TMI Blog2017 (2) TMI 797X X X X Extracts X X X X X X X X Extracts X X X X ..... to the file of the Assessing Officer and accordingly, ground No.1 is treated as party allowed for statistical purposes. disallowance of payment of ‘professional fees’ - non deduction of tds - Held that:- CIT (A) has reckoned the payment as “fees for technical services” without elaborating or elucidating the nature of payment. So far as the benefit under India-New Zealand DTAA, the payment of professional fee is not taxable under Article 14, which deals with “Independent personal services”. The language of Article 14 is similar to the language of India-Canada DTAA which has been reproduced hereinabove. Here also DTT New Zealand neither has any fixed base/ PE nor had any of its employees/professionals stayed in India for the period exceeding 183 days in any consecutive twelve months period. Accordingly, under the DTAA the “professional fee” paid to DTT is not taxable in India. However, Article 12(4) of India-New Zealand DTAA dealing with “fees for technical services” imbibes same definition as has been given 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 therei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee against separate impugned orders of even date, 22.03.2011 for the assessment years 2003-04 and 2004-05 and order dated 30.03.2011 for the assessment year 2004-06, passed by Ld. CIT (Appeals)-3, Mumbai for the quantum of assessment passed under section 143(3). Since the issues involved in all the three appeals are common arising out of identical set of facts, therefore, same were heard together and are being disposed off by way of this consolidated order. 2. As a lead appeal, to understand the facts and the issues involved, we are taking up the appeal for assessment year 2003-04, wherein, the assessee has raised following grounds: 1. Payment of subscription fees to Deloitte Touche Tohmatsu 1.1 The learned Commissioner (Appeals) erred in confirming disallowance under section 40(a)(i) of ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er (Appeals) erred in not directing the Assessing Officer to grant interest under section 244A (1)(a) at the rate of rate of two-third per cent for the month of September 2003. 3. The brief facts qua the issue involved are that, the assessee is a firm of Chartered Accountants, which had filed its return of income on 27.11.2003 declaring total income of ₹ 42,46,760/-. During the course of the assessment proceedings, the Assessing Officer noted that the assessee has made payments towards subscription and fees amounting to ₹ 27,32,335/- which was paid to Swiss Verein, Deloitte Touche Tohmatsu International (DTTL). The assessee was required to furnish the details of TDS deducted on such payment and also specify the nature of payment. In response, the assessee has given the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re of services rendered were given in the following manner: Name address of the Party Amount Paid TDS Amt. Date Services rendered 1 D T Canada, 98, Macdonell Street, Suit 400, Geulph, Ontario M1H4E1 Rs.290,580 NIL Professional services 2 D T Canada, London, HLL House, 1 Little New Street, London EC4A3TR Rs.383,250 NIL Professional services 3 D T New Zealand, 61 Molesworth Street, PO Box No.1490, Wellington, New Zealand Rs.145,290 NIL Professional services 4 D T, Canada, 98, Macdonell Street, Suit 400, Geulph, Ontario M1H431 Rs.63,658 Rs.23,249 29.08.2002 Professional services 5 D T, New York, 1633 Broadway, 38th Floor, New York, NY 10019 Rs.9,28,852 Rs.1,93,847 5.7.2002 Profession ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atsu, New Zealand without deduction of tax at source based on the certificate obtained from a chartered accountant. In this connection, we are to submit that Deloitte Touche Tohmatsu, New Zealand is a non-resident. For a non-resident, the following income is liable to tax in India: Income received or deemed to be received in India Income accrued or arisen in India Income deemed to accrue or arisen in India We have remitted fees of USD 3,000 (equivalent to ₹ 1,45,290) to Deloitte Touche Tohmatsu, New Zealand outside India. Thus Deloitte Touche Tohmatsu, New Zealand has received fees for professional services outside India. Therefore, the same cannot be said to be received in India or deemed to be received in India. Similarly, Deloitte Touche Tohmatsu, New Zealand 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, London ₹ 3,83,250 We were appointed by C M Farming Ltd in connection with their arbitration proceedings in UK. In the process or providing the above services, we availed services of Deloitte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge 74 of the Compilation. We have made remittance to the Deloitte Touche Tohmatsu, Canada without deduction of tax at source based on the certificate obtained from a chartered accountant. In this connection, we are to submit that Deloitte Touche Tohmatsu, Canada is a non-resident. For non-resident, the following income is liable to tax in India: Income received or deemed to be received in India Income accrued or arisen in India Income deemed to accrue or arisen in India We have remitted fees of USD 6,000 (equivalent to ₹ 2,91,780/- to Deloitte Touche Tohmatsu, Canada outside India. Thus Deloitte Touche Tohmatsu, Canada has received fees for professional services outside India. Therefore, the same cannot be said to be received in India or deemed to be received in India. Similarly, Deloitte Touche Tohmatsu, Canada has rendered their professional services outside India. Therefore, payment of professional fees cannot be said to accrue or arise in India . 5. Apart from the above submissions, it was submitted that, since the relationship and dealing with the assessee and the said entities was on Principal to Principal basis, therefore, there was n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecision of Hon ble Supreme Court in the case of Transmission Corporation of Andhra Pradesh and Others vs. CIT, reported in 239 ITR 587 and came to the conclusion that, since assessee has not made any application under section 195 or 197 therefore, the payment made to DTT, Switzerland without deduction of tax is to be disallowed under section 40(a)(i) and accordingly, he disallowed sum of ₹ 24,05,014/-. He also disallowed the payment of legal and professional charges paid to the aforesaid three parties under section 40(a)(i) for sums aggregating to ₹ 8,19,120/-. 7. Before the Ld. CIT(A) the assessee s submissions with regard to payment made to DTT Switzerland, was that, firstly, it was in the nature of reimbursement of expenses, therefore, same cannot be held to be payment chargeable to tax in India; and secondly, the assessee being a Member of DTT Switzerland which is an association of professional accounting firms worldwide, contribute to the Association for which the like other members it is entitled to receive certain, facilities and services from the said association and, therefore, the payment towards its allocation of share of costs, falls within the principle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax at source on grounds of mutuality. Appellant in the submissions has also referred to a recent decision of Chennai Special Bench in ITO versus M/s Prasad production Ltd in ITA No. 663/MDS/2003. It is seen that honorable ITAT Chennai has observed that payee need not undergo the procedure of section 195 at all if he is of the bona fide belief that no part of payment is chargeable to tax in India. In the impugned matter, discussion indicates that there was no substantive ground for appellant to have a bona fide belief that no amount was chargeable to tax in respect of these two payments to DTI. 2.1.10 Apart from appellant not able to establish that these were operational expenses payable by appellant to DTT on principles of mutuality, there is also no evidence on record to indicate that the remittances made by appellant to DTT consisted only of payment of operational charges and that payments were not or did not include amounts for professional or technical services. In absence of such details, appellant's claim that the remittance to DTT was not liable for tax deduction at source due to the principle of mutuality is prima facie incorrect and not in consonance with the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count of appellant's share of operational charges are not allowable expenses under section 40(a)(i). The assessing officer's action in disallowing the same under section /40(a)(i) is, therefore, confirmed. 9. Before us, Ld. Senior Counsel, Mr. Pardiwalla submitted that, so far as the reason for disallowance given by the Assessing Officer as well as ld. CIT(A) that the assessee should have followed the procedure laid down in sections 195 and 197, the same cannot be upheld that for every foreign remittance or payment, authorization from the Assessing Officer on an application has to be made either for nil or lower tax deduction. If the amount which is subject matter of remittance has to be seen from the perspective of whether the income is chargeable to tax under the provisions of the Income Tax Act or not. If it is not chargeable under the Act then the authorization envisaged under section 195(2)/195(3) is not required. It is only in the case where the part of the remittance is claimed to be not taxable, then the deductor cannot determine which part of the remittance, tax should be deducted. Such a determination can only be done by the Assessing Officer under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bute towards its budgeted expense of Verein. The variations of actual expenses with budgeted expenses are adjusted in the next year s contribution. The certificate from DTT (the copy of which has been placed in the paper-book at page 67), confirms that the subscription fees remitted by the assessee is only allocation of shares of assessee s expenses. The said allocation is without any profit or mark-up. He also drew our attention to the statement of revenue and expenditure account of DTT and also the invoices raised by them. Thus, he submitted that being in the nature of reimbursement of expenses; no TDS was required to be deducted. He further submitted that, the Ld. CIT(A) has erroneously referred to section 80P while adjudicating the issue of principle of mutuality which has no bearing or any relevance in the context of assessee s case. He submitted that the entire approach of Assessing Officer and CIT(A) is erroneous as first of all, the Assessing Officer or CIT(A) should have discussed or given a specific finding that the subscription fee paid by the assessee to DTT was in fact chargeable to tax under the Act and provision of TDS are applicable, then only disallowance under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome Tax Act. However before that, to fall within the definition of fee for technical services, the nature of services should be in the category specified under 9(1)(vii) r.w. Explanation 2, that is, rendering of managerial, technical or consultancy services. The professional services cannot be held to be covered under section 9(1)(vii) under the Income-tax Act because same has been separately dealt and defined under section 194J r.w. clause (a) of Explanation thereto which provides separate definition of professional services. 12. On the other hand, the Ld. DR strongly relied upon the finding of the CIT(A) on both the issues and drew our attention to the various observations made in the impugned orders. Thereafter he pointed out to the allocation of the expenses in the case of DTT Switzerland and pointed out that the allocation of expenses is decided by the Board of Directors and not on the basis of actual, then how can it be reckoned as reimbursement of expenses. He also submitted that, the payment is made to USA office and not to the Swiss entity, as noted by the CIT(A) in third paragraph. The reimbursement means the actual reimbursement and not which could be something more o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the international and national leadership of the Member Firms in rendering Professional Services; and to perform all other functions incidental to the above purposes . Article 8 deals with financial matters and Clause (b) of the said Article reads as under:- (a) Each Member Firm shall contribute toward the budgeted operating expenses of the Verein for each fiscal Year in such proportions as shall be allocated by the Board of Directors; and (b) The amount allocated to each Member Firm shall be based upon aggregate revenues and such other factors, if any, as may be determined by the Board of Directors and approved by the Member Firms. and Article 12 deals with dissolution, which reads as under:- 12.1 By Resolution. a dissolution of the Verein shall occur if a resolution to that effect is, adopted by the Member Finns. 12.2 Distributions. Upon dissolution of the Verein, any liquidation proceeds shall be applied in the following order: (a) payment or discharge of all liabilities of the Verein, including any unpaid principal of and accrued interest on any loans and advances made by the Member Firms to the Verein; and (b) payment of any remainin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esh (supra). 15. In our opinion, before invoking the provision of section 195 for making absolute obligation upon the assessee to comply with such provision, the pre-requisite condition is that, the sum which is subject matter of remittance should be first held to be chargeable to tax in the hands of the non-resident in India under the provisions of the Act. Prelude to invoking of section 195 is that, the sum should be chargeable under the provisions of the Income-tax Act. If the sum is not chargeable to tax under the provisions of the Act then no tax is required to be deducted at source and consequentially section 195 has no applicability. The Hon ble Supreme Court in the case of GE India Technology Centre Pvt. Ltd vs. CIT (supra) after taking note of the decision of Hon ble Supreme Court in the case of Transmission Corporation Ltd Andhra Pradesh Ltd (supra) (which has been relied upon by the authorities below) observed as under:- The most important expression in s. 195(1) consists of the words chargeable under the provisions of the Act . A person paying interest or any other sum to a non-resident is not liable to deduct tax if such sum is not chargeable to tax under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 195(3) are safeguards. The said provisions are of practical importance. From this it follows that where a people responsible for deduction is fairly certain then he can make his own determination as to whether the tax was deductible at source and, if so, what should be the amount thereof. If the contention of the Department that the moment there is remittance the obligation to deduct tax at source arises is to be accepted then the words chargeable under the provisions of the Act in s. 195(1) would be obliterated. The said expression in s. 195(1) shows that the remittance has got to be of a trading receipt, the whole or part of which is liable to tax in India. The payer is bound to deduct tax at source only if the income is assessable in India. If income is not so assessable, there is no question of tax at source being deducted-Transmission Corporation of A. Ltd. vs. CIT (1999) 155 CTR (SC) 489: (1999) 239 ITR 587 (SC) and Vijay Ship Breaking Corpn. Ors. vs. CIT (2008) 219 CTR (SC) 639: (2008) 14 DTR (SC) 74: (2009) 314 ITR 309 (SC) relied on; CIT vs. Cooper Engineering Ltd. (1968) 68 ITR 457 (Bom) impliedly approved. Sec. 195 falls in Chapter XVII which deals with collec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Sec. 195(2) provides a remedy by which a person may seek a determination of the appropriate proportion of such sum so chargeable where a proportion of the sum so chargeable is liable to tax. The entire basis of the Department's contention is based on administrative convenience in support of its interpretation. There is no merit in the contention. As stated hereinabove, s. 195( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. (2010) 232 CTR (Kar) 20 : (2010) 38 DTR (Kar) 350 set aside . Thus, aforesaid decision, clearly clinches the issue and in wake of law laid down by the Hon ble Apex Court, the decision of ITAT Mumbai Bench in the case of Arthur Andersen and Co. has no relevance or bearing at all which laid down the proposition that even where there existed a doubt to the chargeability of Income-tax then also the tax is to be deducted at source by way of abundant caution and the fact whether income is eligible to tax or not can only be determined after the assessment. On the contrary, as the Hon ble Apex Court as reproduced above has held that, the person making the payment to non-resident would be liable to deduct tax under section 195 only if such sum is chargeable to tax in India and not otherwise. Thus, prerequisite condition for going through the procedure of 195 is that, income should be first held to be chargeable to tax in India. The assessee, as noted above, has made out its case in a very elaborate manner as to why the payment made to DTT Switzerland is not liable for tax in India. However, both the authorities have not properly adjudicated these aspects. Therefore, in the interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd in some it does not. With regard to this allegation, it has been clarified before us that in respect of other DTT entities, the professional people had come to India for rendering of the services and that is why the assessee had deducted the TDS. But in these two cases, services were rendered outside India, therefore, same is not liable to be taxed in India. Here again, the allegation of the Assessing Officer has been that, assessee should have sought approval under section 195 without giving any cogent reason as why and how such professional fees payable to non-resident entity is taxable either under the Act or in terms of DTAA. The Ld. CIT(A), came to different conclusion and finding that it is in the nature of fees for technical services , which was not the case of AO. She referred to the decision of ITAT Mumbai Bench in the case of Ashapura Minichem vs. ADIT, reported in [2010] 5 taxman.com 57 and after quoting the said decision, she observed that, if fee for technical services is rendered outside India the same is taxable in view of retrospective amendment to section 9(1)(vii) brought by Finance Act, 2010, which envisages/clarifies that it is not necessary that services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch a payment described in paragraph 3 is received; or (b) make available technical knowledge, experience, skill, know-how, or processes or consist of the development and transfer of a technical plan or technical design. Thus, to fall within the meaning of fee for included services or for rendering of any technical or consultancy services it is sine-qua-non that such services should make available technical knowledge, experience, skill, knowhow or processes or consist of development and transfer of technical plan or technical design. Here in this case, the professional service has been rendered by DTT Canada only for providing information about the Diary Sector and not for the purpose of any technical services as defined. In any case there is no make available of any of the terms as mentioned in the said Article. Therefore, in terms of Article 12(4) the payment does not fall within the realm of fee for included services. If it is a payment for independent personal services in terms of Article 14, then same can be taxed only when in the hands of non-resident, if he has some kind of fixed base or is regularly available in India or his stay for rendering of pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nds deleted. 18. Even otherwise, under the Income Tax Act the payment of professional fee to the non-resident cannot be taxed in India in terms of Section 9 (1) (i), because such an income should be received or deemed to be received in India or accrue or arise in India to the non-resident through or from any business connection in India, or through or from any property in India, or through or from any asset, or source of income in India. Here, in the present case one has to see whether the non-resident, i.e. DTT Canada has any kind of business connection in India in terms of Explanation 2 to section 9(1)(i). The relationship between DTT Canada and the assessee is on principal-to-principal basis and there is no person who is acting on behalf of DTT Canada in India. Thus, in terms of Section 9(1) (i) no income of DTT Canada has been received or accrued or deemed to have been received or accrued in India as it does not have any kind of business connection in India and, therefore, there was no liability for deducting TDS on payment made to DTT Canada. 19. Now, whether such a payment can be said to be in the nature of fees for technical services in terms of Section 9(1) (v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terms of Section 9 (1) (vii). 20. As regards the professional fees paid to DTT New Zealand, the same too were akin to payment made to DTT Canada. The explanation of the assessee before the authorities below qua this payment was as under:- 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 India by Deloitte Touche Tohmatsu, New Zealand. In respect of the aforesaid services, Deloitte Touche Tohmatsu, New Zealand raised the invoice dated 9 October 2002 for an amount of USD 3,000. A copy of the invoice is enc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owance u/s 40(a) (i) for non-deduction of tax at source in respect of remittance of professional fee to DTT Australia of ₹ 1,16,693/-. (iii) Disallowance of Satyanarayan Puja expenses of ₹ 93,980/-. 24. So far as first issue as raised in Ground No.1 is concerned, it has been admitted by both the parties that the issue involved is identical to ground No.1 as raised in the appeal for the assessment year 2003-04. Hence, our finding given therein in respect of payment made to DTT Swiss Verein towards subscription fee will apply mutatis mutandis; accordingly, the matter would be decided by the AO in line with the directions given above. Thus, ground No.1 is treated as partly allowed for statistical purposes. 25. As regards second issue raised in ground No.2 the assessee has challenged the disallowance of ₹ 1,16,693/- made u/s 40(a) (i) in respect of payment of professional fees made to DTT Australia on the ground that the assessee should have deducted TDS. Admittedly, here in this case also, the observation and finding of the AO as well as CIT(A) are exactly the same. Regarding rendering of professional services by DTT Australia, it was submitted that the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the authorities below. 29. After considering the rival submissions and perusal of the impugned orders, we find that the assessee s main contention is that Satyanarayan puja is done at the business premises for the larger interest of the professional and employees of the assessee firm. It was more in the nature of goodwill gesture and keeping good relationship and environment amongst the colleagues. If any expenditure which is incurred for the general benefit of the professionals and employees, the same cannot be held to be incurred for non-business purposes. This has been held so in the aforesaid decisions cited above by the learned Counsel. In the aforesaid cases, the puja expenses have been allowed for business purposes. Thus, following the ratio laid down in the aforesaid decisions, we direct the AO to allow the said expenses. Accordingly, ground No.5 is treated as allowed. 30. In the result, appeal of the assessee is partly allowed for statistical purposes. 31. Now, we take up the appeal for the assessment year 2005-06, wherein the assessee has raised following issues in various grounds of appeal:- (i) Disallowance u/s 40(a) (i) for non-deduction of tax at sourc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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