2016 (4) TMI 953 - AT - Income Tax

TDS u/s 195 - Disallowance u/s. 40(a)(i) - professional fees paid outside India without deduction of tax at source - existence of PE in India - Held that - Looking into the nature of services rendered. It is seen that, firstly, none of these services fall in the nature of make-available of any technical knowledge, experience, skill, know-how or process. The provisions of Indo-U.S. and U.K. treaties are absolutely clear that in case of fees for technical services, it is essential that technical knowledge, skill, know-how should be made available to the assessee and the assessee should be at liberty to use them in its own right. If 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. Therefore, such a payment does not attract the provisions of TDS under section 195. See KPMG vs JCIT 2013 (11) TMI 188 - ITAT MUMBAI - Decided in favour of assessee Disallowance made by the AO u/s 40a(i) in respect of professional fee paid to KPMG Huazhen, China - Held that - No law can create an obligation to deduct tax at source by retrospective operation. Thus, in our considered view, the assessee was not required to deduct tax at source on the said payment. It is further noted by us that KPMG Huazhen is an entity registered in China and it is resident of China as is understood in Indo-China tax Treaty. The admitted facts on record are that services were rendered in China in relation to the review of information securities services and assistance in audit. The assessee has claimed that services in question would fall specifically in article 14 of Indo China Treaty. We have gone through article 14 of the Tax Treaty which provide that income derived by resident of a contracting state in respect of professional services or other activities of an independent character shall be taxable only in that contracting state except when the said resident has a PE or fixed basis or stay exceeding prescribed number of days in the other contracting states. It is noted on the basis of facts brought before us that these professional services have been provided in China by a team consisting of accountants, lawyers and engineers. Thus, we find that these services specifically fall in Article 14, and in absence of their being any PE or any stay of the persons of KPMG China, in India, the payment made by the assessee was not taxable in India and therefore, not liable to deduction of tax at source. - Decided in favour of assessee

Summary

Issues Involved:
1. Disallowance of professional fees paid outside India without deduction of tax at source under Section 40(a)(i).
2. Addition of undisclosed income from professional services based on Annual Information Return (AIR).
3. Granting credit for taxes paid in the United Kingdom.

Detailed Analysis:

1. Disallowance of Professional Fees Paid Outside India Without Deduction of Tax at Source (Section 40(a)(i)):
Revenue's Appeal for A.Y. 2007-08:
- The Revenue contended that the CIT(A) erred in deleting the disallowance of ?1,22,58,136 under Section 40(a)(i) for professional fees paid outside India without TDS.
- The AO had disallowed the fees paid to KPMG entities in the UK, USA, France, and China, arguing these were fees for technical services under Article 12/13 of respective DTAAs.
- The CIT(A) ruled that TDS was not required for payments to KPMG UK, USA, and France but upheld the disallowance for KPMG China.

Tribunal's Decision:
- The Tribunal upheld the CIT(A)'s decision, noting that the services did not "make available" technical knowledge, skill, experience, know-how, or processes as required under the respective DTAAs.
- Payments to KPMG UK, USA, and France were classified as independent personal services under Article 15, not subject to TDS as there was no PE in India.
- The Tribunal reiterated that retrospective amendments (Finance Act, 2010) could not impose TDS obligations retrospectively.
- The appeal by the Revenue was dismissed.

Assessee's Appeal for A.Y. 2007-08:
- The assessee contested the disallowance of ?6,00,482 paid to KPMG Huazhen, China.
- The Tribunal ruled that services rendered outside India were not taxable under Article 14 of the Indo-China Treaty, thus not liable for TDS.
- The disallowance was deleted.

Revenue's Appeal for A.Y. 2008-09:
- Similar disallowance of ?6,68,10,721 was made for payments to various KPMG entities and others.
- The CIT(A) deleted the disallowance except for KPMG Huazhen, China.
- The Tribunal upheld the CIT(A)'s decision, noting the services were not taxable in India under the respective DTAAs.
- The appeal by the Revenue was dismissed.

Assessee's Appeal for A.Y. 2008-09:
- The assessee contested the disallowance of ?33,54,628 paid to KPMG Huazhen, China.
- The Tribunal deleted the disallowance, consistent with its decision for A.Y. 2007-08.

2. Addition of Undisclosed Income from Professional Services Based on AIR:
Assessee's Appeal for A.Y. 2007-08:
- The assessee challenged the addition of ?52,743 based on AIR.
- The Tribunal remanded the issue to the AO for re-examination, emphasizing that AIR information alone cannot justify additions without proper verification.

Assessee's Appeal for A.Y. 2008-09:
- The assessee contested the addition of ?2,93,090 based on AIR.
- The Tribunal remanded the issue to the AO for re-examination, consistent with its directions for A.Y. 2007-08.

3. Granting Credit for Taxes Paid in the United Kingdom:
Assessee's Appeal for A.Y. 2007-08:
- The assessee requested credit for ?15,05,849 taxes paid in the UK.
- The Tribunal directed the AO to verify the documents and grant the credit accordingly.

Conclusion:
- The Tribunal dismissed the Revenue's appeals and partly allowed the assessee's appeals for both A.Y. 2007-08 and A.Y. 2008-09.
- The Tribunal upheld the CIT(A)'s decisions regarding non-requirement of TDS for certain foreign payments and remanded issues related to AIR-based additions and tax credit verification back to the AO for further examination.