2022 (5) TMI 1002 - AT - Income Tax

TDS u/s 195 - Disallowance u/s 40(a)(i) - non-deduction of tax at source on payment made towards membership/subscription fee - principle of mutuality- amount paid by a member firm to the umbrella association - nature of membership and subscription fee paid to GTIL and whether such payment required withholding of tax at source under section 195 - whether the payment made by the assessee to GTIL falls within the definition of royalty either under the India- UK DTAA or domestic law? - HELD THAT - As irrespective of the fact whether use of trade mark/brand name is mandatory or voluntary, the nature and character of payment made has to be determined by looking at the terms of the agreement under which payment was made. A reading of the Member Firms Agreement as a whole does not indicate that the payment made was for use of brand name. Member Firms Agreement read as whole would demonstrate that the umbrella association, GTIL, was formed for the benefit of its members. Therefore, the relationship between GTIL and its members would be governed by the principle of mutuality. While dealing with, more or less, identical issue concerning payment of membership fee by KPMG to an international association/umbrella association, viz, KPMG International, the Coordinate Bench in case of DCIT Vs. KPMG 2017 (4) TMI 869 - ITAT MUMBAI has held that the amount paid by a member firm to the umbrella association would fall within the ambit of principle of mutuality, hence, would not be taxable. Therefore, the Bench held that there was no obligation on the assessee to deduct tax at source. In our view, the ratio laid down by the Coordinate Bench in case of DCIT Vs. KPMG (supra) will also apply to the facts of the present appeal. In a recent decision rendered in case of DCIT vs. M/s. Deloitte Touche Tohmastu, 2022 (5) TMI 896 - ITAT DELHI , the Coordinate Bench has reiterated the view expressed in case of DCIT Vs. KPMG. Thus, the issue in dispute, in a way, is covered by the aforesaid decisions of the Tribunal. Thus we hold that the payment made by the assessee to GTIL towards membership and subscription fee is not taxable at the hands of the payee. That being the case, the assessee was not required to withhold tax at source in terms with section 195 of the Act. In view of the aforesaid, we delete the addition. This ground is allowed. Addition u/s 40(a)(ia) with 195 - whether the assessee was required to withhold tax under section 195 of the Act on the payment made to GT UK LLP.? - HELD THAT - In the facts of the present case, an Indian company had engaged a group entity of the assessee in India to render certain professional services which required to be performed in UK. Instead of deploying its employees to travel to UK to do the work, GT Firm engaged another group entity GT UK LLP to do the work on its behalf. GT UK LLP instead of raising the invoice for the services rendered on GT Firm raised it on the assessee. Whereas, GT Firm reimbursed the expenses incurred by the assessee on actual basis after deduction of tax at source. Obviously, the departmental authorities have treated the payment made by the assessee to GT UK LLP as FTS under section 9(1)(vii) of the Act. However, the departmental authorities have not at all examined, whether it can be regarded as FTS under Article 13(4) of the Tax Treaty. The payment made cannot be regarded as FTS under Article 13(4) of the Tax Treaty. The only other provision under which it can fall is Article 15 of the Tax Treaty which speaks of independent personal services. However, the payment cannot also fit into Article 15 as neither the services were rendered in India or any employees of the payee came to India to render such services. Even, there is no material on record to suggest that the payee has rendered such services from any fixed base in India. Thus, the payment made cannot even come under Article 15. In any case of the matter, the amount in dispute has been subjected to TDS in India, though, may not be at the hands of the payee but certainly at the hands of the assessee. That being the factual position, in our view, the assessee was not obliged to deduct tax at source under section 195 of the Act while remitting the amount to GT UK LLP. Accordingly, the disallowance is deleted. Ground is allowed.

Summary

Issues Involved:
1. Disallowance of Rs. 2,73,52,203/- under section 40(a)(i) for non-deduction of tax on membership fees paid to Grant Thornton International Ltd.
2. Disallowance of Rs. 21,76,575/- under section 40(a)(i) for non-deduction of tax on professional fees paid to GT UK LLP.

Issue 1: Disallowance of Rs. 2,73,52,203/- under section 40(a)(i) for non-deduction of tax on membership fees paid to Grant Thornton International Ltd.

The assessee, a resident company engaged in advisory services, paid Rs. 2,73,52,203/- to Grant Thornton International Ltd. (GTIL) as membership/subscription fees. The Assessing Officer (AO) treated this payment as Fees for Technical Services (FTS) under section 9(1)(vii) of the Income-tax Act, 1961, and held that tax should have been deducted at source under section 195. The AO disallowed the payment under section 40(a)(i) for non-deduction of tax.

The Commissioner of Income Tax (Appeals) [CIT(A)] held that the payment should be treated as royalty under section 9(1)(vi) for using the brand of the overseas entity and sustained the disallowance on this basis.

The assessee argued that GTIL is a non-profit international association that does not render any services to its members. The payment was claimed to be a reimbursement of operational expenses, not taxable in India. The assessee referred to Article 13(4) of the India-UK Tax Treaty, arguing that the payment does not qualify as FTS or royalty under the treaty.

The Tribunal examined the Member Firms Agreement and found that GTIL does not render services to its members and the payments are for sharing operational expenses. The Tribunal held that the payment does not qualify as royalty or FTS under the India-UK DTAA. The relationship between GTIL and its members is governed by the principle of mutuality, making the payment non-taxable. Therefore, the assessee was not required to deduct tax at source, and the disallowance was deleted.

Issue 2: Disallowance of Rs. 21,76,575/- under section 40(a)(i) for non-deduction of tax on professional fees paid to GT UK LLP

Grant Thornton India (GT Firm) engaged GT UK LLP to conduct a tax due diligence in the UK and paid Rs. 18,44,925/- for the services. The AO treated the payment as FTS under section 9(1)(vii) and disallowed it under section 40(a)(i) for non-deduction of tax.

The CIT(A) upheld the AO's decision, treating the payment as services rendered in India and suggesting the assessee acted as an agent of GT UK LLP.

The assessee argued that GT UK LLP has no permanent establishment in India and the services were rendered entirely outside India. The payment should be examined under the India-UK DTAA, where the definition of FTS is narrower. The services did not involve making available technical knowledge or skills, and thus, the payment does not qualify as FTS under Article 13(4) of the DTAA. The payment also does not fall under Article 15 (independent personal services) as the services were not rendered in India.

The Tribunal agreed with the assessee, stating that the payment does not qualify as FTS under the DTAA and the services were not rendered in India. Additionally, the amount was reimbursed and subjected to TDS in India. Therefore, the assessee was not required to deduct tax at source, and the disallowance was deleted.

Conclusion:
The Tribunal allowed the appeal, deleting both disallowances under section 40(a)(i) for non-deduction of tax at source on payments made to Grant Thornton International Ltd. and GT UK LLP.