Treaty residence and withholding tax hinge on taxability in India, not mere foreign payment or reimbursement of expenses.

Treaty residence depends on liability to tax by reason of domicile, residence, place of management, place of incorporation or a similar criterion, not on actual payment of tax abroad. On that basis, payments to a non-resident group entity could not be treated as chargeable in India unless taxable under the Act, and the mutuality point was left for fresh consideration. For professional fees paid to another non-resident, no fixed base or permanent establishment in India was shown and the services did not make available technical knowledge, skill or know-how; reimbursement of out-of-pocket expenses also contained no taxable income element. Tax deduction at source was therefore not attracted and the related disallowance could not stand.

---

---

Issues: (i) Whether payments made to KPMG International were chargeable to tax in India on the basis that the recipient was not a resident of the contracting state for treaty purposes and whether the principle of mutuality could be examined in this context; (ii) Whether tax was deductible at source on payments made to KPMG Dubai towards professional fees and reimbursement of expenses, and whether disallowance under section 40(a)(i) was sustainable.

Issue (i): Whether payments made to KPMG International were chargeable to tax in India on the basis that the recipient was not a resident of the contracting state for treaty purposes and whether the principle of mutuality could be examined in this context.

Analysis: The decisive test under the treaty was whether the recipient was liable to tax in the contracting state by reason of domicile, residence, place of management, place of incorporation, or a similar criterion. Actual payment of tax in that state was not essential. The concept of liability to tax was therefore linked to fiscal domicile and the right of the other state to tax, not to the actual levy. On that basis, the assessee was entitled to contend that no tax was chargeable in India unless the payment was otherwise shown to be taxable under the Act. The issue was restored for fresh adjudication in earlier years and the same approach was followed here.

Conclusion: The matter was remitted for de novo adjudication and the assessee succeeded on this ground for statistical purposes.

Issue (ii): Whether tax was deductible at source on payments made to KPMG Dubai towards professional fees and reimbursement of expenses, and whether disallowance under section 40(a)(i) was sustainable.

Analysis: For professional fees, the recipient did not have a fixed base in India and stayed in India for less than the stipulated threshold. The services did not make available technical knowledge, skill, or know-how within the meaning of the applicable treaty provisions, and no permanent establishment or fixed base was established in India. For reimbursement of expenses, the material showed out-of-pocket expenditures incurred in the course of services, and tax deduction was not attracted where the remittance did not contain an income element chargeable to tax in India. Section 195 applied only to sums chargeable under the Act, and disallowance under section 40(a)(i) could not be sustained where no such chargeability was shown.

Conclusion: No tax was deductible at source on these payments and the disallowance was deleted in favour of the assessee.

Final Conclusion: The assessee obtained substantive relief on the question of taxability and withholding, while the remaining connected issues were sent back or resolved only for statistical purposes, resulting in a partial allowance of both appeals.

Ratio Decidendi: For section 195, the obligation to deduct tax arises only when the sum paid to a non-resident is chargeable to tax in India, and treaty residence depends on liability to tax by reason of fiscal domicile rather than actual payment of tax abroad.

---