TMI Blog2022 (5) TMI 1002X X X X Extracts X X X X X X X X Extracts X X X X ..... y. While dealing with, more or less, identical issue concerning payment of membership fee by KPMG to an international association/umbrella association, viz, KPMG International, the Coordinate Bench in case of DCIT Vs. KPMG [ 2017 (4) TMI 869 - ITAT MUMBAI] has held that the amount paid by a member firm to the umbrella association would fall within the ambit of principle of mutuality, hence, would not be taxable. Therefore, the Bench held that there was no obligation on the assessee to deduct tax at source. In our view, the ratio laid down by the Coordinate Bench in case of DCIT Vs. KPMG (supra) will also apply to the facts of the present appeal. In a recent decision rendered in case of DCIT vs. M/s. Deloitte Touche Tohmastu, [ 2022 (5) TMI 896 - ITAT DELHI] , the Coordinate Bench has reiterated the view expressed in case of DCIT Vs. KPMG. Thus, the issue in dispute, in a way, is covered by the aforesaid decisions of the Tribunal. Thus we hold that the payment made by the assessee to GTIL towards membership and subscription fee is not taxable at the hands of the payee. That being the case, the assessee was not required to withhold tax at source in terms with section 195 of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .2017 of learned Commissioner of Income Tax (Appeals)-16, New Delhi, pertaining to assessment year 2011-12. 2. The effective grounds raised by the assessee read as under: 1. The CIT (A) erred in law and on facts in confirming the disallowance of Rs. 2,73,52,203/- being the membership fees paid by the assessee to Grant Thornton International Ltd. a non-practising non-profit organization u/s 40(a)(ia) due to non-deduction of tax at source ignoring the facts, submissions and explanation of the assessee that the said amount was not liable to tax deduction at source. Thus the disallowance so made should be deleted. 2. The CIT (A) erred in law and on facts in confirming the disallowance of Rs. 21,76,575/- (correct figure is Rs. 18,44,925/-) being the professional fees paid to GT UK LLP u/s 40(a)(ia) of the Act due to non-deduction of TDS ignoring the facts and evidences placed on record to show that the said payments were not taxable in India and therefore not liable to tax deduction u/s 195 of the Act. Thus the disallowance so made should be deleted. 3. The dispute in ground no. 1 relates to disallowance of Rs.2,73,52,203/- under section 40(a)(i) of the Income-tax Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uired to deduct tax at source under section 195 of the Act. The assessee having failed to do so, the Assessing Officer disallowed the amount of Rs.2,73,52,203/- under section 40(a)(i) of the Act. Contesting the disallowance so made, the assessee preferred appeal before learned Commissioner (Appeals). 3.2 After perusing the facts on record and the nature of payment, learned Commissioner (Appeals) called upon the assessee to explain, as to why the payment should not be treated as royalty under section 9(1)(vi) of the Act for using the brand of the overseas entity. Though, the assessee submitted that the payment made is purely in the nature of reimbursement of expenses incurred to develop GT brand in India, however, rejecting the submissions of the assessee, learned Commissioner (Appeals) held that the amount paid by the assessee for user of the brand has to be treated as royalty, hence, taxable in India. Since, the assessee had failed to deduct tax at source under section 195 of the Act while making such payment, learned Commissioner (Appeals) sustained the disallowance made by the Assessing Officer, though, on a completely different reasoning. 3.3 Before us, learned counse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or any services ancillary and subsidiary to the application or enjoyment of the right, property or information for which royalties are paid. Therefore, he submitted, the payment cannot be treated as royalty. Further, he submitted, expression make available used in Article of the Tax Treaty implies that the technical knowledge, skill, etc. remain with the person utilizing the services even after the particular transaction is over or even after the particular contract comes to an end. In support of such contention, he relied upon the following decisions: (a) Cushman Wakefiled (S) Pte. Ltd. (2008) 305 ITR 208 (b) Sandvik Australia Pty. Ltd. Vs. DDIT (International Taxation) (2013) 141 ITD 598 (Pune) (c) CIT Vs De Beers India Minerals Pvt. Ltd. (2012) 346ITR 467 (Karn) (d) ISR0 Satellite Centre (ISAC) (2008) 307 ITR 59 (AAR) (e) Intertek Testing Services India (P) Ltd. Vs. Authority for Advance Rulings (2008) 307 ITR 418 (f) BharatiAxa General Insurance Co. Ltd. (2010) 326 ITR 477 (AAR) (g) Cable Wireless Networks India Pvt. Ltd. (2009) 315 ITR 72 (h) Invensys Systems Inc., (2009) 317 ITR 438 (i) Guy Carpenter Co. Ltd. Vs ADIT (2012) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. Thus, he submitted, the disallowance under section 40(a)(i), having been wrongly made, should be deleted. 4. Strongly relying upon the observations of learned Commissioner (Appeals), learned Departmental Representative submitted, in course of proceedings before learned appellate authority, the assessee tried to give a new angle to the entire dispute by claiming that the membership fee and subscription paid to GTIL is nothing but reimbursement of cost. He submitted, to support its claim the assessee has also furnished a separate agreement for reimbursement of cost. He submitted, in course of assessment proceeding, this was never the case of the assessee. Therefore, the first appellate authority has rightly rejected the fresh claim of the assessee. Proceeding further, he submitted, the assessee has paid the amount to its AE not only for using the brand, but also for availing certain services. Therefore, the amount paid has to be treated as royalty, both under section 9(1)(vi) as well as under the provisions of India UK DTAA. 5. We have considered rival submissions in the light of the decisions relied upon and perused the materials on record. The controversy between the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vices in accordance with GTIL policies and professional standards. It is further evident, GTIL by itself does not render any service to its members. Rather, the member firms get benefited from each other by way of referral. In other words, if a member firm located in a particular country is entrusted with professional work by a client located in another country, such work can be referred to a member firm located at the place where the client is located. Of course, the choice to entrust work to such member firm is completely at the discretion of the client. 5.2 Clause 4 of the agreement provides for a separate name use agreement under which a member firm can request for entering into a name use agreement which will enable such member firm to use the name Grant Thornton or an approved derivative thereon. However, such request of a member firm to enter into a name use agreement has to be approved by the members of Board of GTIL present at a meeting with Corum by at least 75% vote. Thus, from the aforesaid clause, it is very much clear that user of brand name/trade mark (Grant Thornton) is not mandatory, but on request of a particular member firm. Clause 5 of the agreement speak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibit A to the agreement, it is noticed that GTIL has permitted use of software only for the purpose of performing the work in accordance with uniform standard prescribed by GTIL. No member is permitted to effect modification/enhancement to the software owned by GTIL. Further, clause 17.4 of the agreement stipulates that GTIL will grant each member firm a limited royalty-free, non-exclusive, non transferable and non-sublicensable right and licence (a) to use the software in object code format; (b) to modify and enhance (i) the object code version of the software to the extent, if any, provided on Exhibit A or in the documentation that the GTIL provides with the software; and (ii) the source code version of the software to the extent necessary to correct errors, ingredients or otherwise operate the software for member firms for internal business purposes and make as many copy of the software as reasonably necessary for such permitted use, modification and enhancement and such backup copies as are necessary for its lawful use. Clause 17.5 puts further restrictions/conditions to the aforesaid license right as provided under section 17.4. 5.3 Thus, on a reading of the salient feat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Treaty. 5.5 As discussed earlier, learned Commissioner (Appeals) has treated the payment as royalty for use of trade mark/trade name of GTIL. However, the different clauses of the agreement, as discussed earlier, which provide for permanent contribution, annual contribution etc. do not demonstrate that the payments are made for use of or right to use of trademark/brand name etc. Rather, the clauses in the agreement make it clear that the payments received from members in a given circumstance can be given to a member firm either fully or in part towards fees for referral to another member firm. The clauses of the agreement further demonstrate that the excess of expenses over receipt are allocated to member firms. If, that is so, assessee s claim that these are reimbursement of expenses on cost to cost basis cannot be rejected. In fact, the reimbursement of expenses is implicit in Member Firms Agreement and one does not have to go to the cost reimbursement agreement dated 05.05.2010, whose genuineness learned Commissioner (Appeals) doubted. 5.6 Further, clause 17.1 of the agreement, as discussed earlier, makes it absolutely clear that GTIL shall be the sole owner of all in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd keeping in view the ratio laid down in the judicial precedents cited before us, we hold that the payment made by the assessee to GTIL towards membership and subscription fee is not taxable at the hands of the payee. That being the case, the assessee was not required to withhold tax at source in terms with section 195 of the Act. In view of the aforesaid, we delete the addition. This ground is allowed. 6. The next issue as raised in ground no. 2 relates to the disallowance of Rs.21,76,575/- under section 40(a)(i) of the Act. 7. Briefly the facts are, Grant Thornton India (GT Firm) entered into an agreement with M/s. Hindustan Polyamides Fibres Ltd. to conduct a limited scope tax due diligence of M/s Tessenderlo Fine Chemicals Ltd., an international chemical group. Since, such professional work has to be performed in UK, GT Firm entered into an agreement with GT UK LLP to do the work. For rendering professional services GT Firm raised a bill of 25,500 GBP on Hindustan Polyamides Fibres Ltd. Whereas, for the services rendered to GT Firm, GT UK LLP raised a bill of Rs.18,44,925/- equivalent to 25,500 GBP on the assessee which was paid to GT UK LLP. However, the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of GT UK LLP. Similarly, if GT UK LLP has some work in India, it engages either assessee or other group entity to carry out the work. Therefore, the services of each other are utilized on reciprocal basis. He submitted, while treating the payment made as FTS under section 9(1)(vii) of the Act, the departmental authorities have totally overlooked the fact that the taxability of the amount paid to GT UK LLP has to be examined by applying the provisions of India UK DTAA. Drawing our attention to Article 13(4) of the India UK DTAA which defines the scope of FTS, learned counsel for the assessee submitted, the payment made by the assessee cannot be regarded as FTS as the payee has not made available technical knowledge, experience, skill, know-how or processes, or transferred a technical plan or technical design while rendering the services. He submitted, the meaning of FTS under the Treaty provision is narrower than the meaning under section 9(1)(vii) of the Act. He submitted, since, there is no provision akin to explanation 2 to section 9 in the India UK DTAA, such meaning cannot be given to the payment made while applying the Treaty provision. Thus, he submitted, under no cir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A reading of section 195 of the Act makes it clear that the assessee is required to deduct tax at source while making payment of certain income arising to a non-resident, if such income is chargeable to tax in India. Therefore, the crucial words which need to be kept in mind is income chargeable to tax in India . Thus, obligation of the assessee to withhold tax arises only when the payment to be made to the non-resident assumes character of income chargeable to tax in India. If the payment made has no element of income chargeable to tax in India, there is no requirement of withholding of tax under section 195 of the Act. This is a fairly well settled legal principle propounded by the Hon ble Supreme court in case of GE India Technology Cent. Pvt. Ltd. Vs. CIT (Civil Appeal Nos. 7541- 77542 of 2010, dated 09.09.2010). Therefore, what logically follows is, the liability of the assessee to withhold tax at source under section 195 of the Act would arise only where the income is chargeable to tax in India. 10.1 In the facts of the present case, an Indian company had engaged a group entity of the assessee in India to render certain professional services which required to be performed ..... X X X X Extracts X X X X X X X X Extracts X X X X
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