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TMI Blog2016 (4) TMI 953X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 (11) TMI 188 - ITAT MUMBAI] - Decided in favour of assessee Disallowance made by the AO u/s 40a(i) in respect of professional fee paid to KPMG Huazhen, China - Held that:- No law can create an obligation to deduct tax at source by retrospective operation. Thus, in our considered view, the assessee was not required to deduct tax at source on the said payment. It is further noted by us that KPMG Huazhen is an entity registered in China and it is resident of China as is understood in Indo-China tax Treaty. The admitted facts on record are that services were rendered in China in relation to the review of information securities services and assistance in audit. The assessee has claimed that services in question would fall specifically in article 14 of Indo China Treaty. We have gone through article 14 of the Tax Treaty which provide that income derived by resident of a contracting state in respect of professional services or other activities of an independent character shall be taxable only in that contracting state except when the said resident has a PE or fixed basis or stay exceeding prescribed number of days in the other contracting states. It is noted on the basis of facts br ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eedings, assessee was asked by the AO to show cause as to why the professional fees paid outside India without deduction of tax at source should not be disallowed u/s 40(a) (i) of the Act. It was explained that payment made outside India was not a sum chargeable to tax in India, hence provisions of section 195 were not applicable, consequently no disallowance could be made u/s 40(a)(i) of the Act. The assessee also submitted that the aforesaid payments were governed by provisions of Double Taxation Avoidance Agreement (DTAA) entered between India with UK, USA, France and China. KPMG was Limited liability registered in UK and income of KPMG was taxable as income of the partner's of KPMG LLP. The partner's in KPMG LLP were individual resident in the UK as per the treaty. KPMG LLP did not have fixed basis /establishment in India. The income was therefore not taxable in India, and hence no withholding of tax was required. Without prejudice, the amount would be derived by the individual partner's of KPMG LLP who were tax resident of UK as understood in Article 4 of treaty and as such would not be taxable in their hands under Article 15 of the treaty. In the case of KPMG US, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee also submitted that similar issue in assessee s own case was decided in favour of the assessee by the Ld. CIT(A) in assessee s own case for A.Y. 2004-05. The Ld. CIT(A) considered submissions of the assessee in detail and decided the issue substantially in favour of the assessee except for one of these remittances i.e. payment made to KPMG, China. It was held by him that with regard payments made to first three parties out of total four parties i.e. KPMG LLP (UK), KPMG LLP (USA), and KPMG France, TDS was not required to be deducted, whereas with respect to the remaining fourth party i.e. KPMG Huazhen, China, it was held by him that TDS was liable to be deducted. 4.6. Being aggrieved, the Revenue filed an appeal against the relief given by the Ld. CIT(A) for the above mentioned three parties, whereas assessee filed an appeal before the Tribunal with respect to the fourth party i.e. KPMG, Huazhen (China) for which relief was not granted by the Ld. CIT(A). During the course of hearing before us, Ld. DR has relied upon the orders of the AO. On the other hand Ld. Counsel of the assessee argued the matter in detail and in addition to relying upon the order of the Ld. CIT(A), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nn.com 208 (Mum (2) Independent Personal Services v. Fees for Technical Services : In case a payment falls within the scope of expression 'independent personal services' within the meaning of article 15, the same shall automatically be out of ambit of article 12(4) since, in view of the specific provisions of article 12(5), notwithstanding the provisions of article 12(4), 'fees for included services' do not, inter alia, include amounts paid to any individual for independent personal services as defined in article 15. In other words, when an amount paid to an individual or a firm resident in the contracting state, is found to be covered by the scope of expression independent personal services' within the meaning assigned in article 15, it is immaterial whether or not the same is covered by the scope of expression 'fees for included / technical services' under article 12. In that eventuality, in view of the provisions of article 12(5), if at all that amount is liable to tax in India; it can only be taxable under article 15, and to that extent, the provisions of article 12(4) and article 15 are non-competing and mutually exclusive. In support of this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fect. Since the subject services were rendered outside India, the same were not subjected to withholding tax obligation at that point of time and thus, no disallowance tinder section 40(a)(i) of the Act can be made. In support of this proposition reliance was made upon following judgments: 1. Rich Graviss Products P. Ltd. vs. ACIT 49 taxmann.com 531 (Mum) 2. United Helicharters (P) Ltd. v. ACIT 37 taxmann.come 343 (Mumbai ITAT) 3. Channel Guide India Ltd. v. ACIT 25 Taxmann.come 25 (Mumbai ITAT) 4. New Bombay Park Hotel Pvt. Ltd. v. ITO (IT) ITA No.7641/Mum/2011 (Mumbai ITAT) 5. DCIT v. Virola International 42 taxmann.com 286 (Agra ITAT) 6. Sterling Abrasives Ltd. v. ITO ITAT No.2243 2244/Ahd/2008 (Ahd) 7. Metro Metro v. ACIT 39 taxmann.com 26 (Agra ITAT) 8. Infotech Enterprises Ltd. v. ACIT 41 taxmann.com 364 (Hyderabad ITAT) 9. Sonata Information Technology Ltd. v. DCIT 25 taxmann.com 125 (Mumbai ITAT) 4.7. We have gone through all the arguments made before us by both the sides, orders of the lower authorities as well as judgments placed before us. 4.8. It is noted that the payments have been made to the aforesaid three parties namely KPMG LLP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vided a mandatory condition that services should be rendered in India before it could be made taxable u/s 9(1)(vii). This requirement of rendering services in India was done away with insertion of an explanation by the Finance Act, 2010, with retrospective effect. But the issue that arises here is that even if a retrospective amendment may legally change the determination of tax liability in the hands of recipient of income with the retrospective effect, but whether it can also create an obligation upon the payer to deduct tax at source, that too with retrospective effect. This issue has also been discussed and decided in favour of the assessee in many cases by holding that obligation to deduct tax at source cannot be created with the help of an amendment made with retrospective effect. It is noted that similar issue came before Agra Bench of the Tribunal in the case of DCIT vs. Virola International (supra); some relevant observations of the Hon ble Bench are reproduced hereunder: 6. Hon ble Supreme Court, in the case of Ishikawajima Harima Heavy Industries Ltd Vs DIT (288 ITR 408), had held that in order to bring a fees for technical services to taxability in India, not only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regard to the internationally accepted principle and the DTAA, no extended meaning can be given to the words income deemed to accrue or arise in India as expressed in s. 9 of the Act. Sec. 9 incorporates various heads of income on which tax is sought to be levied by the Republic of India. Whatever is payable by a resident to a non-resident by way of fees for services, thus, would not always come within the purview of s. 9(1)(vii) of the Act. It must have sufficient territorial nexus with India so as to furnish a basis for imposition of tax. Whereas a resident would come within the purview of s. 9(1)(vii) of the Act, a non-resident would not, as services of a non-resident to a resident utilized in India may not have much relevance in determining whether the income of the non-resident accrues or arises in India. It must have a direct link between the services rendered in India. When such a link is established, the same may again be subjected to any relief under the DTAA. A distinction may also be made between rendition of services and utilization thereof. With the above understanding of law laid down by the apex Court, if one turns to the facts of the case in hand and examines them ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n India, the fees for such services could not be brought to tax under Section 9(1)(vii). The law amended was undoubtedly retrospective in nature but so far as tax withholding liability is concerned, it depends on the law as it existed at the point of time when payments, from which taxes ought to have been withheld, were made. The tax deductor cannot be expected to have clairvoyance of knowing how the law will change in future. A retrospective amendment in law does change the tax liability in respect of an income, with retrospective effect, but it cannot change the tax withholding liability, with retrospective effect. The tax withholding obligations from payments to non-residents, as set out in Section 195, require that the person making the payment at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income -tax thereon at the rates in force . When these obligations are to be discharged at the point of time when payment is made or credited, whichever is earlier, such Assessment year : 2008 -0 9 Page 6 of 7 obligations can only be discharged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , but, for the reasons set out above and in the light of the legal position discussed above, will be academic in the present context. As regards learned Departmental Representative vehement reliance on a decision of Chennai A bench of this Tribunal in the case of ACIT Vs Evolv Clothing Pvt. Ltd [(2013) 33 taxmann.com 309] wherein on the basis of taxability of income alone, the coordinate bench has confirmed the disallowance under section 40(a)(i), we can only say that a decision cannot be an authority for a legal question which has not been dealt with in that decision, or not having been raise d in that case. 10. In view of these discussions, as also bearing in mind entirety of the case, we uphold the conclusions arrived at by the learned CIT(A) and decline to interfere in the matter. As we have decided this appeal on this short legal point regarding scope of section 40(a)(i) r.w.s section 195, we see no need to deal with other erudite contentions of the parties as also findings of the learned CIT(A), which, given our adjudication on this legal issue, are now rendered academic in the present context. 4.11. It is noted by us that in the case before us, the assessment order invo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... similar observations were made. In view of the detailed discussion, it was held by the Bench that no payments were liable or chargeable to be taxed in India, and therefore, TDS was not required to be deducted u/s 195. Thus, we find that the case of the assessee is covered also covered in its favour with the order of the tribunal for A.Y. 2004-05. 4.13. Thus, we find that the impugned order passed by the Ld. CIT(A) is in accordance with law and facts, and therefore, no interference is called for therein and therefore, same is upheld and ground raised by the revenue dismissed. 5. As a result appeal of the Revenue is dismissed. Now, we shall take the assessee s appeal in ITA No.6286/Mum/2012 for A.Y. 2007-08 6. Ground No.1: In this ground the assessee has challenged the action of Ld. CIT(A) in upholding the disallowance made by the AO u/s 40a(i) in respect of professional fee of ₹ 6,00,482/- paid to KPMG Huazhen, China. 6.1. The reasons for upholding the disallowance for Ld. CIT(A) is that since the Indo China Treaty does not have make available clause, therefore the payment can be considered as fee for technical services and therefore, would be taxable in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services and assistance in audit. The assessee has claimed that services in question would fall specifically in article 14 of Indo China Treaty. We have gone through article 14 of the Tax Treaty which provide that income derived by resident of a contracting state in respect of professional services or other activities of an independent character shall be taxable only in that contracting state except when the said resident has a PE or fixed basis or stay exceeding prescribed number of days in the other contracting states. The terms professional services have been defined to include inter alia independent activities of lawyers and accountants. Thus, perusal of this article reveals that services provided by residents (it could be an individual, firm or company) shall fall in this Article if the services provided are of the nature of any one or more of the categories as mentioned in Article 14(2). 6.5. It is noted on the basis of facts brought before us that these professional services have been provided in China by a team consisting of accountants, lawyers and engineers. Thus, we find that these services specifically fall in Article 14, and in absence of their being any PE or an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uments. 8.2. This kind of order is found to be quite strange and unusual by us. The AO should either grant the credit or should clearly specify that credit cannot be granted for the reasons to be stated. Therefore, we send this issue back to the file of the AO with the direction to grant the credit of the taxes paid after verification of required documents for which he shall give adequate opportunity of hearing to the assessee. Thus, this ground is treated as allowed for statistical purposes. 9. As a result, appeal filed by the assessee is partly allowed. We shall take Appeal of the Revenue in ITA No.1918/Mum/2013 For A.Y. 2008-09. 10. The revenue has raised following grounds: On the facts and in the circumstances of the case and in law, whether the Ld. CIT(A) was justified in deleting the disallowance of ₹ 6,68,10,721/- u/s 40(a)(i) being professional fees paid outside India without deducted of tax at source. 11. In this year disallowance was made on account of payment made to the following parties for the professional services received by the assessee: Description Amount in Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (A): 2.3. I have considered the facts and perused the material on record. It is noticed that Rahman Rahman Huq, Bangladesh and KPMG Mauritius are firms of invidividuals registered in Bangladesh and Mauritius respectively. KPMG Portugal, KPMG Sweden, KPMG Netherlands, Background Bureau Inc., USA Scherzer Intl., USA, KPMG IFRG Ltd, UK and KPMG USCMG Ltd., UK are companies registered in the respective countries. The services were entirely rendered outside India. Further the services relate to assistance in audit, taxation, information technology services, conducting background checks, responses to queries related to International Financial Reporting Standards and review of documents to be filed with Securities and Exchange Commission in respect of companies listed in US stock exchanges. which are not fees for technical services in nature and having been rendered outside India, fall outside the purview of Article 12 / 13 of the respective tax treaties, therefore the income fell under the ambit of Article 7 of the respective tax treaties dealing with 'Business Profits'. Since the overseas entities did not have a permanent establishment in India, there was no income chargeab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tates. As can be seen from the details the remittance is towards membership fees and not towards services. Thus the question of considering them as 'fees for technical services' does not arise. Therefore the disallowance u/s 40[a){i) in respect of payment mode to The Conference Board Inc. is deleted. 2.3.3. I also find that the payment made to KPMG international towards the usage charges of online database and GTPS interpreter (Transfer pricing database) for the period 01 October 2006 to 30 September 2007 is towards reimbursement of expenses and not towards services. As can be seen from the details the remittance is towards membership fees and not towards services. Thus the question of considering them as 'fees for technical services' does not arise. Therefore the disallowance u/s 40[a){i) in respect of payment mode to The Conference Board Inc. is deleted. 11.3. It has been argued before us by the Ld. Counsel that issues involved in this year are same as were involved in A.Y. 2007-08. No distinction has been made on facts or law by the Ld. DR also. In view of the same, we find force in the submissions of the assessee, and therefore, relying upon our order ..... 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