Therefore, in view of our finding given therein, the said payment cannot be held to be taxable in India either under Section 9 (1) (vii) or under Section 9 (1) (i). Accordingly, disallowance made by the AO u/s 40(a) (i) is directed to be deleted. 21. As regards the issue of interest u/s 244A, it has been pointed out by the learned Sr. Counsel that for one month i.e. September, 2003 the rate of interest was two third percent instead of half percent in terms of Rule 119A. The AO has not correctly worked out the interest in accordance the said Rule. Accordingly, the AO is directed to examine the working of the interest and rate of interest and grant correct interest in accordance with the Law. 22. Thus, the appeal of the assessee for the AY 2003-04 is partly allowed for statistical purposes. 23. Now, we will take up the appeal for AY 2004-05, where the assessee has assailed the following grounds: (i) Disallowance u/s 40(a) (ia) of Rs. 15,02,099/- in respect of payment of subscription fee to DTT Swiss Verein. (ii) Disallowance u/s 40(a) (i) for non-de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowance of 'Satyanarayan puja' expenses of Rs. 96,980/-. The assessee had debited an amount of Rs. 16,76,844/- as 'general charges'. The AO noted that these expenditures include expenses of Rs. 96,980/- incurred for 'Satyanarayan puja', which according to him cannot be said to have been incurred for the purpose of assessee's profession. The learned CIT (A) too has confirmed the said disallowance, on the ground that it is religious in nature. 28. Before us, the learned Counsel submitted that the 'Satyanarayan Puja' was an annual affair wherein all the staff and their family members used to meet and have inter-actions. It was mainly for goodwill gesture and maintaining good relationship amongst the professionals and employees in the firm. In support, strong reliance was placed on the following decisions:- (i) CIT Vs Mohan Meakin Ltd. [2010] 189 Taxman 377 (Delhi) (ii) Commercial Mills Co. Ltd. v. CIT [1994] 204 ITR 505 (Guj.) (iii) Brijram Das & Sons v. CIT 142 ITR 509 (iv) Pranav Construction Co. v. Asst. CIT 61 TTJ 145 (Mumbai) On the other hand, the learned DR strongly relied upon the orders of the authorities below. 29. After considering the rival submissions and perusal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the DTAA, Article 13 dealing with the FTS, the same is not taxable due to "make available clause". The nature of professional services is covered under Article 15 which is similar to Article 14 of India Canada and India Australia Treaty and since, there is no fixed base or PE in India, therefore, the payment of professional fee will not be taxable in India. Our finding given in the earlier years will apply mutatis mutandis here also. Accordingly, the issue raised in ground No.1 is allowed. 34. So far as the second issue is concerned as raised in ground No.2, the same is similar to ground No.1 which has been decided in the earlier years as above. Thus, in view of our finding given therein, this matter is restored to the file of the AO to be decided in line with the directions given above. Accordingly, the issue raised in ground No.2 is treated as partly allowed for statistical purpose. 35. The last issue as raised in ground No.3, relates to disallowance of entertainment expenses of Rs. 1,00,000/-. The assessee has debited entertainment expenditure of Rs. 2,46,278/- under the head "general expenses" aggregating to Rs. 51,93,534/-. The AO noted that the assessee has not furnished t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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