2013 (11) TMI 188 - AT - Income Tax

Disallowance u/s 40(a)(i) The tribunal observed that it was for the assessee who was a member of KPMG International to satisfy the adjudicator with all possible evidences that KPMG International was a mutual concern the tribunal thereafter set aside the appeals to the file of CIT(A) with direction to adjudicate the issue raised by the assessee on the chargeability of income-tax on payments made to M/s. KPMG International - Both the parties agreed that the facts in the present appeals were identical and therefore there was no objection to the matter being restored to the file of CIT(A) following the earlier decision of the tribunal - We therefore set aside the orders of CIT(A) and restore the issue to the file of CIT(A) for passing fresh orders after necessary examination in the light of observations made above and after allowing opportunity of hearing to the assessee - the order passed by the Commissioner (Appeals) was set aside and restore the issue back to the file of the Commissioner (Appeals) for de novo adjudication in the light of the decision of the Tribunal given in assessee s own case for assessment years 1997-98 2005-06 and 2006-07 which are the latest orders. Disallowance u/s 40(a)(i) in respect of reimbursement of expenditure and professional fee - Held that - Taxability in one country was not sine qua non for availing relief under the treaty from taxability in other country - All that was necessary was that a person should be liable to tax in the contracting State by reason of domicile resident place of management place of incorporation or any other similar criterion which refers to fiscal domicile of such person - If a fiscal domicile of a person was in the contracting State which in the present case had not been doubted is in U.A.E. then was to be treated as resident of that contracting State irrespective of whether or not that person was actually liable to pay tax in that country - Liable to tax in the contracting State cannot be implied as the person is actually liable to tax but would also cover the cases where the other contracting State had the right to tax such person Following Assistant Director of Income-tax Versus Green Emirate Shipping & Travels Mumbai 2005 (11) TMI 239 - ITAT MUMBAI - It was immaterial whether or not such right had been exercised - We accordingly reject the basis for deducting the TDS u/s 195 by the Assessee for making the payment Decided in favour of Assessee. Disallowance of Expenses - Disallowance on account of Reimbursement of Various Expenses towards air fare conveyance telephone hospital bills etc. made to KPMG Dubai Held that - On reimbursement of expenses there was no requirement to deduct TDS - Otherwise also it was a settled principle of law that obligation to deduct tax arise only if the sum paid was taxable to tax in India - There had to be some element of income embedded in the remittances Following G.E. India Technology Cen. (P.). Ltd. v. CIT2010 (9) TMI 7 - SUPREME COURT OF INDIA - obligation to deduct tax was limited to the appropriate portion of income which was chargeable under the Act. Further on the issue that provisions of section 40(a)(i) cannot be applicable on reimbursement of expenses had been upheld by various decisions - we hold that no TDS was deductible on the reimbursement of expenses Decided in favour of Assessee. Deletion of Additions made - Whether Deleting the addition of reimbursement of professional indemnity insurance charges and bank guarantee charges holding that these amounts were only reimbursement of actual expenses and hence were not subject to TDS while remitting to foreign concern Held that - Following V. R. Entertainers (P.) Ltd. Versus Income-tax Officer (TDS) - 3(5) Mumbai 2011 (5) TMI 308 - ITAT MUMBAI the ground was restored to the file of the Commissioner (Appeals) for deciding the issue afresh. Deletion of Additions Made u/s 40(a)(i) - Whether the CIT(A) erred in deleting the addition of u/s 40(a)(i) of the Act without appreciating the reasoning given Held that - None of the payments which were not liable or chargeable to be taxed in India no TDS was required to be deducted under section 195 therefore the findings given by the Commissioner (Appeals) was factually and legally correct and accordingly the same was hereby affirmed - Sum paid by the appellant(s) to the foreign software supplier was not a royalty and that the same did not give rise to any income taxable in India and therefore the appellant(s) was not liable to deduct TAS - However the High Court did not go into the merits of the case and it went straight to conclude that the moment there was remittance an obligation to deduct TAS arises which view stands hereby overruled - Since the High Court did not go into the merits of the case on the question of payment of royalty we hereby set aside the impugned judgments of the High Court and remit these cases to the High Court for de novo consideration of the cases on merits - The question which the High Court will answer was-whether on facts and circumstances of the case the Tribunal was justified in holding that the amount(s) paid by the appellant(s) to the foreign software suppliers was not royalty and that the same did not give rise to any income taxable in India and therefore the appellant(s) was not liable to deduct any tax at source.

Summary

Issues Involved:

1. Disallowance under Section 40(a)(i) of the Income Tax Act, 1961 for payments made to KPMG International.
2. Disallowance under Section 40(a)(i) for reimbursement of out-of-pocket expenses to KPMG Dubai.
3. Disallowance under Section 40(a)(i) for professional fees paid to KPMG Dubai.
4. Deletion of addition for reimbursement of professional indemnity insurance charges and bank guarantee charges.
5. Deletion of addition for payments made to foreign entities for training and professional services.

Issue-wise Detailed Analysis:

1. Disallowance under Section 40(a)(i) for Payments to KPMG International:

The Tribunal noted that this issue had been previously adjudicated in the assessee's own case for earlier assessment years (1997-98 to 2006-07). The Tribunal had restored the matter to the file of the Commissioner (Appeals) to adjudicate the issue of chargeability of tax on payments made to KPMG International, considering the principle of mutuality. The Tribunal reiterated its earlier stance and set aside the impugned orders, directing the Assessing Officer for de novo adjudication in accordance with the law.

2. Disallowance under Section 40(a)(i) for Reimbursement of Out-of-Pocket Expenses to KPMG Dubai:

The Tribunal examined the nature of the expenses, which included airfare, conveyance, telephone, and hotel expenses. It was argued that these were reimbursement of costs and not income chargeable to tax in India. The Tribunal, relying on multiple judicial precedents, held that reimbursement of expenses does not attract TDS provisions. Consequently, the Tribunal allowed this ground in favor of the assessee.

3. Disallowance under Section 40(a)(i) for Professional Fees Paid to KPMG Dubai:

The Tribunal addressed the contention that Mr. Vijay Malhotra, the proprietor of KPMG Dubai, was not liable to pay tax in UAE and thus not a resident of UAE under the DTAA. The Tribunal, referencing the Supreme Court's decision in Azadi Bachao Andolan and other judicial precedents, concluded that the term "liable to tax" does not necessitate actual payment of tax but rather the right to tax. Therefore, Mr. Malhotra was considered a resident of UAE, and the payments were not chargeable to tax in India. The Tribunal rejected the basis for deducting TDS under Section 195 and decided in favor of the assessee.

4. Deletion of Addition for Reimbursement of Professional Indemnity Insurance Charges and Bank Guarantee Charges:

The Revenue's appeal challenged the deletion of additions made by the Assessing Officer for reimbursement of professional indemnity insurance charges and bank guarantee charges. The Tribunal restored this issue to the file of the Commissioner (Appeals) for fresh adjudication, consistent with its decision on the related issue in the assessee's appeal.

5. Deletion of Addition for Payments Made to Foreign Entities for Training and Professional Services:

The Tribunal reviewed the payments made to Software Technology Transition (USA), Conflict Resolution Company (UK), and Bala Kumar Thambia (Malaysia) for professional services. The Tribunal found that these services did not fall under the definition of fees for technical services as per the respective DTAAs, and none of the entities had a permanent establishment in India. Citing the Supreme Court's decision in GE India Technology Centre, the Tribunal held that no TDS was required on these payments as they were not chargeable to tax in India. The Tribunal upheld the Commissioner (Appeals)'s decision and dismissed the Revenue's ground.

Conclusion:

The Tribunal's order resulted in the assessee's appeal being partly allowed for statistical purposes, and the Revenue's appeal also being partly allowed for statistical purposes. The Tribunal directed the lower authorities to re-examine specific issues in light of its observations and judicial precedents.