Non-resident professional fee payments u/s195 and s.40(a)(i): DTAA taxability check, Philippines relief, Australia remand; mutuality upheld.

Disallowance under s. 40(a)(i) for non-deduction of tax u/s 195 on professional fees paid to non-residents turned on whether the sums were chargeable to tax in India under the applicable DTAAs. For recipients in the Philippines, the Tribunal accepted the finding that the DTAA was similar to the Mauritius DTAA already adjudicated in the assessee's favour; accordingly, the disallowance was held not sustainable for those payments. For payments to an Australian recipient, the first appellate authority had not examined the Australia DTAA; the issue was remitted to the CIT(A) for fresh determination with reference to that DTAA. On the separate issue of mutuality, the Tribunal upheld the CIT(A)'s finding that the assessee was covered by the principle of mutuality, and dismissed the revenue's appeal.

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Issues Involved:
1. Disallowance of sums under section 40(a)(i) for non-deduction of tax at source.
2. Determination of whether payments to KPMG Australia are covered under the relevant DTAA.
3. Classification of KPMGI Co-operative, Switzerland as a mutual association and its tax obligations.

Detailed Analysis:

1. Disallowance of Sums under Section 40(a)(i) for Non-Deduction of Tax at Source:
The primary issue raised by the Revenue was the disallowance of sums under section 40(a)(i) due to the assessee's failure to deduct tax at source for payments made to various non-resident entities. The assessee firm, a chartered accountants' firm, made payments for professional services to entities in several countries, arguing that these payments were not taxable in India under section 195 of the Act due to the Double Taxation Avoidance Agreements (DTAAs) with respective countries. The assessing officer disagreed, leading to the disallowance of the expenditure. The Commissioner of Income Tax (Appeals) sided with the assessee, referencing previous decisions in similar cases.

Upon appeal, the ITAT confirmed that the issue was already settled in favor of the assessee by previous ITAT decisions, including the cases of KPMG vs. Jt. CIT and Asst. CIT vs. M/s. BSR & Co. The Tribunal reiterated that payments for services rendered outside India, where no technical knowledge, skill, or know-how was made available to the assessee, did not fall under 'fee for technical services' and were not taxable under the respective DTAAs. The Tribunal also noted that the non-resident entities did not have a permanent establishment in India, thus their income could not be taxed in India, making the disallowance under section 40(a)(i) unjustified.

2. Determination of Whether Payments to KPMG Australia Are Covered Under the Relevant DTAA:
The ITAT found that while the DTAAs with most countries involved were previously addressed, the DTAA with Australia had not been specifically commented upon by the Commissioner of Income Tax (Appeals). Consequently, the Tribunal remitted the issue back to the Commissioner of Income Tax (Appeals) to examine the payments made to KPMG Australia in light of the relevant DTAA and provide a detailed finding.

3. Classification of KPMGI Co-operative, Switzerland as a Mutual Association and Its Tax Obligations:
The Revenue challenged the Commissioner of Income Tax (Appeals)'s decision that KPMGI Co-operative, Switzerland, was a mutual association and that its receipts were not income chargeable to tax, thus not requiring tax withholding. The ITAT referred to its previous decision in the assessee’s own case, which concluded that the association's activities fell within the principle of mutuality. This meant there was a complete identity between the contributors and participators, and no profit element was involved. Consequently, the Tribunal upheld the Commissioner of Income Tax (Appeals)'s order, affirming that KPMGI Co-operative's receipts were not taxable.

Conclusion:
The ITAT ruled in favor of the assessee on most issues, except for the payments to KPMG Australia, which were remitted back for further examination. The appeals by the Revenue in ITA Nos. 4843, 4844, and 4556 were dismissed, while ITA No. 4842 was partly allowed for statistical purposes. The order was pronounced in the open court on 04.01.2018.

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