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TMI Blog2013 (11) TMI 188X X X X Extracts X X X X X X X X Extracts X X X X ..... )(i) of the Income tax Act 1961 in respect of the Appellant's share of central costs i.e. cash calls paid to KPMG International. * the Commissioner of Income tax (Appeals) erred in upholding the disallowance or Rs.7,27,627 made by the Assessing Officer u/s 40(a)(i) of the Income tax Act 1961 in respect of reimbursement of out of pocket expenses towards airfare, conveyance, telephone, hotel and other expenses made to KPMG Dubai, UAE (sole proprietorship of Mr. Vijay Malhotra) * the Commissioner of Income tax (Appeals) erred in upholding the disallowance of Rs. 1,38,41,163 made by the Assessing Officer u/s 40(a)(i) of the Income tax Act 1961 in respect of professional fees paid to KPMG Dubai, (UAE) (sole proprietorship of Mr. Vijay Malhotra)" 3. Insofar as ground No. 1, is concerned, both the parties agreed before us that similar issue has come up before the Tribunal in assessee's own case right from the assessment years 1997-98 to 2006-07, wherein this issue has been restored to the file of the Commissioner (Appeals) to adjudicate the issue of chargeability of tax on the payments made to KPMG International and also on account of p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MG International is a mutual concern or not, cannot be decided in this case, is devoid of merit. The assessee is a member of KPMG International and it is for the assessee to satisfy the adjudicator, with all possible evidences, that M/s. KPMG International is a mutual concern. When the assessee is making a claim it is for the assessee to prove its case. Thus, we reject this argument of the learned DR. 10. In view of the above discussion, we set aside both the appeals to the file of CIT(Appeals) with a direction to adjudicate the issue raised by the assessee on the chargeability to income tax of payments made to M/s. KPMG International." 6. The aforesaid findings of the Tribunal was subsequently followed by a co-ordinate bench of the Tribunal in ITA no.4605/Mum./2005, and other appeals, order dated 31st January 2011. 7. Consistent with the view taken therein, we set aside the impugned orders passed by the Commissioner (Appeals) and restore the issue to the file of the Assessing Officer for de novo adjudication in accordance with law. Thus, the ground raised in these appeals is allowed for statistical purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ground no.2, the assessee has mainly challenged the disallowance under section 40(a)(i) in respect of reimbursement of expenditure and professional fee paid to KMPG, Dubai, U.A.E., which is the sole proprietorship of Mr. Vijay Malhotra. The Assessing Officer noted that the assessee has remitted Rs. 2,67,997 to KPMG Middle East and South Asia, Sharjah, U.A.E. Rs.8,21,487 to KPMG, Dubai, U.A.E. and Rs. 1,38,41,163 to KPMG, Dubai, Further, it was stated that these payments were made in pursuance of professional services carried out by the KPMG, Dubai (proprietor Mr. Vijay Malhotra) as understood in Article 14 of the Indo UAE treaty dealing with independent personal services. It was stated that the income is not chargeable to tax in India since Mr. Malhotra was not in India for more than 183 days during the previous year and, therefore, the question of deduction of tax at source does not arise. 8. The Assessing Officer rejected the assessee's contentions and held that Mr. Vijay Malhotra, is a resident of U.A.E. and as per U.A.E. decree he is not liable to pay tax in U.A.E. and, therefore, he does not satisfy the requirements of the expression "resident of a Contracting State" so he c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other criterion of similar nature which essentially refers to the fiscal domicile of such a person. Sections 195 and 197 of the I.T. Act in relation to non-deduction certificate obtained from the A.O. was not relevant because the appellant had submitted certificate of the C.A. pursuant to Circular No.759 dated 18/11/97 read with Circular No. 767 dated 22/5/98 and Circular No. 10/2002 dated 9/10/2002 (page 3 para 1.9 of the written submission dated 25/11/08). As far as the case of Transmission Corporation of India [239 ITR 857 (SC)] is concerned, the appellant's case is that the correct interpretation of the said decision was that in case of remittance to a non-resident, tax needed to be deducted at source only on the income embedded in the remittances and not from the entire remittance as interpreted by the A.O. That, in this case, there was no income element at all." 10. The Commissioner (Appeals), on the issue of reimbursement of expenditure, has partly deleted some of expenditure and confirmed payment for various reimbursement of expenditure like travel, hotel, conveyance and payment of professional services, after observing a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10] 39 SOT 132 (Mum.) * Resource Connections [2010] 42 SOT 23 (Mum.) (URO); * Mahavirchand Mehta [ 2011] 11 taxman.com 194 (Mum.); * Mustaq Ahmad Vakil [2011] 47 SOT 454 (Del.). 12. On the issue of reimbursement of expenditure, he drew our attention to various debit notes and details of expenditure along with the payment, vouchers as given in the paper book and submitted that these were purely reimbursement of expenditure. Such reimbursement of expenditure cannot be held to be taxable in view of various decisions, which are as under: * Siemens Attiongesellschaft [ 2008] 220 CTR 425 (Bom.) * nformation Architects [2010] 322 ITR 1 (Bom.) * Van Oord ACZ India (P) Ltd. [ 2010] 230 CTR 365 (Del.) * Sapiem S.A. [2012] 26 Taxman.com 77 (Mum.) * Nathpa Jhakri Joint Venture v. Asstt. CIT [2010] 37 SOT 160 (Mum.) * Linklaters LLP v. ITO, International Taxation [2010] 40 SOT 51 (Mum.) * Mahindra & Mahindra Ltd. [2012] 134 ITD 312 (Mum.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipping Travels (supra), concluded in the following manner:- "It is thus clear that a tax treaty not only prevents current' but also potential' double taxation. Therefore, irrespective of whether or not the UAE actually levies taxes on non-corporate entities, once the right to tax UAE residents in specified circumstances vests only with the Government of UAE, that right, whether exercised or not, continues to remain exclusive right of the Government of UAE. As noted above, the exemption agreed to under the 'assignment' or 'distributive' rule, is independent of 'whether the Contracting State imposes a tax in the situation to which exemption implies'. In the case of John N. Gladden vs. Her Majesty the Queen 85 Tax Cases 5188, which was quoted with approval by the Hon'ble Supreme Court in Azadi Bachao Andolan's case (supra), Federal Court of Canada has observed that the non-resident can benefit from the exemption (under the treaty) regardless of whether or not he is taxable on that capital gain in his own country. If Canada or the US were to abolish the capital gains tax completely, while the other country did not, a resident of the country which has abolished ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O or before the CIT(A), is also not sustainable in law either. 9. For the reasons set out above, and even though we do not approve the reasoning adopted by the CIT(A), we approve the conclusion arrived at by the CIT(A). His having arrived at right conclusion may have been fortuitous but what is material is that he reached the right conclusion. We approve his conclusion and decline to interfere in the matter." 15. All other judgments relied upon by the learned Counsel has followed the aforesaid proposition. Thus, respectfully following the several judicial precedence, we hold that taxability in one country is not sine qua non for availing relief under the treaty from taxability in other country. All that is necessary is 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 is in the contracting State, which in the present case has not been doubted is in U.A.E. then is to be treated as resident of that contracting State irrespective of whether or not that person ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hese amounts are only reimbursement of actual expenses and hence are not subject to TDS while remitting to foreign concern. 2. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in deleting the addition of Rs. 32,85,625 (12,22,221 + 14,49,452 + 6,13,9520) u/s 40(a)(i) of the Act without appreciating the reasoning given in the assessment order and the order of the Hon'ble Supreme Court in the case of Transmission Corporation. " 19. Before us, both the parties agree that this issue is inter-linked with ground no. 1, raised by the assessee in its appeal in ITA no. 2497/Mum./2009. Consistent with the view taken therein, this ground is restored to the file of the Commissioner (Appeals) for deciding the issue afresh. Consequently, ground no.1 is treated as allowed for statistical purposes. 20. In ground no.2, the department has challenged the deletion of addition aggregating to Rs. 32,85,625, which was paid to various persons in abroad in respect of training, professional services provided in India. The Assessing Officer noted that the assessee has made payment of Rs. 12,22,221, to Software Technology Transition, U.S.A. of R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eals). The Commissioner (Appeals), after appreciating the contentions of the assessee, deleted the said disallowance made under section 40(a)(ia) on the ground that the Assessing Officer has not properly appreciated the facts and the contentions of the assessee and the findings of the Assessing Officer, has no basis. 23. The learned Departmental Representative submitted that fee paid to all the three concerns / persons was in the nature of technical service and reliance was placed on the decision of Steel Authority of India Ltd. v. ITO [2009] 120 TTJ 297 (Delhi). He further submitted that looking to the nature of professional services, these were of in the nature of technical services liable to be taxed under the provisions of DTAA. He strongly relied upon the findings of the Assessing Officer. 24. On the other hand, the learned Counsel for the assessee, after reiterating the nature of payments and the facts of the issue involved, submitted that the Assessing Officer has disallowed only on the ground of applicability of the judgment of Hon'ble Supreme Court in Transmission Corporation of A.P. Ltd. (supra) which has been duly explained in the subsequent judgment of the Hon'ble Sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... important observation, which for the sake of ready reference, is reproduced below:- "7. Under s. 195(1), the tax has to be deducted at source from interest (other than interest on securities) or any other sum (not being salaries) chargeable under the IT Act in the case of non-residents only and not in the case of residents. Failure to deduct the tax under this section may disentitle the payer to any allowance apart from prosecution under s. 276B. Thus, s. 195 imposes a statutory obligation on any person responsible for paying to a non-resident, any interest (not being interest on securities) or any other sum (not being dividend) chargeable under the provisions of the IT Act, to deduct income-tax at the rates in force unless he is liable to pay income-tax thereon as an agent. Payment to non-residents by way of royalty and payment for technical services rendered in India are common examples of sums chargeable under the provisions of the IT Act to which the aforestated requirement of TDS applies. The tax so collected and deducted is required to be paid to the credit of Central Government in terms of s. 200 of the IT Act r/w r. 30 of the IT Rules 1962. Failur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o doubt that tax is payable in respect of some part of the amount to be remitted to a non-resident but is not sure as to what should be the portion so taxable or is not sure as to the amount of tax to be deducted. In such a situation, he is required to make an application to the ITO(TDS) for determining the amount. It is only when these conditions are satisfied and an application is made to the ITO(TDS) that the question of making an order under s. 195(2) will arise. In fact, at one point of time, there was a provision in the IT Act to obtain a NOC from the Department that no tax was due. That certificate was required to be given to RBI for making remittance. It was held in the case of Czechoslovak Ocean Shipping International Joint Stock Co. v. ITO [1971] 81 ITR 162 (Cal) that an application for NOC cannot be said to be an application under s. 195(2) of the Act. While deciding the scope of s. 195(2) it is important to note that the tax which is required to be deducted at source is deductible only out of the chargeable sum. This is the underlying principle of s. 195. Hence, apart from s. 9(1), ss. 4, 5, 9, 90, 91 as well as the provisions of DTAA are also relevant, while applying T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... geable under the Act. Sec. 195(2) is not merely a provision to provide information to the ITO(TDS). It is a provision requiring tax to be deducted at source to be paid to the Revenue by the payer who makes payment to a non-resident. Therefore, s. 195 has to be read in conformity with the charging provisions, i.e., ss. 4, 5 and 9. This reasoning flows from the words "sum chargeable under the provisions of the Act" in s. 195(1). The fact that the Revenue has not obtained any information per se cannot be a ground to construe s. 195 widely so as to require deduction of TAS even in a case where an amount paid is not chargeable to tax in India at all. We cannot read s. 195, as suggested by the Department, namely, that the moment there is remittance the obligation to deduct TAS arises. If we were to accept such a contention it would mean that on mere payment income would be said to arise or accrue in India. Therefore, as stated earlier, if the contention of the Department was accepted it would mean obliteration of the expression "sum chargeable under the provisions of the Act" from s, 195(1). While interpreting a section one has to give weightage to every word used in that section. While ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quence. The interpretation placed by the Department would result in a situation where even when the income has no territorial nexus with India or is not chargeable in India, the Government would nonetheless collect tax. In our view, s. 195(2) provides a remedy by which a person may seek a determination of the "appropriate proportion of such sum so chargeable" where a proportion of the sum so chargeable is liable to tax. The entire basis of the Department's contention is based on administrative convenience in support of its interpretation. According to the Department huge seepage of revenue can take place if persons making payments to non-residents are free to deduct TAS or not to deduct TAS. It is the case of the Department that s. 195(2), as interpreted by the High Court, would plug the loophole as the said interpretation requires the payer to make a declaration before the ITO(TDS) of payments made to non-residents. In other words, according to the Department s. 195(2) is a provision by which payer is required to inform the Department of the remittances he makes to the non-residents by which the Department is able to keep track of the remittances being made to non-residents outsid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... posite contract with the resident party making the payments. The said composite contract not only comprised supply of plant, machinery and equipment in India, but also comprised the installation and commissioning of the same in India. It was admitted that the erection and commissioning of plant and machinery in India gave rise to income taxable in India. It was, therefore, clear even to the payer that payments required to be made by him to the non-resident included an element of income which was exigilble to tax in India. The only issue raised in that case was whether TDS was applicable only to pure income payments and not to composite payments which had an element of income embedded or incorporated in them. The controversy before us in this batch of cases is, therefore, quite different. In Transmission Corporation case (supra) it was held that TAS was liable to be deducted by the payer on the gross amount if such payment included in it an amount which was exigible to tax in India. It was held that if the payer wanted to deduct TAS not on the gross amount but on the lesser amount, on the footing that only a portion of the payment made represented "income chargeable to tax in India" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 is 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 is-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? Subject to what is stated hereinabove, we set aside the impugned judgment(s) and remit these cases to the High Court to answer the question framed hereinabove. Accordingly, the appeal(s) filed by the appella ..... X X X X Extracts X X X X X X X X Extracts X X X X
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