2011 (8) TMI 159 - AT - Income Tax

TDS u/s 195 - Fees for technical services - Assessee in default - According to the Assessing Officer the payment by the assessee to KPMG did not fall within the exceptions and, therefore, the payment would be income which accrues or arises in India in the hands of KPMG chargeable to tax - It was pointed out that the objective of appointing KPMG was to identify and acquire sugar mills/distillery plants in Brazil - KPMG being one of the leaders in Brazil in Mergers and Acquisitions (M&A) in the sugar and alcohol section and have already advised in transactions related to disposals of sugar mills and sugar refinery were being engaged for the aforesaid purpose - The dispute is whether the exceptions mentioned in clause (b) to section 9(1)(vii) of the Act would apply so that it can be said that the fees in the nature of FTS has not accrued or arisen to KPMG in India - assessee was contemplating to create a source for earning income outside India. It is no doubt true that the source of income had not come into existence - There is nothing in the language of section 9(1)(vii) clause (b) of the Act, which would go to show that the same is restricted to only to an existing source of income - Decided in favor of the assessee

Summary

Issues Involved:
1. Whether the assessee was bound to deduct tax at source on the payment made to KPMG under section 195 of the Income-tax Act, 1961.
2. Whether the payment made to KPMG constituted income deemed to accrue or arise in India under section 9(1)(vii) of the Income-tax Act, 1961.

Detailed Analysis:

1. Obligation to Deduct Tax at Source:
The primary issue was whether the assessee was required to deduct tax at source on the payment made to KPMG, a non-resident entity, under section 195 of the Income-tax Act, 1961. The Assessing Officer (AO) held that the payment to KPMG was in the nature of fees for technical services (FTS) and thus, taxable in India. Consequently, the assessee was deemed to be in default for not deducting tax at source, leading to a demand for recovery of taxes and interest under sections 201(1) and 201(1A) of the Act.

2. Taxability of Payment under Section 9(1)(vii):
The second issue was whether the payment made to KPMG fell within the exceptions provided under section 9(1)(vii)(b) of the Income-tax Act, 1961, which would exclude it from being deemed as income accruing or arising in India. The assessee argued that the payment was for services utilized in a business carried on outside India and for the purpose of earning income from a source outside India, thus falling within the exceptions.

Findings and Judgments:

1. CIT(A) Findings:
The CIT(A) examined the agreement between the assessee and KPMG, which was in the form of a proposal dated 11-5-2006. The CIT(A) found that the services rendered by KPMG were aimed at assisting the assessee in acquiring sugar mills/distilleries in Brazil, and the services were to be utilized outside India. The CIT(A) concluded that the payment was for the purpose of earning income from a source outside India, thus falling within the exceptions of section 9(1)(vii)(b).

2. Revenue's Appeal:
The Revenue appealed, arguing that the payment was for services utilized in a business carried on by the assessee in India and that the exception in section 9(1)(vii)(b) should only apply to an existing source of income, not a future one. The Revenue also questioned the genuineness of the agreement between the assessee and KPMG.

3. Tribunal's Decision:
The Tribunal upheld the CIT(A)'s decision, stating that the payment to KPMG was indeed for the purpose of earning income from a source outside India. The Tribunal found no basis in the Revenue's argument that the exception should only apply to an existing source of income. The Tribunal noted that the language of section 9(1)(vii)(b) did not restrict the exception to existing sources of income. Consequently, the Tribunal held that the payment was outside the scope of section 9(1)(vii) and not chargeable to tax in India, thereby dismissing the Revenue's appeal.

Conclusion:
The Tribunal concluded that the payment made by the assessee to KPMG for technical services was not taxable in India under section 9(1)(vii) of the Income-tax Act, 1961, as it was for the purpose of earning income from a source outside India. Therefore, the assessee was not liable to deduct tax at source under section 195, and the demand for tax and interest under sections 201(1) and 201(1A) was rightly deleted. The appeal by the Revenue was dismissed.