By Ajay R. Singh
Advocate
4. The Commissioner
of Income Tax-16 vs. KPMG [Income tax Appeal No. 690 of 2017] Date of order: 24th September, 2019 (Bombay High Court)
KPMG vs. ACIT; date of order: 18th
March, 2016; [ITA No. 1918 & 1480/M/2013; A.Y.: 2008-09; Mum. ITAT]
Section 40(a)(ia) – Deduction at source – Fee for
professional services in nature of audit and advisory outside India without
deduction of tax at source – Payment made outside India was not sum chargeable
to tax in India – Hence, provisions of section 195 were not applicable
The assessee is engaged in providing taxation services,
advisory, audit-related and other consultancy services. During the previous
year relevant to the subject assessment year, the assessee had paid fees for
professional services outside India without TDS deduction.
During the course of assessment proceedings for the subject
assessment year, the AO disallowed the professional fees paid u/s 40(a)(i) of
the Act to the service providers outside India. This was on account of the fact
that no tax had been deducted at source. The assessee contended that no tax was
liable to be deducted in view of the fact that the payments made to service
providers for service outside India were governed by the Double Taxation
Avoidance Agreement (DTAA) entered into between India and the countries in
which the service providers rendered service.
The CIT(A) held that the amounts paid to the service
providers in various countries (except China) were governed by the DTAA. Thus,
the disallowance for not deducting tax was not justified. Thus, the entire amount of Rs. 7 crores which was disallowed was deleted, except the payment of
Rs. 33. 54 lakhs made to KPMG, China.
Being aggrieved, both the Revenue and the assessee filed
appeals before the Tribunal. The Revenue was aggrieved with the deletion of
disallowance for non-deduction of tax at source to service providers in all
countries (save China); and the assessee was aggrieved with the extent of the
disallowance for non-deduction of tax at source in respect of payment made to
service providers in China.
In the Revenue’s appeal it was found that services received
by the assessee outside India were audit and advisory in nature. It was held
that none of the services had attributes of making available any technical
knowledge to the assessee in India. It was further held that none of the
service providers had a Permanent Establishment (PE) in India. Therefore, the
payment made to the service providers outside India was covered by the DTAA.
Consequently, the same would be outside the scope of taxation in India.
So far as the assessee’s appeal in respect of China was
concerned, the Tribunal found that the nature of services was professional and
the service providers had no PE in India. Thus, it was covered by the
Indo-China DTAA and hence not taxable in India.
At the relevant time there was no obligation to deduct tax
at source in respect of fees paid to service providers on the basis of its
deemed income u/s 9(1)(vii) of the Act. It was only by the amendment made by
the Finance Act, 2010 with retrospective effect by adding an Explanation to
section 9(1)(vii) of the Act, that the requirement of the service providers
providing the same in India was done away with for its application; thus making
it deemed income subject to tax in India and required tax deduction at source
by the assessee. However, the Tribunal held that the obligation to deduct tax
cannot be created with the aid of an amendment made with retrospective effect
when such obligation was absent at the time of making payment to the service
providers.
Being aggrieved with the Tribunal order the Revenue filed
an appeal to the High Court. The Court held that in terms of section 90(2) of
the Act it was open to an assessee to adopt either the DTAA or the Act as may
be beneficial to it. The Revenue having accepted that the service providers
during the relevant period did not receive any income in view of the DTAA, the
occasion to deduct tax at source would not arise. Therefore, disallowance u/s
40(a)(i) of the Act would also not arise. In the above view, the Revenue was
academic in these facts as the application of DTAA which resulted in no income
arising for the service providers in India was a concluded issue. Thus, the
occasion to examine section 195 of the Act in these facts would not arise. In
view of the above, the questions proposed by the Revenue were academic, as the
basis of the Tribunal’s order was that the amounts paid to the service
providers was not income taxable in India in terms of the DTAA. Accordingly,
the appeal was dismissed.
