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2017 (11) TMI 1202 - AT - Income TaxTDS u/s 195 - non deduction tds on professional charges to one, M/s. Proskauer Rose LLP, USA, stated to be a law firm - payment admittedly is for representing the assessee (and one or more of its US affiliates, referred to collectively as the clients ) for the purpose of bidding on and potentially acquiring the business and assets of Qual Teq, Inc. - Held that - Without doubt, the services rendered by the payee firm are in the nature of professional services covered under article 15. The income arising shall therefore be liable to be subject to tax only in the Contracting State, i.e., of which the payee, rendering services, is a resident, USA, in the instant case. The exceptions, being with regard to the 90 day stay in the other Contracting State (India) as well as a fixed base thereat, are clearly not applicable in the present case. As such, article 15 shall operate to exclude withholding tax, even where, on account of the asset/s (to be) acquired being brought to India, makes the relevant income as accruing or arising in India. As such, either way, no tax is deductible under section 195 on the impugned payment, so that the same could not be disallowed for non- deduction thereof under section 40(a)(i) of the Act. - Decided in favour of assessee.
Issues Involved:
1. Maintainability of the assessee's claim for deduction of professional charges under section 37(1) of the Income-tax Act, 1961. 2. Applicability of section 40(a)(i) due to non-deduction of tax at source under section 195. Issue-wise Detailed Analysis: 1. Maintainability of the Assessee's Claim for Deduction under Section 37(1): The primary issue revolves around the deduction of a sum of ?1,06,67,930 paid as professional charges to M/s. Proskauer Rose LLP, USA, by the assessee, an investment holding company. The assessee claimed this expense as revenue expenditure under section 37(1), arguing that it was incurred for business expansion purposes. However, the Revenue contended that this expense was capital in nature and, therefore, inadmissible under section 37(1). The Tribunal examined whether the expenditure was for acquiring a capital asset, which would make it capital in nature, or if it was revenue expenditure. The assessee relied on the case of CIT v. United Breweries Ltd., arguing that expenses for feasibility studies are revenue in nature. However, the Tribunal distinguished this case by noting that the decision to acquire the business had already been made, making the expense capital in nature. The Tribunal referred to several precedents, including Swadeshi Cotton Mills Co. Ltd. v. CIT, Kwality Fun Foods and Restaurants (P.) Ltd. v. Deputy CIT, and CIT v. Rajendra Prasad Moody, to emphasize that the character of the expenditure does not change merely because the acquisition did not materialize. The Tribunal concluded that the expenditure was indeed capital in nature as it was incurred for acquiring a business or assets, enhancing the profit-making apparatus of the assessee-company. However, the Tribunal noted that the assessee's business objectives, as per its memorandum of association, did not explicitly include acquiring businesses or assets. It was necessary to determine if the proposed acquisition was ultra vires the company's business objectives. The Tribunal remanded the matter to the Commissioner of Income-tax (Appeals) for further examination of the business purpose and nature of the acquisition, instructing the CIT(A) to issue definite findings of fact after allowing the assessee a fair opportunity to present its case. 2. Applicability of Section 40(a)(i) Due to Non-Deduction of Tax at Source under Section 195: The second issue addressed whether the payment to M/s. Proskauer Rose LLP attracted tax deduction at source under section 195, and consequently, if it was disallowable under section 40(a)(i) for non-deduction of tax. The Revenue argued that the payment was a fee for technical services as defined in Explanation 2 to section 9(1)(vii), which would require tax deduction at source. The Tribunal examined the nature of the payment and its applicability under section 195. It noted that if the business was acquired for running it, the payment would be excepted by the first limb of the saving clause. If the acquisition was of assets located outside India, it would be excepted by the second limb of the provision. The Tribunal concluded that no tax was deductible under section 195, as the payment did not accrue or arise in India unless the assets were brought to India. Furthermore, the Tribunal considered the applicability of Article 15 of the Indo-US DTAA, which governs independent personal services. It concluded that the services rendered by the payee firm were professional services covered under Article 15, and the income arising would be taxable only in the USA, the payee's resident state. The exceptions regarding the 90-day stay and fixed base in India were not applicable in this case. Therefore, the Tribunal held that no tax was deductible under section 195, and the payment could not be disallowed under section 40(a)(i) for non-deduction of tax. Conclusion: The Tribunal allowed the assessee's appeal for statistical purposes, dismissed the Revenue's appeal, and dismissed the assessee's cross-objection as infructuous. The matter was remanded to the Commissioner of Income-tax (Appeals) for further examination of the business purpose and nature of the acquisition. The Tribunal concluded that no tax was deductible under section 195, and the payment could not be disallowed under section 40(a)(i) for non-deduction of tax.
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