2016 (5) TMI 356 - AT - Income Tax

Disallowance invoking the provisions of section 40(a)(i) - Indo-US Double Taxation Avoidance Agreement - fee for technical services - Held that - There is no material to establish that any technical knowledge, skill, etc. has been made available to the assessee so as to consider it as falling within the purview of Article-12 of Indo-US Double Taxation Avoidance Agreement. It is also an established fact that such non-resident recipients do not have permanent establishment in India and, therefore, in the said background the same can, at best, be treated as independent personal services covered by Article-15 of the Indo-US Double Taxation Avoidance Agreement. As a consequence and in the absence of any fixed base in India, such income cannot be held chargeable to tax in India so as to require deduction of tax at source. Therefore, invoking of section 40(a)(i) of the Act to disallow such expenditure is not tenable. In the context of payments made to KPMG Tax Services Pvt. Ltd., Singapore, KPMG LLP, Singapore and KPMG Tax Advisor, Belgium, CIT(Appeals) made no mistake in holding that the payments are not fee for technical services . The aforesaid services have been rightly held to be outside the purview of Article-12 and/or Article-13 of the respective tax treaties, and instead such income falls within the scope of Article-7 thereof i.e. in the nature of business profits . It has also not been disputed that such entities do not have a permanent establishment in India, therefore, such incomes are not chargeable to tax in India so as to require deduction of tax at source. On this aspect also, we affirm the stand of the CIT(Appeals) that such payments are not liable for disallowance under section 40(a)(i) of the Act. With regard to the payments to KPMG, Mauritius, KPMG Hazen Hassan, Egypt, KPMG Dubai, UAE and KPMG, Sri Lanka CIT(Appeals) held that the payments for such services fall within the scope of article 14/15 of the respective treaties dealing with independent personal services and in the absence of any fixed place of business of the recipient in India, income from such services was not chargeable to tax in India. Therefore, there was no requirement to deduct tax at source and accordingly the invoking of section 40(a)(i) of the Act has been set-aside by the CIT(Appeals). The aforesaid factual matrix brought out by the CIT(Appeals) has not been assailed by the Revenue before us on the basis of any cogent material and, thus, the same is hereby affirmed. Payment made by assessee to KPMG, Malaysia for audit services it is not in dispute that the said services have been rendered outside India and the same cannot be construed as managerial or technical services so as to be governed by Article-13 of India-Malaysia tax treaty, as contended by the Revenue. Clearly, they are in the nature of independent personal services falling for consideration under Article-14 of Indo-Malaysia tax treaty and, therefore, in the absence of any fixed place of business of the recipient in India, the impugned income is not chargeable to tax in India. Therefore, in such a situation, assessee is not liable for deduction of tax at source - Decided in favour of assessee

Summary

Issues:
Revenue's appeal against CIT(Appeals) order disallowing a sum under section 40(a)(i) of the Income Tax Act, 1961 for A.Y. 2009-10.

Analysis:
The Revenue raised a single issue challenging the CIT(Appeals) decision to disallow a payment under section 40(a)(i) of the Act. The assessee, a firm of Chartered Accountants, had made payments to non-resident entities without deducting tax at source. The Assessing Officer disallowed the expenditure, but the CIT(A) upheld the assessee's stand, citing Double Taxation Avoidance Agreements (DTAA) with the respective countries. The Tribunal considered the nature of services provided by each recipient entity and the applicability of tax treaties.

The Tribunal analyzed payments made to various non-resident entities for professional services rendered outside India. It found that the Revenue's contention that the payments constituted 'fee for technical services' was not justified. The Tribunal examined payments made to entities in the USA, Canada, UK, Singapore, Belgium, Mauritius, Egypt, UAE, and Sri Lanka. It determined that the services provided fell outside the purview of 'fee for technical services' under the relevant tax treaties, and hence, were not taxable in India, negating the need for tax deduction at source.

The Tribunal affirmed the CIT(A)'s decision regarding payments made to entities in the UK, Singapore, Belgium, and other countries, stating that the services provided did not qualify as 'fee for technical services' under the tax treaties. It further noted that the absence of a fixed place of business in India for these entities exempted the payments from tax deduction at source under section 40(a)(i) of the Act.

Additionally, the Tribunal addressed the retrospective amendment to section 9(1)(vii) of the Act and its impact on tax liability. It emphasized that the failure to deduct tax at source did not warrant disallowance under section 40(a)(i) in light of the prevailing legal position and the retrospective nature of the amendment. The Tribunal cited a relevant Tribunal decision to support this position, ultimately upholding the CIT(A)'s decision to delete the disallowance.

In conclusion, the Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision to delete the disallowance under section 40(a)(i) of the Act for the A.Y. 2009-10.