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Reimbursement of trainings, professional services etc

Rupesh Srivastava 
on 16 March 2013

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Traning were commercial in nature and not technical and, hence, not covered by the provisions of DTAA. These payments also cannot be taxed under Article-7, as none of these persons had any P.E. or fixed base in India.

KPMG vs JCIT

Dated: 22nd Feb 2013

The assessee has 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 AO 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.

The AO 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 cannot be treated as resident of U.A.E. within the meaning of Article-4(1) of the treaty. He held that, since income has accrued or arisen in India, therefore, it is chargeable to tax in India and the Assessee was liable to deduct tax in India before making payment to Mr. Vijay Malhotra, proprietor of KPMG, Dubai. In any case, no approval under section 195 or section 197 was taken before remittance and the decision of Supreme Court in Transmission Corporation of A.P. Ltd. v/s CIT, [1999] 239 ITR 587 (SC) is squarely applicable in this case. Since the payment of Rs. 1,49,30,647 was made without deduction of tax, the same was disallowed under section 40(a)(i) of the Act.

On appeal before CIT(A) , assessee submitted that the payments were made towards reimbursement of the cost and in support, copies of vouchers were produced. With regard to the professional services, the assessee's main contentions were that the payments were made in pursuance of professional services carried out by KPMG, Dubai, through proprietor Mr. Vijay Malhotra, the income of his was not chargeable in India since he was not in India for more than 183 days.

Ld. CIT(A), 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.

Assessee appeal before ITAT

Whether Ld. CIT(A) was erred in upholding the disallowance or Rs.7,27,627 made by the AO 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 ld. Counsel for the assessee, after reiterating the contentions made before the Commissioner (Appeals), submitted that the main allegation of the income tax authorities was that Mr. Malhotra, is not paying tax in U.A.E. and, therefore, he is not a resident of U.A.E. within the meaning of Article-4(1) of DTAA Indo-U.A.E. Such reasoning is wholly erroneous as he was liable to tax in U.A.E. which is a sufficient condition and it is not necessary to actually pay the tax. In support of this contention, he relied upon catena of decisions.

Further On the issue of reimbursement of expenditure, 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.

On the other hand, the learned Departmental Representative relied, heavily, upon the findings of the CIT(A) and the AO and submitted that, alternatively, the matter should be restored to the file of the AO as both the authorities below have not examined these issues on merit but have decided the issue on the basis of DTAA. Even with regard to the reimbursement, the nature of expenditure and its co-relation with the reimbursement has not been properly established and the entire issue needs to be examined properly.

ITAT observed that main allegation of the AO which has been confirmed by the CIT(A) is that Mr. Malhotra, cannot be treated as resident of U.A.E. within the meaning of Article-4(1) of DTAA, as Mr. Malhotra, was not paying tax in U.A.E. Article-4(1) provides that under the agreement, the term "Resident" of a "Contracting State'' means any person, who, under the laws of that State (U.A.E.), is liable to tax therein by reason of his domicile resident place of management, place of incorporation, or any other criterion of similar nature. The term liable to tax in the contracting State have been held by catena of decisions that it does not necessarily imply that the person should actually pay the tax in that contracting State. Right to tax on such person is sufficient. This aspect of the matter was clarified by the Hon'ble Supreme Court in Union of India v/s Azadi Bachao Andolan & Anr., [2003] 263 ITR 706 (SC).

ITAT hold that taxability in one country is not sin 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 is actually liable to pay tax in that country. Liable to tax in the contracting State cannot be implied as the person is actually liable to tax but would also cover the cases where the other contracting State has the right to tax such person. It is immaterial whether or not such right has been exercised. We, accordingly, reject the basis for deducting the TDS under section 195 by the Assessee for making the payment to Mr. Vijay Malhotra, amounting to Rs. 1,38,41,163.

Further the other issue is with regard to disallowance of  Rs. 7,27,627, on account of reimbursement of various expenses towards air fare, conveyance, telephone, hospital bills, etc., made to KPMG, Dubai, i.e., Mr. Vijay Malhotra. , ITAT on a perusal of the bills and details of expenses, as are appearing in the paper book, it is seen that they are all in the nature of expenses incurred by Mr. Vijay Malhotra, for the professional services rendered by him in India. On such reimbursement of expenses, there is no requirement to deduct TDS.

ITAT not takes Revenue appeal

The department has challenged the deletion of addition by CIT(A) 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 Rs. 14,49,452, to conflict resolution company, U.K. and Rs. 6,13,952, to Balakumar Thambiah, Malaysia, without deduction of tax. Applying the principle laid down by the Hon'ble Supreme Court in Transmission Corporation of A.P. Ltd. v/s CIT, [1999] 239 ITR 587 (SC), the Assessing Officer disallowed the same under section 40(a)(i).

ITAT observed that, assessee before CIT(A) submitted that the remittance made to Software Technology Transition (STT), U.S.A. was on account of professional services rendered by STT in pursuance of professional service agreement dated 6th April 2003. The STT is a sole proprietorship of Mr. Ronald Radices, who is a resident of U.S.A. These services are to be understood in Article-15 of Indo U.S.A. DTAA which deals with the independent personal service. Mr. Radices did not have any fixed base or P.E. in India and has stayed in India was for less than 90 days. Therefore, in view of the provisions of Article-15, the income from this service was not chargeable to tax in India. Without prejudice, it was also submitted that remittance cannot be treated as royalties or fees for included services as there is no make available of technical knowledge, experience, skill, know-how or process. With regard to the remittance made to Conflict Resolution Company, U.K. (CRC), it was submitted that payment was made for conducting workshops on fee negotiation master class. The CRC is a partnership firm registered in U.K. and resident of U.K. The partner of CRC have provided this service in India for a time of 20 days. If the income of such service is said to be covered under Article-7 of the Treaty dealing with business profit, then the same cannot be taxed in India because CRC did not have P.E. or fixed base in India. Likewise also, there was no make available of any technical knowledge, experience skills, know-how or process. Lastly, on account of remittance made to Bala Kumar Thambia, Malaysia, was on account of conducting advance Advisory Consulting and Project Leadership Workshops, it was submitted that he is a resident of Malaysia, and was in India for 14 days for providing such profession services. He also did not have any P.E. or fixed base in India, therefore, the same cannot be held to be taxable in India.

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/s ITO, [2009] 120 TTJ (Del.) 297. 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.

Further assessee also submitted that the AO has disallowed only on the ground of applicability of the judgment of Hon'ble Supreme Court in Transmission Corporation of A.P. Ltd. which has been duly explained in the subsequent judgment of the Hon'ble Supreme Court in G.E. India Technology Centre Pvt. Ltd. v/s CIT, [2010] 327 ITR 456 (SC). All these payments cannot be taxed under the respective DTAA, firstly, the nature of services were not in the nature of make, available of technical service, etc., as given in respective Articles of Indo-U.S. and Indo-U.K. DTAA, and secondly, all these trainings were commercial in nature and not technical and, hence, not covered by the provisions of DTAA. These payments also cannot be taxed under Article-7, as none of these persons had any P.E. or fixed base in India.

ITAT observed that to the nature of services rendered by all these persons, which has been discussed in detail, it is seen that, firstly, none of these services fall in the nature of make available of any technical knowledge, experience, skill, know-how or process. The provisions of Indo-U.S. and U.K. treaties are absolutely clear that in case of fees for technical services, it is essential that technical knowledge skill know-how should be made available to the assessee and the assessee should be at liberty to use them in its own right. If the service does not result in making available of any such thing, then the same would not fall within the ambit of fees for technical service. These payments also cannot be taxed under Article-7 as none of them were having any P.E. or fixed base in India and the duration of their visit in India was also for a very less period as has been discussed upon. Therefore, such a payment does not attract the provisions of TDS under section 195. Provisions of section 195(1) uses the expression "chargeable under the provisions of the Act". The payer is bound to deduct tax at source only if the sum paid is assessable to tax in India. The obligation to deduct tax is limited to the appropriate proportion of income which is chargeable under the Act and not otherwise. The Hon'ble Supreme Court in G.E. India Technology Centre Pvt. Ltd., after analyzing the provisions of section  195 and the decision in Transmission Corporation of A.P Ltd, SC had held that the obligation to deduct tax at source is limited to the appropriate proportion 'chargeable to tax' under the Act, forming part of the gross sum of money payable to the NR. SC noted that in Transmission Corporation's case, the Court had ruled that "if no such application u/s 195(2) if filed, income-tax on such sum is to be deducted." SC concluded that the words 'such sum' clearly indicate that the observation refers to a case of 'composite payment' where the payer has a doubt regarding the inclusion of an amount exigible to tax in India. It would not mean that the moment there is remittance to a non-resident, the payer needs to make a declaration before the ITO.

ITAT in view of the aforesaid proposition of law, hold that none of these payments which were not liable or chargeable to be taxed in India, no TDS was required to be deducted under section 195, therefore, the findings given by the Commissioner (Appeals) is factually and legally correct and, accordingly, the same is hereby affirmed.



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