2013 (11) TMI 188 - AT - Income Tax

Foreign network payments, reimbursements, and TDS disputes u/s40(a)(i) and s.195; partial relief, rest remanded for reconsideration

Whether disallowance under s.40(a)(i) could be made for payments to a foreign network entity turned on whether the receipts were chargeable in India and, ... Disallowance u/s 40(a)(i) - Appellant's share of central costs i.e. cash calls paid to KPMG International - chargeability of tax on the payments made to KPMG International and also on account of principle of mutuality - HELD THAT:- Tribunal in assessment years 2000-01 to 2003-04 assessee has a right to argue that, the amount paid by it to M/s KPMG International does not give rise to any income chargeable to tax in India and thus the ages deduct any tax at source. The issue whether the assessee can take such an argument has attained finality by the decision of the Hon'ble Supreme Court of India in the case of G.E. India Technology Centre (P.) Ltd. [2010 (9) TMI 7 - SUPREME COURT] In view of the above, we are of the opinion, that the first appellate authority should have adjudicated on the ground whether the payment made by the assessee is chargeable to tax under the Act. Disallowance u/s 40(a)(i) - tds u/s 195 reimbursement of expenditure and professional fee paid to KMPG, Dubai, U.A.E., which is the sole proprietorship of Mr. Vijay Malhotra - We 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 - Accordingly, this issue is decided in favour of the assessee. Disallowance on account of reimbursement of various expenses towards air fare, conveyance, telephone, hospital bills, etc., made to KPMG, Dubai, i.e., Mr. Vijay Malhotra - 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. Otherwise also, it is a settled principle of law that obligation to deduct tax arise only if the sum paid is taxable to tax in India. There has to be some element of income embedded in the remittances. This issue has now being settled in G.E. India Technology Centre Pvt. Ltd. [2010 (9) TMI 7 - SUPREME COURT] as concluded that obligation to deduct tax is limited to the appropriate portion of income which is chargeable under the Act. Expenses paid to various persons in abroad in respect of training, professional services provided in India - 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. Issues: (i) Whether the question of chargeability of payments made to KPMG International (central costs/cash calls) and the principle of mutuality should be adjudicated afresh by the Commissioner (Appeals)/Assessing Officer; (ii) Whether tax was required to be deducted at source under section 195/treated as disallowance under section 40(a)(i) on professional fees/remittances to KPMG, Dubai (proprietor Mr. Vijay Malhotra); (iii) Whether reimbursements of out-of-pocket expenses (airfare, conveyance, hotel, telephone, etc.) paid to non-resident service providers are taxable and subject to TDS.Issue (i): Whether the matter relating to chargeability of payments to KPMG International and mutuality should be restored for fresh adjudication.Analysis: The Tribunal observed that identical issues in the assessee's own earlier assessment years were remitted to the Commissioner (Appeals) for adjudication on chargeability and mutuality; earlier Tribunal decisions require consideration of evidence and determination whether KPMG International is a mutual organization and whether payments give rise to income taxable in India.Conclusion: The impugned orders are set aside and the issue is restored to the file of the Commissioner (Appeals)/Assessing Officer for de novo adjudication. (Decision in favour of reassessment/reattempt of the issue.)Issue (ii): Whether TDS under section 195/disallowance under section 40(a)(i) was payable on professional fees/remittances to Mr. Vijay Malhotra (KPMG Dubai).Analysis: The Tribunal applied treaty residence principles and Supreme Court precedents (including Azadi Bachao Andolan and G.E. India) to conclude that being 'liable to tax' in the contracting State does not require actual payment of tax; fiscal domicile/right to tax in the UAE suffices for treaty residence. The Tribunal also considered that section 195 requires deduction only where sums are 'chargeable under the provisions of the Act' and that obligation is limited to the proportion of the sum that is chargeable.Conclusion: The Tribunal held that Mr. Vijay Malhotra is to be treated as resident of UAE for DTAA purposes and that no TDS was deductible on the payments of Rs. 1,38,41,163 to him; this issue is decided in favour of the assessee.Issue (iii): Whether reimbursements of expenses paid to non-resident (airfare, conveyance, hotel, telephone, hospital bills, etc.) are taxable and subject to TDS.Analysis: On examination of vouchers and debit notes, the Tribunal found the amounts to be reimbursements of expenses incurred by the non-resident in rendering professional services in India and applied the principle that TDS obligation arises only if a sum is chargeable to tax in India; reliance was placed on G.E. India Technology Centre (proportionality and chargeability principles) and other precedents distinguishing reimbursements from taxable receipts.Conclusion: The Tribunal held that these reimbursements did not attract TDS and the disallowances under section 40(a)(i) in respect of such reimbursements are not sustainable; this issue is decided in favour of the assessee.Final Conclusion: The Tribunal partly allowed the assessee's appeal (allowing the TDS/reimbursement issues in favour of the assessee and restoring specified treaty/mutuality issues for de novo consideration) and treated the Revenue's appeal as partly allowed for statistical purposes; overall the operative effect is that certain disallowances were affirmed, certain disallowances were set aside, and certain connected issues were remitted for fresh adjudication.Ratio Decidendi: For TDS under section 195, tax is deductible only from sums that are 'chargeable under the provisions of the Income-tax Act, 1961'; treaty residence depends on liability/right to tax (fiscal domicile) in the contracting State irrespective of actual payment of tax; reimbursements of out-of-pocket expenses which have no element of income embedded are not subject to TDS and not disallowable under section 40(a)(i).